ENVIRONMENTAL FINANCIAL ADVISORY BOARD
A. James Barnes, Cbair
Terry Agrisa
Jolle Beluga
John Boland
Gauge Botcher
Donald Carrett
Hlcbael Carley
Racket Denting
Pete Domenid
KeDy Downanl
Msoy Fraacoeur
Vincent Qliardy
Steve Grossman
Jennifef ffetv&ndez
Keita Binds
Steve nonfood
Langdon Harsh
Greg Mason
CherleRlce
BeleaSanl
Andrew Sawyers
Jim Smith
GregSwaitz
Soala Toledo
Billy Turner
Justin OOsott
Joan Wise
StanMetburg
Designated
Federal Official
MAR 20 2007
Honorable Stephen L. Johnson, Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Re: EFAB Report on the Use of Captive Insurance as Financial Assurance Tool in
Office of Solid Waste and Emergency Response Programs
Dear Administrator Johnson:
At the request of the Agency, the Environmental Financial Advisory
Board (EFAB) has convened a workgroup to address questions concerning the
financial assurance requirements for Office of Solid Waste and Emergency
Response (OSWER) programs. These requirements address closure, post-closure,
corrective action and other aspects of the Resource Conservation and Recovery
Act (RCRA) Subtitle C, D and I programs and also are viewed as guidance with
regard to Superfund response action. On January 11,2006, EFAB submitted to
the Agency its initial findings concerning use of the financial test and corporate
guarantees. We were pleased to receive on February 21,2006, a letter from the
Assistant Administrator of OSWER thanking EFAB for its work and highlighting
elements of our analysis that were of particular assistance. We are grateful for
this prompt and substantive response, which we have taken into account in
approaching the use of captive insurance for financial assurance.
As we noted in our letter of January 11,2006, the financial assurance
requirements and the issues concerning them are complex and multi-faceted. For
this reason, the Board, working with the Agency and other interested
stakeholders, is addressing financial assurance mechanisms in discrete and
manageable pieces, and focusing sequentially on them. The enclosed report on
captive insurance represents a second step in our efforts. We recognize that many
of the issues associated with policies issued by captive insurers are also issues
posed by commercial insurance. While we acknowledge that there could be
benefits hi assessing both at the same time, we also found some unique issues
associated with captive insurance that warranted a separate review. In fact, we
found some commonalities with our earlier analysis of the financial test. In
effect, the methods by which a party complies with its financial assurance
requirements fall within a continuum of inherent financial capacity to fulfill
guaranties by unrelated third parties. We expect that commercial insurance will
be the next area of focus. As we complete our review of other aspects of financial
assurance, we will apprise you of our responses to the questions posed by the
Agency along with our findings.
Providinn Advice on "How To Pay" for Environmental Protection
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The Board was charged with addressing three questions regarding captive insurance: (1)
Should there be minimum capitalization requirements for captive or other insurers who provide
policies for financial assurance and, if so, what requirements would best assure funds are
available for protection of the environment, including closure, post-closure, corrective action and
other environmental clean-up?; (2) Should policies written by captives and commercial insurers
be treated as equally acceptable mechanisms?; and (3) Should the language of policies written by
captives differ in any way from those issued by commercial insurers?
In June 2004, EFAB conducted a workshop in New York City which began to explore the
issues raised by the use of several financial assurance mechanisms, including captive insurance.
On June 27,2006, we convened a second workshop in New York City focused exclusively on
captive insurance in which we heard from governmental and financial community
representatives overseeing and evaluating the captive insurance industry, users of captive
insurance, a representative of the EPA Office of the Inspector General, and State government
representatives familiar with the use of captive insurance for RCRA financial assurance. We
received public comment at the meeting, and subsequently have received additional written
comments from business interests and State solid waste management officials.
Our work has been informed throughout by the expertise of government officials willing
to share their extensive knowledge of environmental insurance. In particular, we appreciate the
insights provided by EPA staff in both OSWER and OECA, and State regulators familiar with
the details of both RCRA and Superfund financial assurance requirements and the structure and
operations of the captive insurance industry. The active participation of expert EPA staff and
representatives of five States in extended discussions at the New York City workshop and in
deliberations both before and after the workshop assisted the Board in understanding the nature
of and regulatory structure for captive insurance.
The Board appreciates EPA's continuing support and participation in the development of
this report and the findings contained herein. If the Agency decides to go forward with the
informational materials recommended by the Board, we would be pleased to work with the
Agency or its designees on that effort. Meanwhile, we will continue to gather and analyze
information on additional topics involving financial assurance in order to respond to the full
range of questions EPA has posed to the Board.
