Short title

This Act may be cited as the

Increasing Insurance Coverage Options for Consumers Act of 2008

Findings

Congress finds the following: (1)The establishment of risk retention groups and risk purchasing groups have provided a successful model for the sale of insurance across State lines, reducing costs, providing alternative mechanisms for coverage to increase competitive options for consumers, and promoting greater premium competition among insurers, especially in areas or for risks where coverage is very limited and relatively unaffordable. (2)There have been abuses of the Liability Risk Retention Act of 1986 (15 U.S.C. 3901 et seq.) and increasing concerns by legislators and regulators about the solvency and policyholder control of management in many of the more recently formed risk retention groups. (3)There have also been inappropriate efforts by certain States to regulate, directly or indirectly, risk retention groups or risk purchasing groups in an extra-territorial manner precluded by section 3 and 4 of the Liability Risk Retention Act of 1986 (15 U.S.C. 3902 and 3903). (4)The Liability Risk Retention Act of 1986 should be strengthened by— (A)requiring uniform corporate governance, disclosure, and financial accounting standards; (B)clarifying and strengthening required compliance with certain State consumer protection laws; (C)allowing risk retention groups under the new standards to provide certain commercial property insurance coverage; (D)allowing risk purchasing groups to contract more broadly for commercial property coverage as well as coverage for all forms of liability insurance; and (E)reinforcing a foundation of the Act that exempts risk retention groups and risk purchasing groups from laws of a State other than their chartering State, except as specifically provided in the Act (15 U.S.C. 3901 et seq.). (5)Fixing and expanding the Liability Risk Retention Act of 1986 will reduce solvency exposure and management abuses of risk retention groups while providing more available competitive insurance coverage for consumers.

Expansion of The Liability Risk Retention Act of 1986 to include property insurance

The Liability Risk Retention Act of 1986 (15 U.S.C. 3901 et seq.) is amended— (1)in section 2 (15 U.S.C. 3901)— (A)in subsection (a)— (i)in paragraph (4)— (I)in subparagraph (C)(i) by striking a liability and inserting an; and (II)in subparagraph (G)(i), by inserting or commercial property after liability; (ii)in paragraph (5)(A), by inserting or commercial property after liability; (iii)in paragraph (6), by striking and at the end; (iv)in paragraph (7), by striking the final period and inserting ; and; and (v)by adding at the end the following new paragraph:

(8)commercial property insurance means commercial lines of real or personal property insurance, including, with regard to excess insurance, insurance against loss or damage from any and all hazard or cause and against loss consequential upon such loss or damage, including business interruption insurance, other than non-contractual legal liability for such loss or damage.

; and

(B)in subsection (b), by inserting , commercial property after of liability; (2)in section 3 (15 U.S.C. 3902)— (A)in subsection (a)(1)(C), by inserting or commercial property after liability; (B)in subsection (b), by inserting or commercial property after liability each place it appears; and (C)in subsection (d)(1)(B), by inserting or commercial property after liability; and (3)in section 6(b) (15 U.S.C. 3905(b)), by inserting or commercial property after liability each place it appears.

Expansion of purchasing groups to include commercial property insurance

Section 4 of the Liability Risk Retention Act of 1986 (15 U.S.C. 3903) is amended— (1)in subsection (b)— (A)in paragraph (1), by inserting or commercial property after liability; and (B)in paragraph (2)— (i)by redesignating subparagraphs (B) and (C) as subparagraphs (C) and (D), respectively; and (ii)by inserting after subparagraph (A) the following new subparagraph:

(B)commercial property insurance;

; and

(2)in subsection (d)(1)(B), by inserting and commercial property after liability.

Corporate governance and financial accreditation standards

(a)

Risk retention group definition

Section 2(a) of the Liability Risk Retention Act of 1986 (15 U.S.C. 3901(a)) is amended— (1)in paragraph (4)— (A)in subparagraph (C), by striking clauses (i) and (ii) and inserting the following:

(i)is chartered or licensed as an insurance company and authorized to engage in the business of insurance under the laws of a State with respect to providing liability or commercial property insurance as a risk retention group; or (ii)met the definition of a risk retention group as defined in this paragraph on the day before the effective date of the Increasing Insurance Coverage Options for Consumers Act of 2007.

;

(B)in subparagraph (G)(ii), by striking ; and and inserting ;; (C)in subparagraph (H), by striking the period and inserting a semicolon; and (D)by adding at the end the following new subparagraphs:

