§431K-2 Risk retention groups chartered in this State. (a) A risk retention group seeking to be chartered in this State shall be chartered and licensed as a liability insurance company authorized by the insurance laws of this State and, except as provided elsewhere in this chapter, shall comply with all of the laws, rules, and requirements applicable to these insurers chartered and licensed in this State and with section 431K-3, to the extent these requirements are not a limitation on the laws, rules, or requirements of this State. Prior to offering insurance in any state, each risk retention group shall also submit for approval to the commissioner a plan of operation or feasibility study and revisions of such plan or study if the group intends to offer any additional lines of liability insurance. Immediately upon receipt of an application for charter, the commissioner shall provide summary information concerning the filing to the National Association of Insurance Commissioners, including:

(1) The name of the risk retention group;

(2) The identity of the initial members of the group;

(3) The identity of those individuals who organized the group or who will provide administrative services or otherwise influence or control the activities of the group;

(4) The amount and nature of initial capitalization;

(5) The coverages to be afforded; and

(6) The states in which the group intends to operate.

Providing notification to the National Association of Insurance Commissioners is in addition to and shall not be sufficient to satisfy the requirements of section 431K-3 or any other sections of this chapter.

(b) New risk retention groups established on or after July 1, 2016, shall be in compliance with the governance standards set forth in subsection (c).

(c) By July 1, 2017, existing risk retention groups shall be in compliance with the following:

(1) The board shall have a majority of independent directors. The board of directors shall: determine whether a director is independent and has no material relationship with the risk retention group; review such determination annually; and maintain a record of the determinations, which shall be provided to the commissioner annually. If the risk retention group is reciprocal, then the attorney-in-fact shall 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 and subscribers advisory committee[;]

(2) The term of any material service provider contract entered into with a risk retention group shall not exceed five years. The contract or its renewal requires approval of a majority of the risk retention group's independent directors. The board of directors has the right to terminate a contract at any time for cause after providing adequate notice as defined in the terms of the contract. Service providers of a reciprocal risk retention group shall contract with the risk retention group[;]

(3) A risk retention group shall not enter into a material service provider contract without the prior written approval of the commissioner[;]

(4) A risk retention group's plan of operation shall include written policies approved by its board of directors requiring the board to:

(A) Provide evidence of ownership interest to each risk retention group member;

(B) Develop governance standards applicable to the risk retention group;

(C) Oversee the evaluation of the risk retention group's management, including the performance of its captive manager, managing general underwriter, or any other person responsible for underwriting, rate determination, premium collection, claims adjustment and settlement, or preparation of financial statements;

(D) Review and approve the amount to be paid under a material service provider contract; and

(E) 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 performance of officers and service providers as measured against the risk retention group's goals and objectives; and

(iii) The continued engagement of officers and material service providers[;]

(5) A risk retention group shall have an audit committee composed of at least three independent board members. A nonindependent board member may participate in the committee's activities if invited to do so by the audit committee, but a nonindependent board member shall not serve as a committee member. The commissioner may waive the requirement of an audit committee if the risk retention group demonstrates to the commissioner's satisfaction that having such committee is impracticable and that the board of directors itself is able to sufficiently perform the committee's responsibilities. The audit committee shall have a written charter defining its responsibilities, which shall include:

(A) Assisting board oversight of the integrity of financial statements, compliance with legal and regulatory requirements, and qualifications, independence, and performance of the independent auditor or actuary;

(B) Reviewing annual audited financial statements and quarterly financial statements with management;

(C) Reviewing annual audited financial statements with its independent auditor and, if deemed advisable, the risk retention group's quarterly financial statements;

(D) Reviewing risk assessment and risk management policies;

(E) Meeting with management, either directly or through a designated representative of the committee;

(F) Meeting with independent auditors, either directly or through a designated representative of the committee;

(G) Reviewing with the independent auditor any audit problems and management's response;

(H) Establishing clear hiring policies applicable to the hiring of employees or former employees of the independent auditor by the risk retention group;

(I) Requiring the independent auditor to rotate the lead audit partner having primary responsibility for the risk retention group's audit, as well as the audit partner responsible for reviewing that audit, so that neither individual performs audit services for the risk retention group for more than five consecutive fiscal years; and

(J) Reporting regularly to the board of directors[;]

(6) The board of directors shall adopt governance standards, which shall be available to risk retention group members through electronic or other means and, upon request, provided to risk retention group members. The governance standards shall include:

(A) A process by which risk retention group members elect directors;

(B) Director qualifications, responsibilities, and compensation;

(C) Director orientation and continuing education requirements;

(D) A process allowing the board access to management and, as necessary and appropriate, independent advisors;

(E) Policies and procedures for management succession; and

(F) Policies and procedures providing for an annual performance evaluation of the board[;]

(7) The board of directors shall adopt a code of business conduct and ethics applicable to directors, officers, and employees of the risk retention group and disclose criteria for waivers of code provisions to the board of directors, which shall be available to risk retention group members through electronic or other means and, upon request, provided to risk retention group members. Provisions of the code shall address:

(A) Conflicts of interest;

(B) Matters covered under the Hawaii corporate opportunities doctrine;

(C) Confidentiality;

(D) Fair dealing;

(E) Protection and proper use of risk retention group assets;

(F) Standards for complying with applicable laws, rules, and regulations; and

(G) Mandatory reporting of illegal or unethical behavior affecting the operation of the risk retention group[;]

(8) The captive manager, president, or chief executive officer of a risk retention group shall promptly notify the commissioner in writing of any known noncompliance with the governance standards established in this subsection.

(d) For the purposes of this section:

"Independent director" means a director who does not have a material relationship with the risk retention group. A person who is a direct or an indirect owner of or subscriber in the risk retention group, as referenced in the definition of "risk retention group" in section 431K-1, or who is an officer, a director, or an employee of the owner and insured unless some other position of the officer, director, or employee constitutes a "material relationship", is considered independent. The commissioner shall have the authority to determine whether or not a director is independent.

A director has a "material relationship" with a risk retention group if the director or a member of the director's immediate family:

(1) Receives in any twelve-month period from the risk retention group or a consultant or service provider to the risk retention group compensation or other item of value in an amount equal to or greater than five per cent of the risk retention group's gross written premium or two per cent of the risk retention group's surplus as measured at the end of any fiscal quarter falling in the twelve-month period, whichever is greater. This provision also applies to compensation or items of value received by any business with which the director or a member of the director's immediate family is affiliated. The material relationship shall be deemed to exist for one year after the item of value is received or the compensation ceases or falls below the threshold established in this paragraph, as applicable;

(2) Is affiliated with or employed in a professional capacity by a current or former internal or external auditor of the risk retention group. The material relationship shall be deemed to exist for one year after the affiliation, employment, or audit ends; or

(3) Is employed as an executive officer of another company whose board of directors includes executive officers of the risk retention group unless a majority of the membership of the other company's board of directors is the same as the membership of the board of directors of the risk retention group. The material relationship shall be deemed to exist for one year after the employment or service ends.

"Material service provider" includes a captive manager, auditor, accountant, actuary, investment advisor, attorney, managing general underwriter, or other person responsible for underwriting, determination of rates, premium collection, claims adjustment or settlement, or preparation of financial statements, whose aggregate annual contract fees are equal to or greater than five per cent of the risk retention group's annual gross written premium or two per cent of its surplus, whichever is greater. "Material service provider" does not mean defense counsel retained by a risk retention group unless the counsel's annual fees are equal to or greater than five per cent of a risk retention group's annual gross written premium or two per cent of its surplus, whichever is greater. [L 1987, c 180, pt of §1; am L 2016, c 140, §4]