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Arthur D Perschetz, Esq.


Most Risk Retention Groups ("RRGs"), formed as captive insurance companies, are not subject to the same regulation as traditional insurers. To date, the regulation of captive RRGs has largely varied state-to-state based on the company's choice of domicile. However, changes are on the horizon. Last year, the National Association of Insurance Commissioners ("NAIC") voted to require that states apply Part A of the NAIC's accreditation standards to captive RRGs. As a result, effective January 1, 2011, the Part A standards will require application of the NAIC's Model Insurance Holding Company System Regulatory Act (the "Holding Company Act") to captive RRGs. This will entail a state-by-state implementation process as it will likely require each state amending its version of the Holding Company Act to make it applicable to captive RRGs. This article focuses on the Holding Company Act and the implications of applying it to captive RRGs.

Overview of the Holding Company Act

The Holding Company Act is a comprehensive law that governs the relationships and activities within insurance holding company systems. This law regulates certain activities of entities that are affiliated with insurance companies that would not otherwise be subject to such regulation. The Holding Company Act regulates the acquisition of control of an insurer and contains certain reporting requirements, including the requirement that insurance company subsidiaries file information relating to capital structure, ownership, financial condition and general business operations. The Holding Company Act also requires the prior review and approval or non-disapproval of "extraordinary" dividend payments by insurers and material transactions by and between insurers and their affiliates. The Holding Company Act defines a "holding company system" as two or more affiliated persons, one or more of which is an insurer. "Affiliates" includes persons that directly or indirectly control, or are controlled by, or are under common control with, the person specified. "Control" refers to possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or management services, or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing ten percent (10%) or more of the voting securities of any other person.

Significant Elements of the Holding Company Act

Under the Holding Company Act, no person may acquire control of an insurer unless prior to the acquisition the person seeking to acquire control files a "Form A Statement" seeking approval of the acquisition of control with the insurer's domestic regulator and the regulator approves the acquisition. The Form A Statement is typically a public document and includes disclosure of the identity and financial information of the purchaser and its ultimate controlling person, the source of financing for the acquisition, biographical information regarding the officers and directors of the purchaser and its ultimate controlling person and the purchaser's future business plans for the target insurer. The terms of the acquisition and a copy of the purchase agreement must also be disclosed to the regulator. In addition, a number of states require public hearings in connection with proposed acquisitions of control. An insurer that is part of a holding company system must annually file a confidential Form B Registration Statement with its domestic regulator, usually by March 15, and must update the Registration Statement during the year to the extent there are material changes to the information filed. The Registration Statement must include an organizational chart and describe all relationships between the insurer and its affiliates. Transactions involving the insurer and its affiliates, including management and reinsurance agreements, must also be described and a considerable amount of information must be provided concerning the ultimate controlling person, including biographical information on its officers and directors and audited financial statements. Regulations have been promulgated by the states to implement the Holding Company Act and include the following reporting forms:

  1. Form A Statement of Acquisition of Control of or Merger with a Domestic Insurer
  2. Form B Insurance Holding Company System Annual Registration Statement;
  3. Form C Summary of Registration Statement; and
  4. Form D Statement of Prior Notice of a Transaction.

In addition to prior approval of an acquisition of control and an annual registration requirement, the Holding Company Act requires the filing at least 30 days in advance and the "non disapproval" of material transactions involving an insurer and any affiliate, including management and service agreements, purchases and sales of assets, loans and guarantees, reinsurance agreements and tax- and cost-sharing/allocation agreements. These transactions are generally scrutinized by the regulator to determine whether the terms are fair and reasonable. Regulators review the fairness of the terms of the transactions and assure that any fees being paid by the insurer are reasonable in relation to the value of the services being provided by the affiliate. The states vary significantly in how they apply the "reasonable" requirement; some require that affiliates provide services at cost, while others permit affiliates to earn a reasonable profit. In addition, the insurer's books and records must accurately disclose the nature and details of the transaction to support the reasonableness of the charges or fees. Dividends declared by an insurer subject to the Holding Company Act that exceed the greater of 10% of the company's surplus or prior year's net gain from operations are considered "extraordinary" and must be reviewed and approved by the regulator prior to distribution. Some states' versions of the Holding Company Act read "lesser of" rather than "greater of." The regulator reviews the proposed dividend to determine whether the company will continue to have adequate capital and surplus to support its business. The Holding Company Act includes insurance liquidation and rehabilitation provisions stating that the receiver may recover (i) from any parent corporation or holding company or person or affiliate who otherwise controlled an insolvent insurer, the amount of distributions, other than distributions of shares of the same class of stock, paid by the insurer on its capital stock, or (ii) any bonus, termination settlement or extraordinary lump sum salary adjustment made by the insurer or its subsidiary to a director, officer or employee, where the distribution or payment pursuant to (i) or (ii) is made during the year preceding the petition for liquidation or rehabilitation subject to certain limitations.