We would be pleased to respond to any questions that you may have with regard to
today's report or any other aspect of our on-going deliberations.
Sincerely,
A. James Barnes A. Stanley Meiburg
Chair Designated Federal Official
Enclosure
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cc: Susan Parker Bodine, Assistant Administrator, Office of Solid Waste and Emergency
Response
Grant Nakayama, Assistant Administrator, Office of Enforcement and Compliance
Assistance
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Environmental Financial
Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal
Official
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
Hon. Vincent Girardy
Steve Grossman
Jennifer Hernandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
Greg Swartz
James Smith
Sonia Toledo
Jim Tozzi
Billy Turner
Justin Wilson
John Wise
The Use of Captive Insurance as a
Financial Assurance Tool in
Office of Solid Waste and Emergency
Response Programs
This report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the views and opinions expressed in the
report do not necessarily represent those of the Agency or any other
agencies in the Federal Government.
March 2007
Printed on Recycled Paper
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The Use of Captive Insurance as a Financial Assurance Tool
in Office of Solid Waste and Emergency Response Programs
Background
The Environmental Financial Advisory Board (EFAB or Board) is examining, at the
request of the U.S. Environmental Protection Agency (EPA or Agency), questions
concerning the financial assurance requirements for Office of Solid Waste and
Emergency Response (OSWER) programs. These requirements address closure, post-
closure, corrective action and other aspects of the Resource Conservation and Recovery
Act (RCRA) Subtitle C, D and I programs and also are viewed as guidance with regard to
Superfund response action. Financial assurance requirements and the issues concerning
them are complex and multi-faceted. For this reason, the Board, working with the
Agency and other interested stakeholders, is addressing financial assurance mechanisms
in discrete and manageable pieces, and focusing sequentially on them. This report
addresses captive insurance, and focuses primarily on Subtitle C closure, post-closure,
and third party liability requirements.
The Board was charged by EPA with addressing three questions regarding captive
insurance: (1) Should there be minimum capitalization requirements for captive or other
insurers who provide policies for financial assurance and, if so, what requirements would
best assure funds are available for protection of the environment, including closure, post-
closure, corrective action and other environmental clean-up?; (2) Should policies written
by captives and commercial insurers be treated as equally acceptable mechanisms?; and
(3) Should the language of policies written by captives differ in any way from those
issued by commercial insurers?
In June 2004, EFAB conducted a workshop in New York City that began to explore the
issues raised by the use of several financial assurance mechanisms, including captive
insurance. On June 27, 2006, we convened a second workshop in New York City
focused exclusively on captive insurance in which we heard from governmental and
financial community representatives overseeing and evaluating the captive insurance
industry, users of captive insurance, a representative of the EPA Office of the Inspector
General, and three State government representatives familiar with the use of captive
insurance for RCRA financial assurance. We received public comment at the meeting,
and subsequently have received additional written comments from business interests and
State solid waste management officials.
Our work has been informed throughout by the expertise of government officials willing
to share their extensive knowledge of environmental insurance. In particular, we
appreciate the insights provided by EPA staff in both OSWER and OECA, and State
regulators familiar with the details of both RCRA and Superfund financial assurance
requirements and the structure and operations of the captive insurance industry. The
active participation of expert EPA staff and State representatives in extended discussions
at the New York City workshop and in deliberations both before and after the workshop
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assisted the Board in understanding the nature of captive insurance regulation by State
insurance regulators, and the regulatory framework for the use of insurance for financial
assurance purposes under environmental law.
The Concept of Captive Insurance
RCRA Subtitle C, D and I require that regulated facilities provide financial assurance
sufficient to secure funds needed to meet program-specific obligations to properly close,
conduct post-closure care or provide needed corrective measures. See, e.g., 40 CFR
Sections 264.143 (e) (Subtitle C closure insurance), 264.145(3) (Subtitle C post-closure
insurance), Section 264.146 (combination of closure and post-closure care insurance),
264.147 (Subtitle C liability insurance); 258.74(d) (Subtitle D closure and post-closure
care insurance and corrective action). Superfund response actions also often require
financial assurance and the RCRA regulations provide guidance in these instances.
Insurance mechanisms are one option for meeting these requirements under Federal law.
Available financial assurance options have included insurance since 1982 (see 47 Fed.
Reg. at 15033 (April 7, 1982)).
