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Section 131 Of Chapter 1.5. Risk Retention From California Insurance Code >> Division 1. >> Part 1. >> Chapter 1.5.
131
. (a) An entity seeking to be licensed in this state as a risk
retention group shall be organized under the laws of this state and
licensed as a liability insurance company pursuant to Article 3
(commencing with Section 699) of Chapter 1 of Part 2.
(b) An entity that has not completed its chartering and licensing as a risk retention group in its domiciliary state is subject to the requirements of Article 8 (commencing with Section 820) of Chapter 1 of Part 2.
(c) In addition to the requirements of Article 3 (commencing with Section 699) of Chapter 1 of Part 2, a risk retention group licensed in this state shall submit to the commissioner a feasibility study or plan of operations and all other documentation required by the federal Liability Risk Retention Act of 1986 (15 U.S.C. Sec. 3901 et seq.) to be submitted by a risk retention group to a nonchartering state.
(d) In addition to the requirements of Article 3 (commencing with Section 699) of Chapter 1 of Part 2, a risk retention group licensed in this state shall comply with all of the following at the time of licensure, and thereafter:
(1) (A) The "board of directors" or "board," as used in this section, means the governing body of the risk retention group elected by the shareholders or members to establish policy, elect or appoint officers and committees, and make other governing decisions.
(B) "Director," as used in this section, means a natural person designated in the articles of the risk retention group, or designated, elected, or appointed by any other manner, name, or title to act as a director.
(2) (A) The board of directors of the risk retention group shall have a majority of independent directors. If the risk retention group is a reciprocal risk retention group, the attorney-in-fact shall be required to adhere to the same standards regarding independence of operation and governance as imposed on the risk retention group's board of directors and subscribers' advisory committee under these standards, and, to the extent permissible under this state's laws, service providers of a reciprocal risk retention group shall contract with the risk retention group and not the attorney-in-fact.
(B) No director qualifies as "independent" unless the board of directors affirmatively determines that the director has no "material relationship" with the risk retention group. Each risk retention group shall disclose these determinations to its domestic regulator, at least annually. For this purpose, any person that is a direct or indirect owner of, or subscriber in, the risk retention group, or is an officer, director, or employee, or all three, of an owner and insured, as contemplated by 15 U.S.C. Section 3901(a)(4)(E)(ii) of the federal Liability Risk Retention Act of 1986, is considered to be "independent," unless some other position of that officer, director, or employee constitutes a "material relationship."
(C) "Material relationship" of a person with the risk retention group includes, but is not limited to, any of the following:
(i) The receipt in any one 12-month period of compensation or payment of any other item of value by that person, a member of that person's immediate family, or any business with which that person is affiliated from the risk retention group or a consultant or service provider to the risk retention group that is greater than, or equal to, 5 percent of the risk retention group's gross written premium for that 12-month period or 2 percent of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in a 12-month period. The person or immediate family member of that person is not independent until one year after his or her compensation from the risk retention group falls below the threshold.
(ii) A relationship with an auditor as follows: a director or an immediate family member of a director who is affiliated with, or employed in, a professional capacity by a present or former internal or external auditor of the risk retention group is not independent until one year after the end of the affiliation, employment, or auditing relationship.
(iii) A relationship with a related entity as follows: a director or immediate family member of a director who is employed as an executive officer of another company where any of the risk retention group's present executives serve on that other company's board of directors is not independent until one year after the end of that service or the employment relationship.
(3) The term of any material service provider contract with the risk retention group shall not exceed five years. Any contract, or its renewal, shall require the approval of the majority of the risk retention group's independent directors. The risk retention group's board of directors shall have the right to terminate any service provider, audit, or actuarial contracts at any time for cause after providing adequate notice as defined in the contract. The service provider contract is deemed material if the amount to be paid for that contract is greater than, or equal to, 5 percent of the risk retention group's annual gross written premium or 2 percent of its surplus, whichever is greater.
