YERMONT. January 15, 2009

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1 State of Vermont Department of Banking, Insurance, Securities and Health Care Administration 89 Main Street Montpelier, Vf Consumer Assistance Only: insurance: Health Care Admin.: Securities: January 15, 2009 Mr. Dan Swanson. Senior [nsurance Reporting Analyst NAlC Executive Headquarters 2301 McGee Street, Suite 800 Kansas City. MO RE: Capital Adequacy Task Force- Risk Retention Group RBC Proposal Dear Mr. Swanson: As requested by the Capital Adequacy Task Force, please find Vermont's comments regarding the proposed Risk Retention Group RBC sensitivity test as follows: Sensitivity Test Calculation Vermont's RRGs record letters of credit and deferred acquisition costs on the balance sheet of the Annual Statement as "aggregate write-ins for other than invested assets". In doing so, the aggregate write-ins get recorded on the RBC Statement on page PRO ll (line 15) and have a 5% factor applied. which in the end effects the Total RBC calculation. In the Sensitivity Test, these assets are being removed in order to compute a new Adjusted Capital for the Sensitivity Test. It appears that the RRG is therefore being penalized twice for the same as::.ets, unce in computing RBC (5%), and then again in computing Adjusted Capital (1 00%). The same situation appears to apply to the difference between GAAP and S.AJ> investments. The investments will already have a factor applied, depending on the type of investments, which in the end effects the Total RBC calculation. By then removing the difference between GAAP and SAP in the Sensitivity Test, it appears the company is being penalized twice. Permitted Practices The Sensitivity Test appears to be adjusting for items that are considered permitted practices by the state of domicile. Since RRGs are not the only Annual Statement filers that have permitted practices, 1 suggest that the test be renamed from ' Sensiti vity Test - Risk Retention Groups' to something like ''Sensitivity Test - Permitted Practices". Why not have a Sensitivity Test that readjusts Adjusted Capital for all permitted practices or deviations from SAP, and is applicable to all 0 YERMONT Banking Insurance Captive Insurance Health Care Admin

2 insurance companies? Since Note I to the Annual Statement already requires a reconciliation for permitted practices for all companies, maybe the Sensitivity Test should also take into account all prescribed practices for all companies. Instead of having to manually input the. three adjusting items as presented, maybe a company could just manually input the net GAAP to SAP differences that are already disclosed in the required Note 1 reconciliation (although I realize that loss reserve discounting and certain other items may already be adjusted out of Adjusted Capital on Page PR026). Although this suggestion may appear to create a more level playing field for all companies it does not resolve the problem as described previously, that the company may be being penalized twice for the same items. The reconciling items may be penalizing the company in computing RBC, and then again in computing Adjusted Capital. Swnmary To change the calculations of the RBC Report to correctly adjust for all permitted practices may be more of a problem than previously anticipated. I understand that as a Vermont regulator of RRGs I may be overly sensiti ve to the Sensitivity Test. On the other band I feel that the permitted practice assets are already being applied an RBC factor in computing RBC, in a manner consistent with other assets. All permitted practices are also being reflected in the Note 1 reconciliation. and the adjusted surplus on a SAP basis is already being fully disclosed. Thank you for the opportunity to comment on the Risk Retention Group RBC Proposal. Feel free to call me at (802) should you have any additional questions. s~~ Peter Raymond, CPA, CFE Director of Captive Insurance

3 January 20, 2009 Mr. Dan Swanson, Senior Insurance Reporting Analyst NAIC Executive Headquarters 2301 McGee Street, Suite 800 Kansas City, MO Re: Capital Adequacy Task Force- Risk Retention Group RBC Proposal Dear Mr. Swanson, Thank you for the opportunity to provide comments to the Capital Adequacy Task Force regarding the proposed Risk Retention Group (RRG) Risk Based Capital (RBC) sensitivity test. The Vermont Captive Insurance Association with its 500+ members hosts the largest RRG membership of domicile associations in the United States. The State of Vermont domicile licenses the largest number of RRGs in the country. Our comments reflect Vermont's success in regulating RRGs for more than twenty years. As stated by Pete Raymond, Vermont's Director of Captive Insurance, in his communication of January 15, 2009, it appears that the proposal related to the RBC calculation for RRGs may penalize the organization twice for the same assets. It also seems that RRGs would be treated differently when Note 1 to the Annual Statement already requires a reconciliation for permitted practices for all companies.

4 Vermont has conducted its oversight of RRGs during the last two plus decades with great care and thoughtful recognition of how RRGs must operate to carry out their important purposes. Based on the Vermont regulators' observations as stated in the January 15th communication, we ask that the Capital Adequacy Task Force consider carefully the negative impact of the proposed "Sensitivity Test- Risk Retention Groups". Thank you again for the opportunity to comment. Sincerely, Molly Lambert President

5 Unknown From: O'Donnell, Sean Sent: Wednesday, January 28, :56 PM To: Swanson, Dan D. Subject: RE: Current exposure items for RRGs Hi Dan. I know the comment deadline has passed, but I just found this buried on my desk and wanted to get a comment out to you. DC does not believe that letters of credit (line 18) should be subtracted from "TAC" (line 14) to arrive at the "TAC for RRG Sensitivity Test" (line 21). LOCs are allowed to be counted towards capital by RRGs by a number of jurisdictions, including DC. LOCs represent a readily available source of funds that can be accessed very quickly by the Commissioner if needed. In some respects LOCs are more secure than other sources of capital such as cash, securities, and other assets that make up a company's capital because these other assets can be expended, lose value, or be depleted for other reasons. LOCs are widely recognized in the traditional insurance industry as acceptable collateral for various transactions. Thus they are essentially already counted towards "capital" for some traditional companies. For example, a company may not be afforded credit for certain unsecured reinsurance recoveries, but those same reinsurance recoveries could be counted as capital by the company if the recoveries were secured by an LOC. Regards, Sean O'Donnell. P. Sean O'Donnell Director of Financial Examination Risk Finance Bureau D. C. Department of Insurance, Securities and Banking 1400 L Street, NW, Suite 400 Washington, DC Phone Fax