Department of Commerce and Insurance Rulemaking Hearing Summary

On Wednesday, July 26, 2017, the Department of Commerce and Insurance held the rulemaking hearing for their proposed revision to the captive regulations found in Tenn. Comp. R. & Reg. § 0780-01-41.  The proposed rules seek to make a number of changes.  The Department also received numerous comments on the proposed rules. At the end of the hearing, the Department left the record open for two weeks in case anyone still wished to comment on the proposed rulemaking.  Click here to find a summary of the changes the department is proposing to make to each section of the rule, as well as the comments received on the proposed changes.  A copy of the notice of rulemaking hearing has been attached to this email for your reference as well. Comments were made by Scott Stone with Arsenal Captive Management, Jeff Simpson with GFM Law, Brian Ridgeway, Mary Frances Miller with Select Actuarial and Randall Ross with Allegiant Actuarial Group, Kevin Doherty with Dickinson Wright, Tony Greer with Dickinson Wright, and Kerrie Riker-Keller with Intuitive Companies.

If anyone would like to make any additional comments, please feel free to contact the Department directly.  If you would like, you may also let us know your additional comments and we can make those comments through the Tennessee Captive Insurance Association on your behalf.  Comments submitted to the Department will be part of the public record of this rulemaking.

0780-01-41-.02. Annual Reporting Requirements
The revisions to this section to eliminate rules that duplicated TCA 56-13-108 and to reflect changes made in 2016 Tenn. Pub. Acts Ch. 1018.  The 2016 update changed the premium tax due date to March 15 annually and eliminated specific references to certain forms for companies that are on a fiscal year.  The proposed change likewise eliminates specific references to certain titled forms that are no longer used by the Captive Section.  This section also implements changes made in the proposed 2017 Captive Bill which authorizes the Commissioner to require that premium taxes be paid electronically and authorizes a fee to pay for this cost.

There were 3 comments on the proposed changes to this rule.  The first comment asked whether proposed rule 0780-01-41-.02(2)(c) created a new tax by rule.  We believe that the Department will not make any changes to the proposed rules based on this comment.

The second comment asked how would the taxpayer know when electronic funds will be available under rule 0780-01-41-.02(2)(d).  The comment continued by pointing out if payments were mailed, a postmark by the due date would usually be sufficient, and the funds of course would not be available for some time after and that it would seem more appropriate to require that the transfer of funds be ordered or posted (whether or not yet available) by the due date. We believe that the Department will not make any changes to the proposed rules based on this comment.

The third comment suggested that in rule 0780-01-41-.02(3) the word “full” should be changed to “estimated”  because a company could not pay the "full" tax due if all you have is an estimate, but companies could certainly pay the "full estimate." We believe that the Department will make changes to the proposed rules based on this comment.

0780-01-41-.03. Audits
The revisions in paragraph (1) clarify the statutory intent that a company must file audited financials each year in order to receive an exam deferral from 3 to 5 years.  This also clarifies the procedures when such reports may be filed late and still count toward a deferral.  This rule also allows for a deferral of audited financial reporting for newly formed captives or cells when formed within the last quarter of their operating year.  Paragraph (5)(e) clarifies the expectations on actuarial review of protected cell companies.  As originally written, protected cell captives were reviewed on an aggregate basis.  However, each cell carries some or all of its own risk, often without recourse to any other cell.  This revision was designed to better identify situations where one cell may be overcapitalized and, on paper, obscure the financial condition of another cell if it were undercapitalized.

This section received the most comments with eight separate comments.  The first comment was that under 0780-01-41-.03(1)(d), only one officer and the captive manager should be required to sign the omission election.  We believe that the Department will make changes to the proposed rules based on this comment. The second comment asked that if audits are optional under 0780-01-41-.03(2), then when must an auditor be identified. We believe that the Department will not make changes to the proposed rules based on this comment.

The remainder of the six comments relate to the certification of loss reserves under proposed rule 0780-01-41-.03(5)(e).