Insurance mechanisms must assure that funds are available once closure or post-closure
begins and in an amount sufficient to cover the current estimate of costs. The facility
owner/operator "may receive reimbursements" as these activities proceed (see 40 CFR
264.146; 258.74(d)(4)). Although as a practical matter facility owner/operators may pay
for closure/post-closure/corrective action as costs are incurred and not elect to draw on
the insurance, the relevant federal or state regulator must have unimpeded ability to direct
insurance funds as costs are incurred in the event that the policy holder defaults. While
the language that must be used in an insurance policy for financial insurance is explicitly
laid out in the regulations, these provisions do not impose any financial requirements or
limitations on who may issue the policy.
There are two forms of insurance: "commercial" insurance and "captive" insurance.
Captive insurance is distinguished by the initial funding and restriction of its coverage
either to one company (so-called "pure" captive insurance where the parent establishes a
captive for its exclusive use) or to an enterprise or risk retention group (e.g., brownfields
redevelopment projects or a consortium of interests developing an affordable housing
development). Captive insurance is used in areas other than environmental protection
where corporate parent firms find it to their advantage to set up a captive to cover well-
understood risks at a lower cost than purchasing insurance policies available from
commercial carriers. Workman's Compensation has been cited as one area where
captives are often used. The Board did not attempt to compare other risk areas where
captive insurance is used with risks associated with environmental protection.
EPA's Office of the Inspector General in September 2005 summarized concerns which
have been raised regarding the use of captive insurance for financial assurance purposes.
"Captive insurance is defined as insurance issued by a wholly-owned subsidiary
of the company being insured. The financial health of the captive insurance
company is closely tied with the parent company, so if the company encounters
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financial difficulties there is no guarantee that the captive insurance company
would retain the necessary resources to fund closure and post-closure. This
concern was expressed in our 2001 report and the ASTSWMO paper. Although
we found no specific instances of financial assurance failure associated with
captive insurance, States and regions remain concerned because there is no
independence of risk between the corporate parent and the company insured."
Office of the Inspector General, Continued EPA Leadership Will Support State
Needs for Information and Guidance on RCRA Financial Assurance, Report No.
2005-P-00026, page 15-16 (September 26, 2005)(hereafter 2005 IG
Repori)(updating and superseding a 2001 report by the Office of the Inspector
General).
The remainder of this report describes specific issues raised in our discussions with
stakeholders on this topic before turning to findings and recommendations. In particular,
we summarize the States' specific concerns with captive insurance, as expressed in the
June 27 workshop. These concerns were consistent with the recent EPA Inspector
General's report summarizing State views on captive insurance. We then summarize the
information provided by State governmental and financial community panelists with
regard to captive insurance, as well as the views of companies who now use captive
insurance. Finally, we offer our evaluation of the materials presented to us, and
recommendations to EPA on how it can strengthen the reliability and transparency of
captive insurance for financial assurance.
State Concerns about Captive Insurance
According to the September 2005 Inspector General's report cited above, 13 states do not
accept captive insurance as a financial assurance mechanism — 2005 IG Report at 14. A
further reflection of this lack of confidence was that presentations at the June 2006
workshop suggested that other jurisdictions, while not prohibiting the use of captive
insurance in principle, impose restrictive requirements on these policies which tend to
make them noncompetitive and unavailable in practice.
The three State regulators participating in the New York workshop were consistent in
raising concerns about captive insurance:
• Captive insurance is perceived to pose a high risk because of lack of
independence (and thus true transfer of risk) between the captive subsidiary and
its insured parent.
• State environmental regulators are concerned that captive insurers may not be
subject to minimum requirements with regard to capitalization, minimal reserves
or encumbrances on reserves (e.g., loans back or reliance on lines of credit).
• Where a captive insures an asset of declining value, like a landfill approaching
capacity, there is no mechanism to compensate for the increasing risk of financial
failure. State environmental regulators have limited experience with the
insurance regulatory structure or with State insurance commissions. In general,
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State regulators thought that the assurance of quality oversight provided by
independent third-party review and ongoing oversight (such as that provided by
investment ratings for companies using the financial test, as recommended by
EFAB in our earlier report) would be valuable. However, State regulators
cautioned that the third party reviewing agency would need to fully understand
the particular characteristics of the environmental risks being insured by a captive
insurance firm.
• Where a captive is domiciled in a jurisdiction other than the State of the facility at
issue, the host State is concerned about licensing requirements and continued
oversight by the domicile jurisdiction's insurance regulators. States are
concerned by the lack of consistent regulatory oversight in the states of domicile.