(A) For purposes of this standard, "service providers" shall include captive managers, auditors, accountants, actuaries, investment advisers, attorneys, and managing general underwriters or any other party responsible for underwriting, determination of rates, collection of premium, adjusting and settling claims, or the preparation of financial statements. Any reference to "attorneys" does not include defense counsel retained by the risk retention group to defend claims, unless the amount of fees paid to those attorneys are "material" as referenced in this paragraph.
(B) A service provider contract meeting the definition of "material relationship" pursuant to paragraph (2) shall not be entered into unless the risk retention group has notified the commissioner in writing of its intention to enter into the transaction at least 30 days prior thereto, and the commissioner has not disapproved the transaction within that period.
(4) The risk retention group's board of directors shall adopt a written policy in the plan of operation as approved by the board that requires the board to do all of the following:
(A) Ensure that all owners or insureds, or both, of the risk retention group receive evidence of ownership interest.
(B) Develop a set of governance standards applicable to the risk retention group.
(C) Oversee the evaluation of the risk retention group's management, including, but not limited to, the performance of the captive manager, managing general underwriter, or other parties responsible for underwriting, determination of rates, collection of premium, adjusting or settling claims, or the preparation of financial statements.
(D) Review and approve the amount to be paid for all material service providers.
(E) Review and approve, at least annually, all of the following:
(i) The risk retention group's goals and objectives relevant to the compensation of officers and service providers.
(ii) The officers' and service providers' performance in light of those goals and objectives.
(iii) The continued engagement of the officers and material service providers.
(5) The risk retention group shall have an audit committee composed of at least three independent board members as defined in paragraph (2). A nonindependent board member may participate in the activities of the audit committee, if invited by the members, but cannot be a member of that committee.
(A) The audit committee shall have a written charter that defines the committee's purpose, which, at a minimum, shall be to do all of the following:
(i) Assist in board oversight of the integrity of the financial statements, the compliance with legal and regulatory requirements, and the qualifications, independence, and performance of the independent auditor and actuary.
(ii) Discuss the annual audited financial statements and quarterly financial statements with management.
(iii) Discuss the annual audited financial statements with its independent auditor and, if advisable, discuss its quarterly financial statements with its independent auditor.
(iv) Discuss policies with respect to risk assessment and risk management.
(v) Meet separately and periodically, either directly or through a designated representative of the committee, with management and independent auditors.
(vi) Review with the independent auditor any audit problems or difficulties and management's response.
(vii) Set clear hiring policies of the risk retention group as to the hiring of employees or former employees of the independent auditor.
(viii) Require the external auditor to rotate the lead or coordinating audit partner having primary responsibility for the risk retention group's audit as well as the audit partner responsible for reviewing that audit, so that neither individual performs audit services for more than five consecutive fiscal years.
(ix) Report regularly to the board of directors.
(B) If an audit committee is not designated by the insurer, the insurer's entire board of directors shall constitute the audit committee.
(6) The board of directors shall adopt and disclose governance standards by making the information available through electronic means, such as posting the information on the risk retention group's Internet Web site, or other means, and providing that information to members and insureds upon request. The information shall include all of the following:
(A) A process by which the directors are elected by the owners, insureds, or both.
(B) Director qualification standards.
(C) Director responsibilities.
(D) Director access to management and, as necessary and appropriate, independent advisers.
(E) Director compensation.
(F) Director orientation and continuing education.
(G) The policies and procedures that are followed for management succession.
(H) The policies and procedures that are followed for the annual performance evaluation of the board.
(7) The board of directors shall adopt and disclose a code of business conduct and ethics for directors, officers, and employees and promptly disclose to the board of directors any waivers of the code for directors or executive officers, including all of the following topics:
(A) Conflicts of interest.
(B) Matters covered under the corporate opportunity doctrine under the state of domicile.
(C) Confidentiality.
(D) Fair dealing.
(E) Protection and proper use of risk retention group assets.
(F) Compliance with all applicable laws, rules, and regulations.
(G) Requiring the reporting of any illegal or unethical behavior that affects the operation of the risk retention group.
(8) The captive manager, president, or chief executive officer of the risk retention group shall promptly notify the domestic regulator, in writing, if he or she becomes aware of any material noncompliance with any of these governance standards.
