Report on the Examination of MEDICAL MALPRACTICE JOINT UNDERWRITING ASSOCIATION OF RHODE ISLAND Providence, Rhode Island as of December 31, 2010 State of Rhode Island Department of Business Regulation Insurance Division
TABLE OF CONTENTS SALUTATION........ 1 SCOPE OF EXAMINATION 2 HISTORY AND CORPORATE RECORDS. 3 PLAN OF OPERATION 3 Group Retrospective Rating Plan......... 5 Stabilization Reserve Fund.... 6 Recoupment Deficit Funding..... 7 Association..... 8 MANAGEMENT 9 Members.......... 9 Board of Directors & Committees. 10 Stabilization Reserve Fund Directors.... 12 Conflict of Interest..... 13 FIDELITY BOND AND OTHER INSURANCE.. 14 TERRITORY AND PLAN OF OPERATIONS 14 REINSURANCE 15 ACCOUNTS AND RECORDS. 15 INFORMATION SYSTEMS CONTROLS... 16 FINANCIAL STATEMENTS... 17 Comparative Statement of Assets. 18 Comparative Statement of Liabilities and Surplus and Other Funds 19 Statement of Income..... 20 Capital and Surplus Account..... 21 Reconciliation of Capital and Surplus... 22 Analysis of Examination Adjustments.. 23 ASSETS... 24 Bonds..... 24 Cash Equivalents 24 Page
TABLE OF CONTENTS (Cont.) LIABILITIES...... 25 Losses. 25 Loss Adjustment Expenses 25 Vested Retirement Reserve.... 25 CAPITAL AND SURPLUS....... 27 SUMMARY OF RECOMMENDATIONS... 28 SUBSEQUENT EVENTS. 29 CONCLUSION.. 30
January 5, 2012 Honorable Paul McGreevy Insurance Commissioner State of Rhode Island Department of Business Regulation 1511 Pontiac Avenue Cranston, Rhode Island 02920 Dear Commissioner: In compliance with your instructions and pursuant to the provisions of Section 13 of Regulation 21 of the State of Rhode Island, Department of Business Regulation, Insurance Division, and R.I. General Law 27-9-36, an examination has been made as of December 31, 2010, of the financial condition and affairs of MEDICAL MALPRACTICE JOINT UNDERWRITING ASSOCIATION OF RHODE ISLAND a joint underwriting association created by the State of Rhode Island, at its home office located at One Turks Head Place, Suite 200, Providence, Rhode Island. The report of such examination is herewith submitted. An examination of the Medical Malpractice Joint Underwriting Association of Rhode Island, hereinafter referred to as the Association or as MMJUA, was previously conducted by the Insurance Division of the Department of Business Regulation of the State of Rhode Island as of December 31, 2005. 1
SCOPE OF EXAMINATION The current examination was performed in compliance with the above-mentioned sections of the General Laws of the State of Rhode Island, as amended, and covered the intervening fiveyear period ended December 31, 2010. The examination was conducted in accordance with the National Association of Insurance Commissioners ( NAIC ) Financial Condition Examiners Handbook ( Handbook ), 7-Phase Risk-Focused Examination Process. The Handbook requires that we plan and perform the examination to evaluate the financial condition and identify prospective risks of the Association by obtaining information about corporate governance, identifying and assessing inherent risks, and evaluating the controls and procedures used to mitigate those risks. The examination included assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation, and management s compliance with Statutory Accounting Principles and the NAIC Annual Statement Instructions. The examination process included a business risk assessment to focus examination procedures on those areas considered to have greater risk in order to identify significant operating issues and/or deviations from statutory accounting practices that may affect solvency. All accounts and activities of the Association were considered in accordance with the Risk-Focused Examination Process. The MMJUA instructed their independent accounting firm to make available for review all work papers concerning procedures followed, tests performed, information obtained, and conclusions reached pertinent to the firm s audit of the Association s financial statements for the year ended December 31, 2010. The work papers of the independent accounting firm 2
were reviewed in order to ascertain the extent to which procedures were employed to determine compliance with statutory requirements and guidelines. The work papers and analyses prepared by the independent accounting firm were utilized to the extent possible. When applicable, the independent accounting firm s work papers have been incorporated into the examination process. HISTORY AND CORPORATE RECORDS The Association was originally established in accordance with R.I. General Law 42-35-3, by the adoption of Emergency Regulation 21 by the Department of Business Regulation (the Department ) effective June 16, 1975. Subsequently, legislation was enacted which authorized the Department to promulgate regulations relating to medical malpractice insurance and validated Emergency Regulation 21. It was the intent of the Department that the Association provide a continuing stable facility for medical malpractice insurance. The records of meetings of the Board of Directors, and all Committees were reviewed as part of this examination. The meetings appeared to be held in accordance with the Association s bylaws and did not contain evidence of any actions contrary to the Association s Plan of Operation, bylaws, or laws of the State of Rhode Island. PLAN OF OPERATION Under a Plan of Operation (the Plan ), originally filed and approved effective June 25, 1975, and as amended and approved by the Department effective November 10, 2003, MMJUA 3