The third comment was that the loss reserve certification should be in its own section, independent of the CPA report.  Similarly, the fourth comment was that the rule should clear up the ambiguity about the language on loss reserves opinions because CPAs read it to say that CPAs are supposed to be attesting to the loss reserve opinion.  This comment also suggested that the proposed language in  rule 0780-01-41-.03(5)(e) could be changed to include something about a separate report prepared by an actuary must be included with the audited financial statements when filed. We believe that the Department will make changes to the proposed rules based on these comments.

The fifth comment pointed out that requiring proposed language in rule 0780-01-41-.03(5)(e) requiring identification of individual protected cells whose reserves are either inadequate or redundant will require a change in the methods of the actuary and a review of the financial position of each individual protected cell.  This comment asserts that this change in actuarial methods will add both time and expense to the annual actuarial review. We believe that the Department will not make changes to the proposed rules based on this comment. 

The sixth comment stated that the review of individual cells would be the bare minimum that any competent actuary would include in the actuarial opinion because each cell is independent of the others and cannot call on the others’ resources.  The comment further states that certain actuarial firms are already doing a review of the individual cells in actuarial opinions that they prepare. The comment also stated that it would do the regulator no service for an actuary to issue an actuarial opinion opining that the company’s total is fine when in fact there is one or more cells in trouble. Finally, the comment concluded that this proposed change is a clarification rather than an increase in requirements and that there would be no cost impact to the actuarial opinions because most actuaries already include a review of individual cells in actuarial opinions.

The seventh comment stated that the proposed 0780-01-41-.03(5) appears to require only one Statement of Actuarial Opinion (SAO) for the core. The comment continues that if there are any cells with deficient or redundant reserves, then the SAO must identify that issue; however, if there are no issues, apparently the SAO need not address reserves for individual cells. The comment also explained that although SAOs for individual cells are not required, the actuary must review adequacy (reasonableness) of reserves for each individual cell in order to meet this requirement. Therefore, the comment concludes that requiring SAOs for each cell should not involve significantly more work for the actuary because the bulk of work is in reviewing the reasonableness of reserves for each cell, and documenting those findings in a SAO involves minimal effort.

The final comment on this section  suggested that the proposed 0780-01-41-.03(5)use the term  “reasonableness” instead of “adequacy” where that term appears because most of  SAOs use the “reasonable” standard, which is consistent with the National Association of Insurance Commissioners Annual Statement Instructions and Actuarial Standards of Practice.  This comment concluded that the term “adequacy” implies that reserves are greater than the amount needed to settle unpaid claims.

0780-01-41-.04. Deposit Requirements
Updates requirements to reflect 2015 statutory revisions allowing for cash equivalents.  See TCA 56-13-105(c).

There were no comments on this rule.

0780-01-41-.06. Limited Scope Examination and Informal Visitation
This is an entirely new section drafted from scratch and is designed to clarify the procedures on the examination of captive insurance companies short of triggering a full scope exam.  TCA 56-13-109 authorizes the commissioner to visit and examine a company whenever it is deemed prudent.  This rule carries out that authority for situations where specific limited questions have arisen about the operation of a company but the company and the department both wish to avoid the time and expense of a full exam.

This section received two comments.  The first comment suggested that proposed 0780-01-41-.06 uses the terms “thorough examination” and “comprehensive examination” interchangeably and that it would be clearer to use one term. We believe that the Department will make changes to the proposed rules based on this comment.

The second comment suggested that in the first sentence of For 0780-01-41-.06(4)the language “visitation of a captive insurance company” should be changed to “visitation of such captive insurance company” in order prevent one captive from requesting an examination of an unrelated captive. We believe that the Department will make changes to the proposed rules based on this comment.

0780-01-41-.08.  Directors.
Revision to clarify who is required to submit a biographical affidavit.  Allows Commissioner to waive requirement.

The only comment on this section suggested that proposed rule 0780-01-41-.08 should define the "governing body" of a captive and require that members of the governing body file biographical affidavits, because the terms directors and managers used in the proposed rule capture most management situations, but not all. We believe that the Department will not make changes to the proposed rules based on this comment.  

0780-01-41-.09.   Managers
Adds captive managers to list of persons to whom the conflict of interest rule applies.

This section received two comments.  The first comment seeks clarification on the word “manager” added in proposed rule 0780-01-41-.09; specifically, asking is the term “manager” a reference to a LLC with managing members or to a captive managers. We believe that the Department will not make changes to the proposed rules based on this comment.  

