Administrative Rules of the State of Montana

BEFORE THE STATE AUDITOR AND COMMISSIONER OF INSURANCE

OF THE STATE OF MONTANA

In the matter of the amendment of ARM 6.6.6802, 6.6.6804, 6.6.6805, 6.6.6806, 6.6.6811, 6.6.6815, 6.6.6820, and 6.6.6821, and the repeal of 6.6.6810, pertaining to Formation and Regulation of Captive Insurance Companies

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NOTICE OF PUBLIC HEARING ON PROPOSED AMENDMENT AND REPEAL

TO: All Concerned Persons

1. On November 2, 2011, at 10:30 a.m., the office of the State Auditor and Commissioner of Insurance, Monica J. Lindeen, (State Auditor's Office) will hold a public hearing in the 2nd floor conference room, at the State Auditor's Office, 840 Helena Ave., Helena, Montana, to consider the proposed amendment and repeal of the above-stated rules.

2. The State Auditor's Office will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing, or need an alternative accessible format of this notice. If you require an accommodation, contact the department no later than 5:00 p.m., October 26, 2011, to advise us of the nature of the accommodation that you need. Please contact Darla Sautter, State Auditor's Office, 840 Helena Avenue, Helena, Montana, 59601; telephone (406) 444-2726; TDD (406) 444-3246; fax (406) 444-3497; or e-mail dsautter@mt.gov.

3. The rules as proposed to be amended provide as follows, stricken matter interlined, new matter underlined:

6.6.6802 DEFINITIONS For purposes of these rules:

(1) remains the same.

(2) "Commissioner" means the State Auditor and Commissioner of Insurance.

AUTH: 33-28-206, MCA

IMP: 33-28-101, MCA

6.6.6804 ADDITIONAL SECURITY (1) If the commissioner deems that the financial condition of the company warrants additional security, he the commissioner may require the company to deposit through the ~~office of the Montana~~ State Auditor's Office in the manner described in 33-2-604, MCA, cash or securities approved by the commissioner or, alternatively, to furnish the commissioner a clean irrevocable letter of credit issued by a bank chartered by the state of Montana or by a member of the bank of the federal reserve system and approved by the commissioner.

(2) and (3) remain the same.

AUTH: 33-28-206, MCA

IMP: 33-28-104, MCA

6.6.6805 PERMITTED REINSURANCE (1) through (1)(d) remain the same.

(2) Credit for reinsurance of captive risk retention groups shall be permitted if reinsurer complies with 33-2-1216, MCA.

(3) If a captive risk retention group does not qualify for reinsurance under (2), credit for reinsurance may still be permitted if the reinsurer:

(a) maintains an A- or higher A.M. Best rating, or other comparable rating from a nationally recognized statistical rating organization;

(b) maintains a minimum surplus as regards policyholders in an amount acceptable to the commissioner based upon a review of the reinsurer's most recent audited financial statements; and

(4) If a captive risk retention group does not qualify for reinsurance under (2) or (3), credit for reinsurance may still be permitted if the reinsurer satisfies all of the following requirements and any other requirements deemed necessary by the commissioner:

(a) the risk retention group licensed as a captive insurer shall file the reinsurer's audited financial statements. The commissioner shall analyze these statements for appropriateness of the reserve credit, and the initial and continued financial condition of the reinsurer. The statements shall be filed:

(i) annually;

(ii) at the request of the commissioner; or

(iii) if the risk retention group thinks it appropriate, more often.

(b) the reinsurer shall demonstrate to the satisfaction of the commissioner that it maintains a ratio of net written premium, wherever written, to surplus as regards policyholders of not more than 3 to 1;

(c) the affiliated reinsurer shall not write third-party business without obtaining prior written approval from the commissioner;

(d) the reinsurer shall not use cell arrangements without obtaining approval from the commissioner;

(e) the reinsurer shall be licensed and domiciled in a jurisdiction acceptable to the commissioner; and

(f) the reinsurer shall submit to the examination authority of the commissioner.