(I)which— (i)in the case of a corporation or other limited liability association other than a corporation or association referred to in subparagraph (C)(ii), is licensed or chartered in a State that has adopted corporate governance standards that apply to risk retention groups licensed or authorized by the State that are materially identical to— (I)the corporate governance standards described in section 8; or (II)similar standards relating to corporate governance that apply to risk retention groups that a State reasonably determines provide at least as much protection as the standards referred to in subclause (I) for the members of such group chartered in the State; and (ii)in the case of a corporation or other limited liability association referred to in subparagraph (C)(ii), has implemented the requirements of the corporate governance standards described in paragraphs (1) through (7) of section 8 or similar standards referred to clause (i)(II); (J)which, prior to providing coverage for commercial property insurance, is licensed or chartered in a State that has adopted requirements, as appropriate, for examination authority, audits by certified public accountants, accounting practices and procedures, filings with the National Association of Insurance Commissioners, valuation of investments, safety and liquidity of investments, liabilities and reserves, actuarial opinions, capital and surplus, corrective actions, holding company systems, risk limitations, and reinsurance ceded rules; and (K)which, prior to providing coverage for commercial property insurance, is licensed or chartered in a State that has adopted minimum requirements for safety and soundness, including requirements that— (i)prohibit groups from underwriting any single risk exposure, such as wind losses in a coastal region or earthquake coverage on a single fault, that could unduly impair the group’s capital, similar to such requirements for other insurance companies or for risk retention groups in other States; (ii)establish minimum standards for size or sophistication of risk retention group members; and (iii)establish solvency requirements for risk retention groups.

;

(2)in paragraph (6), by striking ; and and inserting ;; (3)in paragraph (7), by striking the period and inserting ; and; and (4)by adding at the end the following new paragraph:

(8)materially identical means requiring or prohibiting identical conduct with respect to corporate governance by risk retention groups, notwithstanding that the standards adopted by a State may differ with respect to conduct required or prohibited with respect to other activities or entities.

(b)

Codification of standards

The Liability Risk Retention Act of 1986 (15 U.S.C. 3901 et seq.) is amended by adding at the end the following new section:

Corporate governance standards

Corporate governance standards described in this section are standards that require the following: (1)

Independent directors

(A)

In general

The board of directors of the risk retention group shall have a majority of independent directors. If the risk retention group is a reciprocal, then the attorney-in-fact would 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 or subscribers advisory committee under these standards and, to the extent permissible under State law, service providers of a reciprocal risk retention group should contract with the risk retention group and not the attorney-in-fact. (B)

Independence

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— (i)any person that is a direct or indirect owner of, or subscriber in, a risk retention group defined in section 2(a)(4)(E)(ii) is considered to be independent; and (ii)any person that is an officer, director, or employee of a person described in clause (i) is considered to be independent, unless some other position of such officer, director, or employee constitutes a material relationship. (C)

Material relationship

A material relationship between a person and a risk retention group includes the following: (i)The receipt in any one 12-month period of compensation or payment of any other item of value by such person, a member of such person’s immediate family, or any business with which such person is affiliated from the risk retention group or a consultant or service provider to the risk retention group is greater than or equal to five percent of the risk retention group’s gross written premium for such 12-month period or two percent of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in such a 12-month period. Such person or immediate family member of such person is not independent until one year after such person’s 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 risk retention group’s board of directors is not independent until one year after the end of such service or the employment relationship. (2)

Service provider contracts

(A)

In general

The term of any material service provider contract with the risk retention group shall not exceed five years. Any such 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 or its insured owners 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 such contract is greater than or equal to five percent of the risk retention group’s annual gross written premium or two percent of its surplus, whichever is greater. (B)

Service providers

For purposes of subparagraph (A), service providers includes captive managers, auditors, accountants, actuaries, investment advisors, lawyers, managing general underwriters, or other party responsible for underwriting, determination of rates, collection of premium, adjusting and settling claims, or the preparation of financial statements. In this subparagraph, the term lawyer does not include defense counsel retained by the risk retention group to defend claims, unless the amount of fees paid to such lawyer is greater than or equal to five percent of the risk retention group’s gross written premium for such 12-month period or two percent of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in such a 12-month period. (C)

Prior approval

Any contract with a service provider that has a material relationship with the risk retention group shall be submitted for prior approval by the domestic regulator at least 30 days prior to the effective date. No service provider contract involving a material relationship referred to in paragraph (1)(C) shall be entered into unless the risk retention group has notified the Commissioner in writing of its intention to enter into such transaction at least 30 days prior thereto and the Commissioner has not disapproved it within such period. (3)

Written charter

The risk retention group’s board of directors shall have a written policy in the Bylaws that requires the board to— (A)assure that all insured owners 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; (D)review and approve all material service provider contracts; (E)approve the compensation for all service providers; and (F)review and approve, at least annually— (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; and (iii)the continued engagement of the officers and material service providers. (4)

Audit committee

(A)

In general

The risk retention group shall have an audit committee composed of at least three independent board members as described in paragraph (1). A non-independent board member may participate in the activities of the audit committee, if invited by the members, but cannot be a member of such committee. (B)

Written charter

The audit committee shall have a written charter that defines the committee’s purpose, which, at a minimum, must be to— (i)assist board oversight of (1) the integrity of the financial statements, (2) the compliance with legal and regulatory requirements, (3) the qualifications, independence, and performance of the independent auditor and actuary, and (4) the performance of the captive manager, managing general underwriter, or other party or parties responsible for underwriting, determination of rates, collection of premium, adjusting or settling claims or the preparation of financial statements; (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 for 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 and the audit partner responsible for reviewing that audit so that neither individual performs audit services for more than five consecutive fiscal years; and (ix)report regularly to the board of directors. (C)