was created to provide medical malpractice insurance for physicians, hospitals and other health care providers, on a self-supporting basis. The Association is authorized to issue medical malpractice policies with limits not to exceed $1,000,000 for each medical incident under one policy and $3,000,000 in the aggregate under one policy in any one year. Also, the Association is authorized to underwrite incidental coverage for any provider of health care, but only if such provider is insured by the Association for medical malpractice. Other liability policies are issued with limits not to exceed $1,000,000 for each medical incident under one policy year and $2,000,000 in the aggregate under one policy in any one year. All policies are on an annual basis and shall be subject to the Group Retrospective Rating Plan and Stabilization Reserve Fund as authorized by Regulation 21. The Group Retrospective Rating Plan and Stabilization Reserve Fund are described below. Policies may be written on a claims made or occurrence basis. Occurrence basis provides coverage for claims incurred during the policy year regardless of when the claims are reported, while claims made basis provides coverage to the policyholder for claims reported during the policy year regardless of when the claims are incurred. All policies issued prior to October 1, 1983, were issued on an occurrence basis. Effective October 1, 1983, and July 1, 1990, policies became available for hospitals and physicians, respectively, on a claims made basis. 4
Group Retrospective Rating Plan Pursuant to Section 6 of Regulation 21, all policies shall be subject to a non-profit Group Retrospective Rating Plan ( GRRP ). A GRRP document was submitted and approved by the Director of the Department of Business Regulation (the Director ) effective for policies issued on or after June 16, 1975. Under the GRRP, the final premium for all policyholders of the Association, as a group, will be equal to the administrative expenses, loss and loss adjustment expenses and taxes, plus a reasonable allowance for contingencies and servicing. Policyholders shall be given full credit for all investment income, net of expenses and a reasonable management fee on policyholder supplied funds. As provided within Section 6 of the Plan, the GRRP will be established to allow for possible return of premiums to the policyholders or the assessment of an additional premium if necessary. Section 2 of the GRRP document states that the Association shall return to its policyholders insured during each annual rating period any excess premiums computed to be due for such annual rating period. Such premium returns shall be made through the Stabilization Reserve Fund ten (10) years after the expiration of each annual rating period or when all reported claims for such annual rating period are closed, whichever is later. 5
Stabilization Reserve Fund Section 7 of Regulation 21 creates a Stabilization Reserve Fund ( SRF ). Prior to being repealed effective July 25, 1996, each policyholder initially contributed to the SRF an amount equal to one-third their first annual premium. All funds held within the SRF are to be held in trust and used to replenish the Underwriting Fund, if and when necessary, at the sole discretion of the Director. All investment income of the SRF, less all expenses of administering the SRF, is to be credited annually to the Underwriting Fund of the Association. Policyholders are to be given full credit for all SRF income, net of expenses, under the GRRP. Any funds remaining in the SRF after all retrospective premium charges have been paid to the Underwriting Fund are to be returned to the policyholders under procedures authorized by the Director. Section 4 of the GRRP document requires that SRF funds on policies which have been terminated at the insured s request or otherwise shall be held in trust for a period of ten (10) years from the date of termination and shall be distributed at that time or when all reported claims against the policyholder are closed, whichever is later. Such distribution shall consist of the lesser of the policyholder s original contribution or the pro rata share of the balance of the SRF at the end of the month preceding the distribution. Due to the uncertainty in the 6
