CAPTIVE REPORT: NORTH CAROLINA LAWMAKERS DELAY FRONTING BILL

RALEIGH, N.C.-North Carolina legislators last week delayed action on a controversial North Carolina bill that would restrict fronting arrangements for businesses, especially captives.

Lawmakers postponed action at a committee meeting Wednesday because of the strength of the opposition to the bill as well as "confusion" over some unpublished amendments proposed by the Insurance Department, said Bill Hale, the department's legislative counsel.

The bill, however, could be considered again this week.

A broad-based coalition, including risk managers and insurance industry groups, are seeking to revise-or preferably kill-the bill.

The Risk & Insurance Management Society Inc. is among seven industry groups opposing the measure, S.B. 611, according to Anne Allen, RIMS legislative director.

Opponents fear that the proposed legislation would burden businesses with unnecessary and onerous reporting regulations and would hamper their ability to make the best use of captives for reinsuring their risks.

RIMS helped organize the opposition and planned a letter-writing campaign to North Carolina lawmakers last week, Ms. Allen said.

The mobilization effort had an almost immediate impact on the state Senate's Pensions & Retirement and Insurance Committee, which is considering the fronting legislation.

The bill is North Carolina regulators' proposed solution to perceived problems stemming from fronting arrangements, according to Sen. Brad Miller, D-Raleigh, who filed the bill late last month.

However, Ken Mitchell, chairman of the North Carolina Self-Insured Guaranty Assn. in Raleigh says that his concerns were "very narrow," yet "regulators came out with a model bill that had to do with so many different things, it was really not the right vehicle to use." Mr. Mitchell also is executive vp of the North Carolina Homebuilders Assn. in Raleigh.

Sen. Miller said that action on the bill was delayed because "various industry folks expressed concern and we pulled it off the agenda to see if their concerns could be accommodated."

"The point of the law is to protect the policyholders, as well as the recipients of workers compensation benefits," said Deputy Commissioner Ray Martinez, who oversaw the proposal's drafting.

North Carolina Commissioner Jim Long has said uncontrolled fronting arrangements can cause insolvencies.

Specifically, the proposed legislation would impose reporting requirements and prior approval of certain reinsurance transactions upon insurers domiciled in North Carolina. It also would impose those requirements in some situations when a licensed insurer delegates to an unauthorized reinsurer underwriting or claims settlement authority.

North Carolina's proposed front-ing disclosure act is very similar to the controversial model fronting disclosure act adopted in 1993 by the National Assn. of Insurance Commissioners (BI, Dec. 13, 1993).

However, the NAIC model law actually applies to few, if any, fronting transactions involving captives, because no states have adopted the NAIC's model and very few states have enacted related fronting legislation or regulations.

The initial version of the North Carolina bill generally would have offered an exemption to "an insurance company owned by one or more affiliated persons and domiciled in a jurisdiction that is accredited under the financial regulation standards of the NAIC," Sen. Miller said in an interview.

However, the Insurance Department quickly introduced amendments that would expand the exemption to most single-parent captives or pools of such captives in a similar industry, regardless of their location.

"By carving out single-parent captives domiciled anywhere, the North Carolina proposed model is substantially more liberal than the NAIC model that restricted the exemption of single-parent captives to only those captives domiciled in the United States," said Mr. Martinez, the state regulator.

"That is a tremendous improvement, in my book," said C.J. "Jim" Spivey of Charlotte, N.C. He is executive director of the North Carolina Housing Authorities Risk Retention Pools, which uses reinsurance provided by a Bermuda-based captive.

RIMS generally opposes all fronting legislation because it increases costs and reporting requirements unnecessarily. In addition, regulators "shouldn't treat single-parent and group captives differently," Ms. Allen said.

However, Mr. Spivey said the recent liberalization of the definition of the captive domicile may make the proposed legislation something he could support, though he said he needs to study the legislation.

North Carolina's Mr. Martinez late last month predicted that the proposed amended legislation would have "a fair chance" of being enacted, once it is introduced.

However, the bill's chances appear to have dimmed already.

Regulatory problems with front-ing may be better addressed by two bills proposing regulations for workers compensation self-insurance, which will be introduced this week, said the department's Mr. Hale.

In addition to RIMS, the bill's opponents include: the Alliance of American Insurers, the American Insurance Assn., the Coalition of Alternative Risk Funding Mechanisms, the Council of Insurance Agents & Brokers, the National Assn. of Insurance Brokers and the Reinsurance Assn. of America. American International Group Inc. also opposes the bill.