(e) Domestic risk retention groups, licensed as of December 31, 2013, shall be governed by subdivision (d) on and after January 1, 2015.
(b) An entity that has not completed its chartering and licensing as a risk retention group in its domiciliary state is subject to the requirements of Article 8 (commencing with Section 820) of Chapter 1 of Part 2.
(c) In addition to the requirements of Article 3 (commencing with Section 699) of Chapter 1 of Part 2, a risk retention group licensed in this state shall submit to the commissioner a feasibility study or plan of operations and all other documentation required by the federal Liability Risk Retention Act of 1986 (15 U.S.C. Sec. 3901 et seq.) to be submitted by a risk retention group to a nonchartering state.
(d) In addition to the requirements of Article 3 (commencing with Section 699) of Chapter 1 of Part 2, a risk retention group licensed in this state shall comply with all of the following at the time of licensure, and thereafter:
(1) (A) The "board of directors" or "board," as used in this section, means the governing body of the risk retention group elected by the shareholders or members to establish policy, elect or appoint officers and committees, and make other governing decisions.
(B) "Director," as used in this section, means a natural person designated in the articles of the risk retention group, or designated, elected, or appointed by any other manner, name, or title to act as a director.
(2) (A) The board of directors of the risk retention group shall have a majority of independent directors. If the risk retention group is a reciprocal risk retention group, the attorney-in-fact shall be required to adhere to the same standards regarding independence of operation and governance as imposed on the risk retention group's board of directors and subscribers' advisory committee under these standards, and, to the extent permissible under this state's laws, service providers of a reciprocal risk retention group shall contract with the risk retention group and not the attorney-in-fact.
(B) No director qualifies as "independent" unless the board of directors affirmatively determines that the director has no "material relationship" with the risk retention group. Each risk retention group shall disclose these determinations to its domestic regulator, at least annually. For this purpose, any person that is a direct or indirect owner of, or subscriber in, the risk retention group, or is an officer, director, or employee, or all three, of an owner and insured, as contemplated by 15 U.S.C. Section 3901(a)(4)(E)(ii) of the federal Liability Risk Retention Act of 1986, is considered to be "independent," unless some other position of that officer, director, or employee constitutes a "material relationship."
(C) "Material relationship" of a person with the risk retention group includes, but is not limited to, any of the following:
(i) The receipt in any one 12-month period of compensation or payment of any other item of value by that person, a member of that person's immediate family, or any business with which that person is affiliated from the risk retention group or a consultant or service provider to the risk retention group that is greater than, or equal to, 5 percent of the risk retention group's gross written premium for that 12-month period or 2 percent of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in a 12-month period. The person or immediate family member of that person is not independent until one year after his or her compensation from the risk retention group falls below the threshold.
(ii) A relationship with an auditor as follows: a director or an immediate family member of a director who is affiliated with, or employed in, a professional capacity by a present or former internal or external auditor of the risk retention group is not independent until one year after the end of the affiliation, employment, or auditing relationship.
(iii) A relationship with a related entity as follows: a director or immediate family member of a director who is employed as an executive officer of another company where any of the risk retention group's present executives serve on that other company's board of directors is not independent until one year after the end of that service or the employment relationship.
(3) The term of any material service provider contract with the risk retention group shall not exceed five years. Any contract, or its renewal, shall require the approval of the majority of the risk retention group's independent directors. The risk retention group's board of directors shall have the right to terminate any service provider, audit, or actuarial contracts at any time for cause after providing adequate notice as defined in the contract. The service provider contract is deemed material if the amount to be paid for that contract is greater than, or equal to, 5 percent of the risk retention group's annual gross written premium or 2 percent of its surplus, whichever is greater.
(A) For purposes of this standard, "service providers" shall include captive managers, auditors, accountants, actuaries, investment advisers, attorneys, and managing general underwriters or any other party responsible for underwriting, determination of rates, collection of premium, adjusting and settling claims, or the preparation of financial statements. Any reference to "attorneys" does not include defense counsel retained by the risk retention group to defend claims, unless the amount of fees paid to those attorneys are "material" as referenced in this paragraph.