marketplace and the results of operations of the Association, the Department has not allowed the contributions to be returned. Recoupment of Deficit Funding Section 6 of Regulation 21 provides that in the event that all resources of the Underwriting Fund and Stabilization Reserve Fund have been exhausted, the Association is required to certify to the Director the amount of any deficit remaining. If sufficient funds are not available for the sound financial operation of the Association, the members are required to contribute to the financial requirements of the Association. If such contributions to the Association become necessary, all the insurance companies which are members would participate in the proportion that their gross direct premiums written for personal injury liability insurance during the preceding calendar year in Rhode Island bear to the aggregate gross direct premiums written for such insurance in Rhode Island that year by all members. Such participation is to be determined annually. The Director is then required to authorize the members of the Association to recoup their respective share of the deficit by either (1) applying a surcharge to be determined by the Association at a rate not to exceed 1% of the annual premiums on future policies affording those kinds of insurance which form the basis for their participation in the Association, or (2) deducting their share of the deficit from past or future taxes due the State of Rhode Island. As amounts of incurred losses become finalized and the deficit is adjusted, the members of the Association will adjust their recoupment procedure accordingly. 7
Association The Association had operated under the terms of a Servicing Carrier Agreement with Marsh USA, Inc. from 1989 through December 31, 2006. Effective for a three-year period commencing on January 1, 2007, the Association entered into a servicing carrier agreement with Beecher Carlson Insurance Services, LLC., a limited liability company licensed to operate in the State of Rhode Island, in association with its subcontractor Western Litigation, Inc, so as to carry out all duties and obligations as servicing carrier. The current agreement was renewed for a three-year period effective January 1, 2010, as approved by the Department of Business Regulation of the State of Rhode Island. Under the terms of the agreement, the servicing carrier is to provide general administrative, accounting and statistical services, underwriting, policyholder services, claims administration, risk management and loss control services. Section 5 of Article II of the Operating Principles of the Plan contains eligibility requirements and service standards applicable to the servicing carrier. Also, subsection 5(c) outlines the compensation paid to the servicing carrier. As the Servicing Carrier Agreement has been renewed, normally on a three-year basis, and approval has been obtained from the Director, the applicable sections of the Plan have been updated. Section 14 of Article 1 of the Plan of Operation allows amendments to the Plan to be made subject to the approval of the Director. Upon each renewal of the Servicing Carrier 8
Agreement and with the approval of the Director, Article II of the Plan has been amended to reflect the current Servicing Carrier Agreement s terms. MANAGEMENT Members Membership in the Association is required of all insurance companies authorized to write, within the State of Rhode Island on a direct basis, personal injury liability insurance as defined in R.I. General Law 27-9-2, including insurers covering such perils in multiple peril package policies. Every member shall participate in the Association s writings, expenses, servicing allowances, management fees and losses in the proportion that the net direct premiums of each such member, excluding that portion of premiums attributable to the operation of the Association, written during the preceding calendar year bears to the aggregate net direct premiums written in Rhode island by all members of the Association. Each member s participation shall be determined annually. An insurer ceasing to be licensed or authorized shall automatically cease to be a member and shall no longer be bound by the Plan, however, such insurer shall remain liable for any liabilities arising from its participation in the Association. The Association s Plan of Operation provides that the Annual Meeting of its Members shall be held on such a date, or on about the anniversary of Regulation 21, at such place within the 9