Implications of Applying the Holding Company Act to Captive RRGs

Applicability to Captive RRGs

Whether or not the Holding Company Act will apply to a captive RRG depends on whether the RRG is considered part of a "holding company system." This question generally boils down to whether or not the RRG is controlled by, or is under common control with, some other person or entity. If such "control" exists, then the RRG will be subject to the Holding Company Act.  Because the Liability Risk Retention Act (the "LRRA") speaks in terms of "ownership" and not "control," applicability of the Holding Company Act to captive RRGs will vary depending on the ownership and control structure of the RRG. Traditional captive RRGs that are owned and controlled directly by their members will likely not be subject to the Holding Company Act so long as no member owns more than 10% of the voting "securities" of the RRG or is otherwise deemed to control the RRG. But, a traditional captive RRG that has a single owner organization or association, that (i) has as its members only persons who comprise the membership of the RRG and (ii) is owned only by persons who comprise the membership of the RRG and are provided insurance by the RRG, may be subject to the Holding Company Act because the captive RRG and its sole owner could be considered "affiliates." Other types of captive RRGs, such as reciprocal RRGs, may find themselves under the purview of the Holding Company Act not from the controlling-owner perspective but rather due to the nature of the contractual relationship with the RRG's attorney-in-fact. However, determining whether such "control" exists with certain "entrepreneurial" RRGs will be a very fact-specific analysis. As set forth above, "control" may be found where a person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the RRG. This control can be achieved through ownership, contract or otherwise. As the 2005 GAO Report on RRGs pointed out, the LRRA also does not have a requirement that RRG insureds retain control over the management and operation of their RRG. As a result, many RRGs have been structured in a manner that provides certain service providers the power to control and direct the management and policies of the RRG. Where such service providers are found to have this level of "control," such RRGs will likely be considered part of holding company systems and thus subject to the Holding Company Act.

Additional Layers of Regulations and Costs of Compliance

Application of the Holding Company Act will impose new reporting obligations and additional costs on captive RRGs. On one hand, the filing of certain agreements, such as reinsurance agreements and service provider agreements whether between affiliates or not, with an RRG's domestic regulator are generally already required. On the other hand, however, application of the Holding Company Act to captive RRGs provides specific standards for the review of such transactions. Moreover, service providers found to be the ultimate controlling person of an RRG could find themselves subject to additional biographical and financial information reporting requirements. Additionally, with respect to dividends, the application of the Holding Company Act gives clear guidance on the amount of dividends that a "controlled" RRG may declare without receiving prior approval from the regulator. It is worthwhile to note that under the Holding Company Act, if control does not in fact exist despite certain ownership thresholds, a party may attempt to rebut the presumption of control and disclaim affiliation by a filing setting forth all material relationships with the insurer and captive RRG and the basis for disclaiming such affiliation. This essentially allows the regulator some flexibility in the application of the Holding Company Act. While this could provide some opportunities for relief, the regulatory burdens for captive RRGs will certainly increase as a result of the NAIC's action.


The NAIC is requiring the states to impose requirements on captive RRGs that are similar in nature to those imposed on traditional insurance companies. The application of the Holding Company Act may be just the start – the NAIC also voted in October 2010 to incorporate the application of the Annual Financial Reporting Model Regulation, also known as the "Model Audit Rule," to captive RRGs within the Part A standards, effective January 1, 2012. Since RRGs are like snowflakes (no two are alike), an analysis of their ownership and control structure must be made on a case-by-case basis to determine whether or not the Holding Company Act will apply. And, since many captive RRGs do not have the experience and mechanisms in place to comply with the Holding Company Act, they will likely incur additional compliance costs associated with the new filing and prior approval requirements. Although greater accountability will soon be required of captive RRGs as efforts for imposing additional regulations on captive RRGs continue, the possibility of inconsistent regulation between different types of RRGs and different regulators remains and may lead to continued confusion down the road.

Thanks to Jason Kimpel, Jared Danilson and Abhishek Dubé for their significant work and contribution on this article.