Testimony by the Captive Insurance Industry and Regulators
The State of Vermont, which operates the largest domestic program for licensing captive
insurance companies, provided extensive background on its activities. This discussion
was supplemented by AM Best's presentation on the nature of their assessment of captive
insurers' credit quality. The State of Vermont and AM Best shared the perspective that
captive insurers are evaluated with regard to licensing with rigor equal to commercial
insurers when evaluating the numeric fundamentals, with additional review of the quality
of the parent employing a captive and of the business plan for the captive itself.
With regard to specific concerns raised about captive insurance, the panel representing
State licensing and private sector oversight provided the following pertinent information:
1. Understanding captive insurance licensing requirements: Although the panel
provided an excellent basis on which to improve understanding of captive
insurance, they did not articulate in detail the practices of licensing programs by
States other than Vermont, or by overseas jurisdictions which license captive
insurers. Given that insurance is regulated at the State rather than the federal
level, State insurance regulations are not uniform. One State's program may not
provide enough of a framework by which environmental regulators can evaluate
the quality of captive policies offered by organizations licensed in jurisdictions
other than Vermont.
2. Independence: The panel stated that in their experience, in jurisdictions which do
license captives, the factual terms of evaluation and requirements with regard to
ability to cover claims are equivalent for captive and commercial insurers. These
licensing practices, and the nature of rating agencies' oversight, also constitute a
check upon parental control of and relationship with its captive. In addition, the
State of Vermont imposes independent review authority on aspects of the
captive's operations (e.g., the licensing authority must pre-approve loans, changes
to the business plan, or changes in coverage). For captives rated by AM Best,
there is an additional independent review, again of aspects of operations material
to financial assurance (asset value and risk, credit risk exposure, loss reserves,
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premiums written and, for captives, long-term performance, diversification and
the financial strength of the captive's parent company).
3. Minimum requirements: As noted above, the State of Vermont and AM Best
stated that they regularly review both commercial and captive insurers using equal
standards with regard to capitalization, reserves, and encumbrances on reserves
(e.g., Vermont must pre-approve loan backs and must have immediate and
unencumbered access to evergreen Letters of Credit). However, the licensing
jurisdiction for a substantial number of captives is outside of the United States.
There are no universally recognized minimum standards. The requirements of the
varying jurisdictions, both domestic and foreign, may vary considerably.
4. Risk of Failure: The financial assurance requirements for OSWER programs, at
the federal level at least, do not have guidelines for minimum financial strength of
the companies issuing insurance policies, commercial or captive. Both Vermont
and AM Best evaluate diversification of assets and continually monitor asset
value and risk. AM Best's rating process specifically analyzes the captive's ability
to underwrite effectively, generate capital growth from ongoing operations and
pay claims readily. On a stand-alone basis the captive insurer must have the
financial means to support the policies written. Significant developments at the
captive or the parent can result in rating change, reflecting the changed level of
risk of failure.
5. Third Party Review: In response to questions, Vermont, AM Best, the insurance
industry and State representatives agreed that third-party fiscal evaluation in the
form of a secure rating from AM Best or comparable entities, or the parent's
ability to satisfy the financial test (or possession of investment-grade credit with
agencies such as Standard and Poor's and Moody's), is important corroborating
evidence of fiscal soundness for companies seeking to use captive insurance.
Users of Captive Insurance
The September 2005 Report by the EPA Inspector General summarized the views of the
industry it polled as follows: "Industry representatives generally considered the financial
assurance mechanisms to be adequate, at least for large companies." (2005 IG Report at
17). This view has been reiterated specifically with regard to captive insurance in
comments to the Board in the public comment period and in written comments submitted
subsequent to the June 27 meeting.
As mentioned above, industry representatives noted that some States refuse to allow the
use of captive insurance for meeting financial assurance requirements. Users of captive
insurance cited the following reasons why they did so:
• ability to obtain tailored insurance coverage at reasonable rates in a constrained
commercial market;
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• reduced costs (e.g., the risks are better understood and managed since the parent is
expert in the risks insured, and captives' investment income can be used to cover
losses); and
• access to the reinsurance market, although this market is limited for captives.
Written comments submitted on behalf of the Superfund Settlements Project and the
RCRA Corrective Action Project described their members' views of the value of captive
insurance as follows: "Captive insurance is a sophisticated and legitimate financial
strategy that benefits the large and medium-sized insurance consumer by providing it
with greater control over its risk programs, the ability to achieve cost savings and
efficiencies that are passed on throughout its organization, and the opportunity to
customize the type(s) of insurance coverage that it purchases." Superfund Settlements
Project/RCRA Corrective Action Project, Letter to Mary Francoeur and Stanley
Meiburg, Environmental Finance Advisory Board (July 28, 2006).