State or such other location and at such hour as may be designated by the Chairperson of the Board. Special meetings may be called by the Chairperson of the Board upon written request by members whose net direct premiums equal 20% or more of the net direct premiums of all members in the most recent calendar year. Notices of all regular and special meetings shall be sent to the Director of the Department of Business Regulation of the State of Rhode Island. A quorum for the transaction of business requires the presence of 51 percent or more of the Members present in person or proxy. Board of Directors and Committees The Plan of Operation provides that its affairs, business and property shall be managed by a board of eleven (11) members; seven (7) of whom shall represent member companies, four (4) of whom shall be providers of health care appointed annually by the Director of the Department of Business Regulation as nominated by the Rhode Island Medical Society and the Hospital Association of Rhode Island. Not more than one (1) insurer in a group under the same management or ownership shall serve on the Board at the same time. Directors shall serve until their successors are duly elected or appointed as the case may be. Vacancies in the Board of Directors occurring from any cause may be filled by appointment and confirmation of the Director of Business Regulation. The Board shall meet as often as may be required to administer the Association. 10
The Board shall file annually in the Office of the Director on or before the first day of March, a statement in the form prescribed by the Director, which shall contain information with respect to the Association s transactions, condition, operations and affairs during the preceding year and it shall furnish to the Director, as he or she may at any time require, such additional information as would be considered material and of assistance in evaluating the scope, operation and experience of the Association. Six (6) members of the Board shall constitute a quorum for the transaction of business and the acts of a majority of the directors present in person, by telephone or other electronic, real time or by proxy, at a meeting which a quorum is present shall be the acts of the Board. Each member is entitled to one (1) vote in person or by proxy. Directors, officers and committee members holding office at December 31, 2010, were as follows: Board of Directors Richard Cammet Earl Cottam, Jr. Jan Feldman, DDS Raymond Geary Geoffrey Hunt, Jr. Susan Lees Kenneth Nanian, MD James Pascalides, DPM Michael Souza Robert Suglia Maura Travers 11
Officers of the Board Chairperson Vice Chairperson Secretary Assistant Secretary Maura Travers Raymond Geary Susan Lees Jerilynn Leahy Officers of the Association Executive Director Jerilynn Leahy Executive Committee Maura Travers, Chair Raymond Geary Susan Lees Finance and Audit Committee Earl Cottam, Jr. - Chair Geoffrey Hunt Michael Souza Robert Suglia Nominating Committee Kenneth Nanian, MD - Chair Jan Feldman, DDS Robert Suglia Stabilization Reserve Fund Directors The Stabilization Reserve Fund ( SRF ) shall be administered by the Director or his or her Deputy. Without limiting the power of the said Deputy or his or her Deputy to administer the Fund, they shall seek the advice and assistance of an Advisory Board consisting of two (2) members, both of whom shall be appointed by the Director. The Advisory Board members shall serve no fixed term, but at the pleasure of the Director. One Advisory Board member shall be a member of the Association, and the other a representative of its policyholders, 12
provided, however, that the Director may from time to time substitute a member of the banking or financial industry for either representative. All funds received by the SRF shall be held in trust by a corporate trustee selected by the Director or his or her Deputy, after seeking the advice of and consulting with the Advisory Board. The corporate trustee may invest the monies held in trust, subject to the approval of the Director or his or her Deputy. Conflict of Interest The Association has an established procedure for disclosure to its Board of Directors of any actual conflicts of interest or situations which reasonably could lead to a perception that a conflict of interest exists. The disclosure is required for all Board members, volunteers, employees and consultants of the Association. The policy approved by the Board requires each of these individuals to complete and submit a Code of Ethical Conduct form on an annual basis. A review of these forms did not reveal any conflict of interest or a perceived conflict of interest situation. The following was noted during our review of the Association s Code of Ethical Conduct forms for all years under examination. It was noted that one Board member did not complete the required form for the year 2007, and a different Board member did not complete the required form for the year 2008. For the year 2007, the Board member did not return the required form. For the year 2008, the Board member never received the form. Currently the 13