(5) Risk retention groups shall not receive statement credit if:

(a) all policies are ceded through 100% reinsurance arrangements; or

(b) the commissioner requires a maximum ceded reinsurance percentage of less than 100% and the risk retention group exceeds the approved percentage. The portion within the approved amount may still qualify for state credit if the reinsurer is eligible under (2), (3), or (4).

(6) The commissioner shall require:

(a) a reinsurer not domiciled in the U.S. to include language in the reinsurance agreement that states that in the event of the reinsurer's failure to perform its obligations under the terms of its reinsurance agreement, it shall submit to the jurisdiction of any court of competent jurisdiction in the U.S.; or

(b) for credit for reinsurance and solvency regulatory purposes, the commissioner may require any of the following collateral:

(i) an approved funds-held agreement;

(ii) letter of credit; or

(iii) trust or other acceptable collateral based on paid losses, unearned premium, and LAE reserves.

(7) Upon application, the commissioner may waive the reinsurance requirements of (4)(b) in circumstances where the risk retention group licensed as a captive insurer or reinsurer can demonstrate to the satisfaction of the commissioner that the reinsurer:

(a) is sufficiently capitalized based upon an annual review of the reinsurer's most recent audited financial statements;

(b) the reinsurer is licensed and domiciled in a jurisdiction satisfactory to the commissioner; and

(c) the proposed reinsurance agreement adequately protects the risk retention group licensed as a captive insurer and its policyholders. Any such waiver should be included in the plan of operation, or any subsequent revision or amendment of the plan, pursuant to Section 3902(d)(1) of the Federal Liability Risk Retention Act of 1986, and the plan must be submitted by the risk retention group licensed as a captive insurer to the commissioner of its state of domicile and each state in which the risk retention group licensed as a captive insurer intends to do business, or is currently registered. Any such waiver of (4) requirement constitutes a change in the risk retention group's plan of operation in each of those states.

(8) Upon application, the commissioner may waive either of the reinsurance requirements in (6) in circumstances where the risk retention group licensed as a captive insurer or reinsurer can demonstrate to the satisfaction of the commissioner that:

(a) the reinsurer is sufficiently capitalized based upon an annual review of the reinsurer's most recent audited financial statements;

(b) the reinsurer is licensed and domiciled in a jurisdiction satisfactory to the commissioner, and

(c) the proposed reinsurance agreement adequately protects the risk retention group licensed as a captive insurer and its policyholders. Any such waiver should be disclosed in Note 1 of the risk retention group's annual statutory financial statement.

(9) Each approved risk retention group licensed as a captive insurer shall assess its reinsurance program and within 60 days of the effective date of these guidelines, submit a written report to the commissioner indicating whether such risk retention group licensed as a captive is in compliance with these guidelines. All risk retention groups licensed as captive insurers that fail to submit the report in a timely manner may be examined, at the risk retention group's expense, to determine compliance with these guidelines.

(10) These guidelines are effective December 9, 2011, and apply to risk retention groups licensed as captive insurers. Risk retention groups licensed as captive insurers who require additional time to comply with these guidelines shall be permitted to take credit for reinsurance for risks ceded to reinsurers not in compliance with these guidelines for a period not to exceed 12 months from the effective date of these guidelines upon satisfactory demonstration to the commissioner that such delay of implementation will not cause a hazardous financial condition or potential harm to its member policyholders.

AUTH: 33-2-121, 33-2-217, 33-28-102, 33-28-206, MCA

IMP: 33-28-203, MCA

6.6.6806 INSURANCE MANAGERS AND INTERMEDIARIES (1) No person shall, within the state of Montana, act as a manager, broker, agent, salesperson, or reinsurance intermediary for a company without the authorization of the commissioner. Application for such authorization must be in ~~the~~ a form prescribed by the commissioner.