The second on this section suggested that proposed rule 0780-01-41-.08 should define the "governing body" of a captive and require that members of the governing body file biographical affidavits, because the terms directors and managers used in the proposed rule capture most management situations, but not all. We believe that the Department will not make changes to the proposed rules based on this comment.

0780-01-41-.12.  Change of Business Plan
This rewrites the existing rule, which used similar wording about business plan changes.  The old wording is removed to avoid any conflict between the statute and rule over the definition of a material change of business plan.  See TCA 56-13-103(c)(1)(E). This clarifies the procedure for filing changes of business plans that do not meet the statutory definition of a material change and thus not subject to an additional fee.

This section received two comments. The first comment pointed out that the changes to proposed rule 0780-01-41-12 appear to be intended for minor items asked for clarification on whether it is still the intent that non-material changes will not be subject to the change of business plan fee. We believe that the Department will make changes to the proposed rules based on this comment.

Tony Greer with Dickinson Wright commented that the use of the terms  and “Business Plan” used in the proposed rule should be consistent with the term “Plan of Operation” use in the statute. We believe that the Department will make changes to the proposed rules based on this comment.

0780-01-41-.13.  Designation of a Captive Manager
This adds a new requirement that the Commissioner must approve any change in captive manager.  The role of the captive manager is critical in the Department’s oversight of a captive insurance company, as the department holds the captive manager responsible for ensuring that the captive is run in accordance with the law.  Under the current rule, the Department only approves the captive manager as part of the application.  There is no direct restriction on the company firing a manager and choosing a new one that is not acceptable to the Department.  Note that a captive manager is not, in and of itself, a position requiring a formal license or credential.  No domicile or trade association certifies or licenses captive managers.  The captive section approves captive managers for individual captives on a case by case basis, based on their reputation and experience.

There were no comments on this section.

Appendix A. Tennessee Captive Insurer Annual Report
The revision also incorporates a new Appendix into the rule, which is required by TCA 56-13-108 to be adopted by rule.  The new appendix is the annual statement form that captive insurance companies file annually with the Department.

This section received seven comments.  The first comment requested that the annual include basic financial statements. We believe that the Department will not make changes to the proposed rules based on this comment.

The second comment pointed out that the listing of directors on page 1 of the annual report does not take into account manager managed LLCs. We believe that the Department will make changes to the proposed rules based on this comment.

The third comment sought clarification on whether Item 4 is asking for the captive manager or something else like the third party administrator. We believe that the Department will make changes to the proposed rules based on this comment.

The fourth comment asked if it is a problem under Item 7 if a captive's periodic unaudited financials do not include the balance sheet, income statement, statement of retained earnings and statement of cash flows because many captives prepare only balance sheets and income statements. We believe that the Department will make changes to the proposed rules based on this comment.

The fifth comment  pointed out that Item 18 is onerous and difficult to answer because many captive managers run pools where the participants are anonymous to one another.  As an example, the comment stated that where the pool is big, you would be asking captives to file reports with hundreds of names.  We believe that the Department will make changes to the proposed rules based on this comment.

The sixth comment pointed out that the management narrative requirement in Item 21 is excessive, time consuming and burdensome to produce, especially if the captive is being audited annually, and it's generally subjective and therefore not helpful.  The comment continued on stating that to the extent the annual report is supposed to be an abbreviated report of insurance activity that is supposed to give the regulator useful information, reinforced by an annual audit, between periodic "thorough" examinations, a management narrative seems extreme and is more than any other domicile requires.  We believe that the Department will make changes to the proposed rules based on this comment.

The seventh comment stated, with regard to the Oversight Documents Checklist, Item 1, that the contract to manage the captive on an ongoing basis is generally between the captive itself and the captive manager while the contract to investigate the feasibility of a captive and/or form it is typically between the owner and the captive manager. We believe that the Department will make changes to the proposed rules based on this comment.

General Comments on the rule:
Finally, there were two general comments on the rule as whole. The first comment was that the rule should consider using the world “examination” instead of “audit” where appropriate.  Second comment also asked if the word “manager” used in several places refers to the captive manager. We believe that the Department will not make changes to the proposed rules based on this comment.

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