Association s general counsel is responsible for sending and receiving back the Code of Ethical Conduct forms. Recommendation #1 It is recommended that the Association establish procedures to ensure that the Code of Ethical Conduct form is sent out and received back from all Board members, volunteers, employees and consultants of the Association on an annual basis. FIDELITY BOND AND OTHER INSURANCE The Association is a named insured on a Directors and Officers Liability Policy with an annual aggregate limit of insured person and organization liability coverage of $10,000,000, less retention of $100,000. Coverage includes the part of each loss, including defense costs, which is in excess of the retention amount. Management has determined the adequacy of coverage for all insurable risks and assets of the Association. TERRITORY AND PLAN OF OPERATIONS During a review of the certificate of authority in effect at December 31, 2010, the examiners confirmed that the Association was licensed to transact business in State of Rhode Island and that the Association appeared to be operating in compliance with its certificate of authority. The Association is authorized to transact the business of medical malpractice and incidental liability insurance for physicians, hospitals, and other health care providers in the State of Rhode Island. 14
REINSURANCE The Association maintains three (3) catastrophic reinsurance contracts. The reinsurance contracts are intended to cover any losses that arise out of litigated court rulings that are in excess of the original policy limits of $1,000,000. The Association has 5% retention under each of the three contracts. The layers of each of the three contracts are as follows: $4,000,000 excess of $1,000,000, $5,000,000 excess of $5,000,000, and $10,000,000 excess of $10,000,000. ACCOUNTS AND RECORDS The accounts and records of the Association are processed and maintained by personnel and information systems of Beecher Carlson Insurance Services, LLC, the servicing carrier, and its subcontractor, Western Litigation, Inc. The Association is audited by an independent accounting firm on an annual basis, and audited financial reports were filed with the Division of Insurance for all years under examination as required. The accounting firm s work papers were reviewed, and utilized as part of our examination where deemed applicable. There were no material internal control weaknesses noted or financial statement adjustments made, as a result of the independent audits conducted during the period under review. 15
INFORMATION SYSTEMS CONTROLS As part of the examination planning process, the Rhode Island Division of Insurance conducted a review of the internal controls surrounding the Association s financially significant information systems. The review was performed in accordance with standards established by the NAIC and included procedures to obtain reasonable assurance that: 1. The Association s responses to the NAIC s Evaluation of Controls in Information Systems Questionnaire ( Exhibit C ) present fairly, in all material respects, the aspects of policies and procedures that may be relevant to its internal control structure; 2. The control structure policies and procedures were suitably designed to achieve the control objectives implicit in Exhibit C; and 3. Such policies and procedures had been in operation from January 1, 2010 to December 31, 2010. 16
FINANCIAL STATEMENTS The results of the examination are set forth in the following exhibits and schedules: Comparative Statement of Assets December 31, 2010 and December 31, 2005 Comparative Statement of Liabilities and Surplus and Other Funds December 31, 2010 and December 31, 2005 Statement of Income Year Ended December 31, 2010 Capital and Surplus Account December 31, 2009 to December 31, 2010 Reconciliation of Capital and Surplus December 31, 2005 to December 31, 2010 17
MEDICAL MALPRACTICE JOINT UNDERWRITING ASSOCIAITON OF RHODE ISLAND Comparative Statement of Assets December 31, 2010 and December 31, 2005 ASSETS December 31, December 31, Increase 2010 2005 (Decrease) Bonds $109,583,403 $94,922,640 $14,660,763 Cash on hand and on deposit and cash equivalents 4,410,697 5,334,862 (924,165) Short-term investments 0 370,553 (370,553) Other invested assets 48,147,194 36,476,521 11,670,673 Aggregate write-ins for invested assets 35,279 0 35,279 Subtotals, cash and invested assets 162,176,573 137,104,576 25,071,997 Investment income due and accrued 1,676,332 1,789,236 (112,904) Uncollected premiums and agents balances in course of collection 278,331 994,169 (715,838) Deferred premiums, agents balances booked but deferred and not yet payable 393,075 0 393,075 Current federal and foreign income tax recoverable and interest thereon 1,327,570 1,202,647 124,923 Net deferred tax asset 982,714 0 982,714 Aggregate write-ins for other than invested assets 8,121 824 7,297 Total Assets $166,842,716 $141,091,452 $25,751,264 18