AUTH: 33-28-206, MCA

IMP: 33-28-102, MCA

6.6.6811 ANNUAL AUDIT (1) through (4)(d) remain the same.

(5) A risk retention group licensed as a captive insurer shall utilize the Model Audit Rule as defined in ARM 6.6.3501 - 6.6.3521.

AUTH: 33-28-206, MCA

IMP: 33-28-107, MCA

6.6.6815 FINANCIAL STATEMENTS (1) through (2)(b) remain the same.

(3) Any pure captive insurance company, branch captive insurance company, industrial insured captive insurance company, or association captive insurance company may make written application for filing the required report on a fiscal year-end basis. if a fiscal year-end reporting date is granted:

~~(a) the required report is due 60 days after the fiscal year-end; and~~

(b) in order to provide sufficient information to support the premium tax return, the captive insurance company shall file, prior to march 1 of each year for the prior calendar year-end, a report acceptable to the commissioner.

AUTH: 33-28-206, MCA

IMP: 33-28-107, MCA

6.6.6820 REVOCATION OF THE COMPANY'S LICENSE (1) The commissioner may revoke the license of a company in accordance with 33-28-108, MCA, including, but not limited to, the following reasons:

(1)(a) through (2) remain the same.

AUTH: 33-28-206, MCA

IMP: 33-28-109, MCA

6.6.6821 LIMIT OF RISK -- CAPTIVE RISK RETENTION GROUPS (1) ~~The provisions of 33-2-1202, MCA, do not apply to a captive insurance company that is a risk retention group.~~ A captive risk retention group shall not retain any risk on any one occurrence in an amount exceeding 10% of its surplus as regards policyholders.

(2) The maximum retained risk on any one occurrence pursuant to (1) may be increased by the commissioner after considering all relevant aspects of a captive risk retention group's business plan and/or operational history including, but not limited to, the following:

(a) the financial strength of the captive risk retention group;

(b) the ability of the risk retention group to raise capital;

(d) rating and pricing methodologies; and

(e) loss prevention and risk management programs.

(3) Increases in the maximum retained risk granted by the commissioner pursuant to (2) shall be by policy, or by program, and shall not apply to a captive risk retention group's other policies or programs without specific approval of the commissioner.

(4) The commissioner may revoke an increase in the maximum retained risk granted to a captive risk retention group pursuant to (2) when the commissioner becomes aware of any adverse change to one or more of the factors used in granting the increase, or when the commissioner becomes aware of any other information meriting a reduction in the maximum retained risk.

(5) Any captive risk retention group licensed and operating prior to the effective date of this rule that has a maximum retained risk higher than the limit in (1) is considered to have been approved for an increase in the maximum retained risk pursuant to (2). The commissioner's authority to revoke an increase in the maximum retained risk pursuant to (4) is applicable to captive risk retention groups.

AUTH: 33-28-206, MCA

IMP: 33-28-207, MCA

4. The State Auditor's Office proposes to repeal the following rule:

6.6.6810 CHANGE IN BUSINESS AND OTHER INFORMATION found at page 6-1883 of the Administrative Rules of Montana.

AUTH: 33-28-206, MCA

IMP: 33-28-102, MCA

5. REASONABLE NECESSITY STATEMENT: The State Auditor and Commissioner of Insurance, Monica J. Lindeen (commissioner), is the statewide elected official responsible for administering the Montana Insurance Department and regulating the business of insurance including the transaction of surplus lines insurance.

The commissioner is a member of the National Association of Insurance Commissioners (NAIC). The NAIC is an organization of insurance regulators from the 50 states, the District of Columbia, and the U.S. territories. The NAIC provides a forum for the development of uniform policy and regulation when uniformity is appropriate. For the Montana Insurance Department to remain accredited, the NAIC has requested the rules regarding captive insurers and risk retention groups licensed as captive insurers be modified in order to comply with national standards.

ARM 6.6.6804 is proposed to be amended for grammatical reasons. It is necessary to remove any gender specific language.

Similarly, ARM 6.6.6806 is also proposed to be amended for grammatical reasons. The change is necessary to reflect the concept that the commissioner may prescribe any form for an authorization application.