(B) A service provider contract meeting the definition of "material relationship" pursuant to paragraph (2) shall not be entered into unless the risk retention group has notified the commissioner in writing of its intention to enter into the transaction at least 30 days prior thereto, and the commissioner has not disapproved the transaction within that period.
(4) The risk retention group's board of directors shall adopt a written policy in the plan of operation as approved by the board that requires the board to do all of the following:
(A) Ensure that all owners or insureds, or both, of the risk retention group receive evidence of ownership interest.
(B) Develop a set of governance standards applicable to the risk retention group.
(C) Oversee the evaluation of the risk retention group's management, including, but not limited to, the performance of the captive manager, managing general underwriter, or other parties responsible for underwriting, determination of rates, collection of premium, adjusting or settling claims, or the preparation of financial statements.
(D) Review and approve the amount to be paid for all material service providers.
(E) Review and approve, at least annually, all of the following:
(i) The risk retention group's goals and objectives relevant to the compensation of officers and service providers.
(ii) The officers' and service providers' performance in light of those goals and objectives.
(iii) The continued engagement of the officers and material service providers.
(5) The risk retention group shall have an audit committee composed of at least three independent board members as defined in paragraph (2). A nonindependent board member may participate in the activities of the audit committee, if invited by the members, but cannot be a member of that committee.
(A) The audit committee shall have a written charter that defines the committee's purpose, which, at a minimum, shall be to do all of the following:
(i) Assist in board oversight of the integrity of the financial statements, the compliance with legal and regulatory requirements, and the qualifications, independence, and performance of the independent auditor and actuary.
(ii) Discuss the annual audited financial statements and quarterly financial statements with management.
(iii) Discuss the annual audited financial statements with its independent auditor and, if advisable, discuss its quarterly financial statements with its independent auditor.
(iv) Discuss policies with respect to risk assessment and risk management.
(v) Meet separately and periodically, either directly or through a designated representative of the committee, with management and independent auditors.
(vi) Review with the independent auditor any audit problems or difficulties and management's response.
(vii) Set clear hiring policies of the risk retention group as to the hiring of employees or former employees of the independent auditor.
(viii) Require the external auditor to rotate the lead or coordinating audit partner having primary responsibility for the risk retention group's audit as well as the audit partner responsible for reviewing that audit, so that neither individual performs audit services for more than five consecutive fiscal years.
(ix) Report regularly to the board of directors.
(B) If an audit committee is not designated by the insurer, the insurer's entire board of directors shall constitute the audit committee.
(6) The board of directors shall adopt and disclose governance standards by making the information available through electronic means, such as posting the information on the risk retention group's Internet Web site, or other means, and providing that information to members and insureds upon request. The information shall include all of the following:
(A) A process by which the directors are elected by the owners, insureds, or both.
(B) Director qualification standards.
(C) Director responsibilities.
(D) Director access to management and, as necessary and appropriate, independent advisers.
(E) Director compensation.
(F) Director orientation and continuing education.
(G) The policies and procedures that are followed for management succession.
(H) The policies and procedures that are followed for the annual performance evaluation of the board.
(7) The board of directors shall adopt and disclose a code of business conduct and ethics for directors, officers, and employees and promptly disclose to the board of directors any waivers of the code for directors or executive officers, including all of the following topics:
(A) Conflicts of interest.
(B) Matters covered under the corporate opportunity doctrine under the state of domicile.
(C) Confidentiality.
(D) Fair dealing.
(E) Protection and proper use of risk retention group assets.
(F) Compliance with all applicable laws, rules, and regulations.
(G) Requiring the reporting of any illegal or unethical behavior that affects the operation of the risk retention group.
(8) The captive manager, president, or chief executive officer of the risk retention group shall promptly notify the domestic regulator, in writing, if he or she becomes aware of any material noncompliance with any of these governance standards.
(e) Domestic risk retention groups, licensed as of December 31, 2013, shall be governed by subdivision (d) on and after January 1, 2015.