MEDICAL MALPRACTICE JOINT UNDERWRITING ASSOCIATION OF RHODE ISLAND Comparative Statement of Liabilities, Surplus and Other Funds December 31, 2010 and December 31, 2005 LIABILITIES, SURPUS AND OTHER FUNDS December 31, December 31, Increase 2010 2005 (Decrease) Losses $62,967,076 $69,436,047 ($6,468,971) Loss adjustment expenses 19,331,497 20,081,858 (750,361) Commissions payable, contingent commissions and similar charges 32,601 0 32,601 Other expenses 140,868 145,000 (4,132) Taxes, licenses and fees 1,454 0 1,454 Unearned premiums 3,012,350 6,196,800 (3,184,450) Advance premium 128,834 0 128,834 Amounts withheld or retained by company for account of others 7,324,090 7,324,090 0 Aggregate write-ins for liabilities 0 1,359,586 (1,359,586) Total Liabilities 92,938,770 104,543,381 (11,604,611) Unassigned funds (surplus) 73,903,946 36,548,071 37,355,875 Surplus 73,903,946 36,548,071 37,355,875 Total Liabilities, Surplus and Other Funds $166,842,716 $141,091,452 $25,751,264 19
MEDICAL MALPRACTICE JOINT UNDERWRITING ASSOCIATION OF RHODE ISLAND Statement of Income Year Ended December 31, 2010 UNDERWRITING INCOME Premiums earned $5,476,947 Losses incurred 8,021,112 Loss adjustment expenses incurred (2,075,173) Other underwriting expenses incurred 2,509,386 Aggregate write-ins for underwriting deductions (500,000) Total underwriting deductions 7,955,325 Net underwriting gain (loss) (2,478,378) INVESTMENT INCOME Net investment income earned 6,631,105 Net realized capital gains (losses) less capital gains tax of $401,627 779,629 Net investment gain (loss) 7,410,734 OTHER INCOME Finance and service charges not included in premiums 29,597 Aggregate write-ins for miscellaneous income 3,270,000 Total other income 3,299,597 Net income before dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes 8,231,953 Dividends to policyholders 0 Net income after dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes 8,231,953 Federal and foreign income taxes incurred 1,643,439 Net income $6,588,514 20
MEDICAL MALPRACTICE JOINT UNDERWRITING ASSOCIATION OF RHODE ISLAND Capital and Surplus Account December 31, 2009 to December 31, 2010 Capital and Surplus, December 31, 2009 $66,219,761 Net income 6,588,514 Change in net unrealized capital gains (losses) less capital gains tax of $0 1,317,510 Change in net deferred income tax (1,813,578) Change in non-admitted assets 1,591,739 Change in capital and surplus for the year 7,684,185 Capital and Surplus, December 31, 2010 $73,903,946 21
MEDICAL MALPRACTICE JOINT UNDERWRITING ASSOCIATION OF RHODE ISLAND Reconciliation of Capital and Surplus December 31, 2005 to December 31, 2010 Capital and Surplus, December 31, 2005 $36,548,071 Net income 33,297,693 Change in net unrealized capital gains (losses) 3,075,470 Change in net deferred income tax 3,356,988 Change in non-admitted assets (2,374,275) Rounding (1) Change in capital and surplus for the period 37,355,875 Capital and Surplus, December 31, 2010 $73,903,946 22
MEDICAL MALPRACTICE JOINT UNDERWRITING ASSOCIATION OF RHODE ISLAND Analysis of Examination Adjustments December 31, 2010 The examination of the Association performed as of December 31, 2010, did not disclose any material misstatements to the financial statements contained in its 2010 Annual Statement filing. Accordingly, the amounts reported by the Association have been accepted for purposes of this report. 23
ASSETS Bonds $109,583,403 Cash Equivalents 2,599,694 The above amounts are the same amounts reported by the Association in its 2010 Annual Statement. At December 31, 2010, 99.8% of bonds and cash equivalents in the Association s portfolio were rated 1 or 2 by the NAIC Securities Valuation Office, which represents investments of the highest and high quality, respectively. All bonds and cash equivalents are held by Bank of America under the terms of a custodial agreement. The book/adjusted carrying value of bonds and cash equivalents owned at December 31, 2010, represents 65.7%, and 1.6% of the Association s total admitted assets, respectively. The book/adjusted carrying value, fair value, actual cost and par value for the bond and short-term investment portfolio at December 31, 2010 are as follows: Category Book/Adjusted Carrying Value Fair Value Actual Cost Par Value Bonds $109,583,403 $118,640,203 $110,204,403 $108,498,940 Cash equivalents 2,599,694 2,599,685 2,599,153 2,600,000 Total $112,183,097 $121,239,888 $112,803,556 $111,098,940 24
LIABILITIES Losses $62,967,076 Loss Adjustment Expenses $19,331,497 Vested Retirement Reserve $1,270,006 The above liabilities for losses, loss adjustment expenses, and the vested retirement reserve are the same as that reported by the Association in its 2010 Annual Statement. The above reserves have been reviewed by Bartlett Actuarial Group, Ltd. ( Bartlett ), consulting actuary for the Rhode Island Division of Insurance. The Association s Physicians claims-made policies include a provision for extended reporting ( tail coverage ) in the event of an insured s death, disability, or retirement. The accrued liability for death, disability, and retirement tail coverage is referred to as the Vested Retirement Reserve or VRR. The Association accounts for the VRR within its unearned premium reserves. As part of the review process, Bartlett examined the assumptions and methods used by Milliman, Inc., the Association s appointed actuary, in determining the reserves and found them to be appropriate and actuarially sound. In assisting Bartlett with the reserve analysis, the examiners performed various procedures to verify the integrity of the Association s loss data. A combination of subjective and statistical sampling techniques was used in testing the loss data. While sampling techniques do not give complete assurance that all errors and irregularities will be detected, there were no material errors or irregularities detected by the examiners while sampling the loss data. The following was noted as a result of examination procedures performed related to losses, loss adjustment expenses, and the vested retirement reserve. In reviewing the Annual 25