Amending ARM 6.6.6805 enables the commissioner to regulate reinsurance agreements between captive insurers and reinsurers when reinsurance carriers do not meet the usual credit for reinsurance standards of 33-2-1216, MCA. The rule is necessary because certain acceptable reinsurance carriers are not addressed within the statutory standards. By utilizing A.M. Best ratings, examinations and audited financial statements, the commissioner can allow these reinsurance carriers to do business in the state.

Furthermore, in instances when the commissioner is comfortable that a reinsurance carrier is domiciled in a state with strong insurance regulation, these rules grant the commissioner discretionary authority to approve a reinsurance carrier. This is necessary to facilitate captive insurance business for Montana-domiciled companies and provide access to legitimate reinsurance carriers in order to reduce total costs.

Another proposed amendment to ARM 6.6.6805 requires a self-reporting requirement. This rule is necessary to ensure existing reinsurance programs are in compliance with the amended rules. For reinsurance programs not in compliance, an extended time frame for achieving compliance is necessary because the negotiation of reinsurance agreements is complex and time consuming. Therefore, it is necessary to allow captive insurers to receive credit for reinsurance ceded within noncompliant reinsurance programs, but only for a limited extended time frame.

ARM 6.6.6811 is proposed to be amended in order to make captive risk retention groups subject to the same audit rules as traditional insurers, which is necessary pursuant to NAIC accreditation requirements.

The purpose of the proposed amendment to ARM 6.6.6815 is to delete misplaced references to the annual financial report. This is necessary because the purpose of this rule is to provide guidance with regard to audited financial statements, not the annual financial report.

The proposed amendment to ARM 6.6.6821 concerns the commissioner's authority to set standards and limitations on risk. This rule is necessary to set standards for captive insurers, as a comparable law exists for traditional insurers. The proposed amendment to the rule grants the commissioner authority to limit risk to maintain solvency and sets standards accordingly.

It is also necessary that the proposed amendment to the rule allows currently licensed captive risk retention groups to be considered approved under the new limitation of risk standards. This "grandfathering" is warranted because the department has already been using similar limitation of risk standards in its review of licensing applications previously submitted by captive risk retention groups.

The proposed repeal of ARM 6.6.6810 is necessary because the current rule diminishes the statute. Section 33-28-102(3)(b), MCA, addresses any changes in the business plan. It is necessary to repeal the rule to make the complete rules harmonious with the standards set forth in statute.

6. Concerned persons may submit their data, views, or arguments concerning the proposed actions either orally or in writing at the hearing. Written data, views, or arguments may also be submitted to Steve Matthews, Examinations Bureau Chief, State Auditor's Office, 840 Helena Ave., Helena, Montana, 59601; telephone (406) 444-2040; fax (406) 444-3499; or e-mail smatthews@mt.gov, and must be received no later than 5:00 p.m., November 10, 2011.

7. Brett O'Neil, Staff Attorney, has been designated to preside over and conduct this hearing.

8. The department maintains a list of concerned persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request that includes the name and mailing address of the person to receive notices and specifies for which program the person wishes to receive notices. Such written request may be mailed or delivered to Darla Sautter, at the State Auditor's Office, 840 Helena Ave., Helena, Montana, 59601; telephone (406) 444-2726; fax (406) 444-3499; or e-mail dsautter@mt.gov or may be made by completing a request form at any rules hearing held by the department.

9. An electronic copy of this Proposal Notice is available through the Secretary of State's web site at http://sos.mt.gov/ARM/Register. The Secretary of State strives to make the electronic copy of the notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. In addition, although the Secretary of State works to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.

10. Pursuant to 2-4-302, MCA, the bill sponsor contact requirements do not apply.

/s/ Brett O'Neil /s/ Jesse Laslovich

Brett O'Neil Jesse Laslovich

Rule Reviewer Chief Legal Counsel

Certified to the Secretary of State October 3, 2011.