Waiver

The domestic regulator may waive the requirement to establish an audit committee composed of independent directors if the risk retention group is able to demonstrate to the domestic regulator that it is impracticable to do so and the risk retention group’s board of directors itself is otherwise able to accomplish the purposes of an audit committee, as described in subparagraph (B). (5)

Governance standards

The risk retention group shall adopt and disclose governance standards that include— (A)a process by which the directors are elected by the insured owners; (B)director qualification standards; (C)director responsibilities; (D)director access to management and, as necessary and appropriate, independent advisors; (E)director compensation; (F)director orientation and continuing education; (G)management succession; and (H)annual performance evaluation of the board. (6)

Business conduct and ethics

The risk retention group 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, which shall include— (A)conflicts of interest; (B)corporate opportunities; (C)confidentiality; (D)fair dealing; (E)protection and proper use of risk retention group assets; (F)compliance with all applicable laws, rules, and regulations; and (G)requiring the reporting of any illegal or unethical behavior that affects the operation of the risk retention group. (7)

Reporting non-compliance

The captive manager or chief executive officer of the risk retention group shall promptly notify the domestic regulator in writing if either becomes aware of any material non-compliance with any of the risk retention group’s governance standards. (8)

Enforcement

The risk retention group’s domestic regulator may take appropriate regulatory action against any director or officer of the risk retention group or its captive manager pursuant to its laws and regulations if the risk retention group or captive manager violates these governance standards.

No participation in State guaranty funds

Section 3 of the Liability Risk Retention Act of 1986 (15 U.S.C. 3902) is amended by adding at the end the following new subsection:

(i)Notwithstanding any other provision of this section, a risk retention group may not participate in an insurance insolvency guaranty association that includes participants other than risk retention groups.

Financial statements

Section 3 of the Liability Risk Retention Act of 1986 (15 U.S.C. 3902) is further amended in subsection (d)(3)— (1)by redesignating subparagraphs (A) and (B) as clauses (i) and (ii), respectively, and moving the margins two ems to the right; (2)by striking which statement shall be certified and inserting

which statement shall— (A)be certified

;

(3)in subparagraph (A)(2) (as designated by paragraphs (1) and (2)), by striking the period and inserting a semicolon; and (4)by adding at the end the following new subparagraphs:

(B)be filed not later than the earlier of— (i)June 1, for the preceding calendar year; and (ii)such time as the State in which the risk retention group is chartered requires; and (C)if not prepared in conformity with statutory accounting principles, include appropriate notes for conversion of such statement to statutory accounting principles.

Disclosure requirements

Section 3 of the Liability Risk Retention Act of 1986 (15 U.S.C. 3902) is further amended— (1)in subsection (a)(1)— (A)in subparagraph (G), by striking jurisdiction; and inserting jurisdiction; and; (B)in subparagraph (H), by striking impaired; and and inserting impaired.; and (C)by striking subparagraph (I); and (2)by adding at the end the following new subsection:

(j)Each risk retention group shall provide to each member of such group, on the front page and the declaration page of each insurance policy issued by such group, in bold 12-point or larger type, the following notice: ‘This policy is issued by your risk retention group of which you are a part owner. Your risk retention group is primarily regulated under the laws of ____ and may not be subject to all of the insurance laws and consumer protections of your State. If your risk retention group fails, it may not be protected by a State insurance insolvency guaranty fund.’. The risk retention group shall insert the name of the State in which the risk retention group is chartered or licensed in place of the blank space.

Fiduciary duty

Section 3 of the Liability Risk Retention Act of 1986 (15 U.S.C. 3902) is further amended by adding at the end the following new subsection:

(k)The board of directors of a risk retention group shall have a fiduciary duty to operate in the best interests of the group.

10.

Underscoring the exemption

The Liability Risk Retention Act of 1986 (15 U.S.C. 3901 et seq.) is amended— (1)in section 3 (15 U.S.C. 3902)— (A)in subsection (a), by striking Except as provided and inserting Except as specifically provided; and (B)in subsection (f)(1)— (i)by inserting or purchasing group after risk retention group; and (ii)by inserting before the period , except that a State may not issue a cease-and-desist order to any risk retention group or purchasing group not chartered or licensed in such State, or otherwise attempt to regulate such group directly or indirectly, except as specifically permitted under this Act.; and (2)in section 4(a) (15 U.S.C. 3903(a)), by striking Except as provided and inserting Except as specifically provided.

11.

Technical correction and amendment to short title

(a)

Technical correction

Section 3(a)(1) of the Liability Risk Retention Act of 1986 (15 U.S.C. 3902(a)(1)) is amended by striking manyand inserting any. (b)

Short title

Section 1 of the Liability Risk Retention Act of 1986 (15 U.S.C. 3901 note) is amended by striking Liability Risk Retention Act and inserting Risk Retention Act.

12.

Delayed effective date

(a)

In general

Subject to subsection (b), this Act and the amendments made by this Act shall take effect on the date of the enactment of this Act. (b)

Exception

Notwithstanding subsection (a), sections 3 (except clauses (iii) through (v) of paragraph (1)(A) of section 3), 5, 7, 8, and 9 shall take effect on the date that is 18 months after the date of the enactment of this Act.