Statement instructions related to the actuarial opinion required to be included or attached to the Annual Statement for all years under examination, it was noted that the Association did not appoint its qualified actuary for the years 2008 and 2009. Per the Annual Statement Instructions related to the actuarial opinion, The Qualified Actuary must be appointed by the Board of Directors, or its equivalent, or by a committee of the Board, by December 31 of the calendar year for which the opinion is rendered. Recommendation #2 It is recommended that the Association have its Board of Directors, or its equivalent, or a committee of the Board, appoint a qualified actuary by December 31 of the calendar year for which the actuarial opinion is rendered, so as to be in compliance with the Annual Statement Instructions. 26
CAPITAL AND SURPLUS Capital and Surplus $73,903,946 The above amount, which is the same as that reported by the Association in its 2010 Annual Statement, consists of the following: Unassigned Funds (Surplus) $73,903,946 Total Capital and Surplus $73,903,946 27
No. SUMMARY OF RECOMMENDATIONS Recommendation Page Number 1 It is recommended that the Association establish procedures to ensure that the Code of Ethical Conduct form is sent out and received back from all Board members, volunteers, employees and consultants of the Association on an annual basis. 2 It is recommended that the Association have its Board of Directors, or its equivalent, or a committee of the Board, appoint a qualified actuary by December 31 of the calendar year for which the actuarial opinion is rendered, so as to be in compliance with the Annual Statement Instructions. 14 26 28
SUBSEQUENT EVENTS A review of the minutes of the Board of Directors and Committee meetings for the period subsequent to the examination period was performed to ascertain whether any subsequent events have occurred which would have a material impact on the Association s operations or financial statements. In addition, an inquiry was made of the Association s management regarding subsequent events. It was noted that no subsequent events appear to have occurred that could have a material impact on the Association with the exception of the following related to structured settlements. During the course of business, the Association from time to time purchases annuities from life insurance companies whereby claimants are payees. One such annuity was purchased by the Association from Executive Life of New York ( ELNY ) during the 1980 s for approximately $4,000,000. ELNY was placed into rehabilitation in 1991. On September 1, 2011, the Superintendent of Insurance for the State of New York has petitioned the Supreme Court of Nassau County, New York, for an Order of Liquidation and an Approval of Restructuring Agreement for ELNY. Based on this petition, an Order to Show Cause hearing will be held on March 15, 2012 as to why orders should not be made declaring ELNY to be insolvent, and converting the rehabilitation proceeding to a liquidation proceeding. The Association may be contingently liable regarding the annuity referenced above. However, as of the date of this report, that amount cannot be determined. 29
CONCLUSION We have applied verification procedures to the data contained in this report using both subjective and statistical sampling techniques as deemed appropriate. While sampling techniques do not give complete assurance that all errors and irregularities will be detected, had any been detected during the course of this examination, such errors and/or irregularities would have been disclosed in this report. We were not informed of, and did not become aware of any other error or irregularity which could have a material effect on the financial condition of the Association as presented in this report. Assisting in the examination with the undersigned were Gianfranco Monaco, CISA, Principal Insurance Examiner, EDP & Automated Systems, and Douglas Fowler, Insurance Examiner, of the Rhode Island Insurance Division. Acknowledgment is also made of the services rendered by Bartlett Actuarial Group, Ltd., the Division of Insurance s consulting actuary. Respectfully submitted, Theodore J. Hurley, CPA, CFE, Insurance Examiner-In-Charge State of Rhode Island Representing Northeast Zone, NAIC 30