Risk Retention and Purchasing Group Handbook NAIC Risk Retention and Purchasing Group Handbook 2020 The NAIC is the authoritative source for insurance industry information. Our expert solutions support the efforts of regulators, insurers and researchers by providing detailed and comprehensive insurance information. The NAIC offers a wide range of publications in the following categories: Accounting & Reporting Special Studies Information about statutory accounting principles and the Studies, reports, handbooks and regulatory research procedures necessary for fi ling fi nancial annual statements conducted by NAIC members on a variety of insurance- and conducting risk-based capital calculations. related topics. 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NAIC Executive Offi ce NAIC Central Offi ce NAIC Capital Markets 444 North Capitol Street, NW 1100 Walnut Street & Investment Analysis Offi ce Suite 700 Suite 1500 One New York Plaza, Suite 4210 Washington, DC 20001 Kansas City, MO 64106 New York, NY 10004 202.471.3990 816.842.3600 212.398.9000 NAIC RISK RETENTION AND PURCHASING GROUP HANDBOOK TABLE OF CONTENTS SECTION I. PURPOSE OF THE HANDBOOK AND BACKGROUND OF THE LIABILITY RISK RETENTION ACT OF 1986 (LRRA) A. PURPOSE ............................................................................................................I-1 B. BACKGROUND .................................................................................................I-1 SECTION II. REGULATION OF RISK RETENTION GROUPS A. NOTICE AND REGISTRATION ..................................................................... II-1 1. NOTICE ................................................................................................ II-1 (a) RISK RETENTION GROUPS ................................................ II-1 (i) Domicilliary State ....................................................... II-1 (ii) Non-Domicilliary State ............................................... II-3 (b) PURCHASING GROUPS ....................................................... II-4 (c) CHALLENGES TO NON-DOMICILLIARY STATES’ REQUIREMENTS CASE LAW ............................................. II-5 2. REGISTRATION - SERVICE OF PROCESS ..................................... II-7 (a) RISK RETENTION GROUPS ................................................ II-7 (b) PURCHASING GROUPS ....................................................... II-8 3. NOTICE AND REGISTRATION FORMS ......................................... II-8 4. REGISTRATION AND OTHER FEES ............................................... II-8 B. FINANCIAL CONDITION ............................................................................... II-9 1. RISK RETENTION GROUPS ............................................................. II-9 2. PURCHASING GROUP INSURERS ................................................ II-10 C. AGENT/BROKER LICENSING .................................................................... II-10 D. APPLICATION OF STATE FINANCIAL RESPONSIBILITY LAWS ........ II-10 1. FINANCIAL RESPONSIBILITY REQUIREMENTS ...................... II-10 2. CASE LAW AND ADMINISTRATIVE RULINGS ......................... II-12 (a) Charter Risk Retention Group v. ROLKA .............................. II-12 (b) Mears Transportation Group v. State of Florida .................. II-13 (c) American Inter Fidelity Exchange, a Risk Retention Group v. Dawson ................................................................... II-13 © 1991-2020 National Association of Insurance Commissioners June 2020 (d) Garage Services and Equipment Dealers Liability Association of America, Inc. v. Holmes ................................. II-14 (e) Yellow Cab Cooperative, Inc., before the California Public Utilities Commission .............................................................. II-15 (f) Ophthalmic Mutual Insurance Company (a Risk Retention Group) v. Musser....................................... II-15 (g) National Warranty Insurance Company, RRG v. Greenfield .................................................................. II-16 E. LIABILITY INSURANCE UNDER THE LRRA ........................................... II-16 F. PROHIBITED POLICY COVERAGE............................................................ II-20 SECTION III. REGULATION OF RISK RETENTION GROUPS A. GENERAL CONCEPTS .................................................................................. III-1 B. CHARTERING STANDARDS ........................................................................ III-1 1. MANAGEMENT EXPERTISE .......................................................... III-1 2. REINSURANCE ARRANGEMENTS ................................................ III-2 3. ABILITY TO PROVIDE SERVICE ................................................... III-2 C. SOLVENCY REGULATION .......................................................................... III-2 D. RATE REGULATION ..................................................................................... III-4 E. POLICY FORM REGULATION ..................................................................... III-4 F. MARKETING .................................................................................................. III-4 G. RISK RETENTION GROUP AS REINSURER .............................................. III-5 H. OTHER ISSUES ............................................................................................... III-6 1. GUARANTY FUNDS ......................................................................... III-6 2. RESIDUAL MARKET MECHANISMS ............................................ III-6 3. PREMIUM TAXES ............................................................................. III-6 4. DISCRIMINATION AGAINST RRGs ............................................... III-6 5. NONADMITTED & REINSURANCE REFORM ACT OF 2010 (NRRA) ....................................................................................... III-7 SECTION IV. PURCHASING GROUP AND PURCHASING GROUP INSURER ISSUES A. INTRODUCTION ............................................................................................ IV-1 B. PURCHASING GROUP EXEMPTIONS FROM STATE LAWS .................. IV-1 C. PURCHASING GROUP’S INSURER REQUIREMENTS ............................ IV-2 D. APPLICATION OF EXCESS AND SURPLUS LINES LAWS TO PURCHASING GROUP INSURERS ........................................... IV-3 E. PURCHASING GROUPS’ INSURER POLICY FORMS AND RATES ........ IV-3 © 1991-2020 National Association of Insurance Commissioners June 2020 F. OTHER ISSUES ............................................................................................... IV-3 1. LICENSING OF AGENTS OR BROKERS FOR PURCHASING GROUPS ................................................................... IV-4 2. JURISDICTIONAL ISSUE ................................................................. IV-4 3. HOMOGENEITY REQUIREMENT OF PURCHASING GROUPS . IV-4 G. PREMIUM TAXES .......................................................................................... IV-4 SECTION V. NAIC AND STATE ACTIVITY RELATED TO RISK RETENTION ISSUES APPENDICES Appendix A Liability Risk Retention Act of 1986 Appendix B NAIC Model Risk Retention Act Appendix C State Insurance Department Risk Retention Group and Purchasing Group Contact Persons Appendix D NAIC Uniform Risk Retention Group Registration Form Appendix E NAIC Uniform Purchasing Group Registration Forms Appendix F Survey of State Laws Relating to Risk Retention Groups Appendix G Statement of Voluntary Dissolution Appendix H Reinsurance Guidelines for Risk Retention Groups Licensed as Captive Insurers Appendix I Risk Retention Group Notice Language © 1991-2020 National Association of Insurance Commissioners June 2020 SECTION I PURPOSE OF THE HANDBOOK