EFAB's ability to evaluate the current use of captive insurance was hindered by a lack of
consistent national information on the extent to which captive insurance or other financial
assurance mechanisms are used by private sector firms. Additional information on this
topic may result from EPA's ongoing national initiative to improve compliance with
financial assurance requirements and other ongoing Agency analyses.
Findings and Recommendations of the Board
Findings:
Consistent with our findings with regard to use of the Financial Test for financial
assurance purposes, we find that the use of independent credit analysis (i.e., credit
ratings) is a cost-effective mechanism for demonstrating the financial strength of a
captive insurer. Insurance credit rating institutions like AM Best distinguish secure from
non-secure insurers, much as rating institutions like Moody's and Standard and Poor's
distinguish investment from non-investment grade credit. These ratings help address the
limited capacity of State regulatory bodies to undertake extensive credit analysis. It is
important that the rating be current (reviewed within a specific length of time, perhaps
the past year).
Because captive insurance has been of particular concern to a number of states, it is
especially important that the licensing authority for any captive insurance firm allowed to
write policies for use in meeting RCRA or Superfund financial assurance requirements
for closure, post-closure care, corrective action or response action be rigorous and
transparent in its procedures. The oversight program adopted by the State of Vermont
appears to apply strong licensing standards for captive insurance companies. These
standards include:
• Initial applications must be detailed and will not be approved unless the captive is
capitalized sufficiently to meet its obligations.
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• Application requirements include audited financial statements, actuarial
certification of loss reserves calculated by an approved actuarial firm, annual
reporting, parent company financial statements and regulatory detailed review by
the jurisdiction of licensure.
• Enforceable requirements for pre-approval of loan backs (or up-streaming of
dividends), change in business plan or claim coverage, and access to evergreen
Letters of Credit (if used for capitalization) in the event of financial difficulty.
In addition, the Board agrees with Vermont officials about the importance of having
sufficient staffing and funding resources to ensure effective oversight.
It is the Board's opinion that these safeguards, embodied in formal State rules and
implemented with consistent and effective state oversight, strengthen captive insurance as
a reliable means of providing financial assurance.
Response to EPA's Charge:
With regard to the three questions posed by EPA, the Board responds as follows:
(1) Should there be minimum capitalization requirements for captive or other
insurers who provide policies for financial assurance and, if so, what requirements would
best assure funds are available for protection of the environment, including closure, post-
closure, corrective action and other environmental clean-up? The Board concludes that
minimum capitalization requirements are necessary. It also concludes that a well-known
and respected insurance rating agency, such as AM Best, is in the best position to
determine what the minimum capital and surplus level should be for a particular insurer
to assure availability of funds for the amount and types of risks being written.
(2) Should policies written by captives and commercial insurers be treated as
equally acceptable mechanisms? Yes, assuming they meet licensing standards similar to
those noted above with regard to the program implemented by the State of Vermont and
are subject to effective, independent oversight.
(3) Should the language of policies written by captives differ in any way from
those issued by commercial insurers? No. Policies issued to provide coverage for
financial assurance purposes should clearly meet all applicable regulatory requirements,
and the policy language should reflect the adequacy of coverage in all instances.
Recommendations:
The State of Vermont and AM Best have addressed many of the Board's questions about
their written requirements for licensing of captives. However, at this time there is no
standard requirement for captives to be either licensed in a jurisdiction with requirements
equivalent to those imposed by either the State of Vermont, or by other independent
review entities. It is understandable why States may not have full confidence in the use of
captive insurance policies as a financial assurance mechanism absent comparable
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understanding of how these captive insurance policies work and are overseen by
insurance regulators in jurisdictions other than Vermont, or by entities that are not
certified by an independent third party ratings agency.
As a consequence, with respect to captive insurance as a financial assurance tool, the
Board recommends that EPA require that:
(1) If the financially responsible affiliate uses a captive insurance policy to provide
financial assurance, that the affiliate either (a) pass the financial test and unconditionally
guarantee the obligations of the captive or (b) possess investment grade rating, or
(2) That the captive entity issuing the insurance policy have a rating of "secure" or
better by AM Best or comparable rating agency.
(3) The rating of the captive must be formally reviewed by the rating agency
annually, at a minimum, and the rating report must be furnished to those States where a
captive policy is being used for financial assurance. Further, States must be notified
within 30-days of a rating change, an outlook change, or a rating being placed under
review.
The Board recognizes that a requirement with respect to ratings of entities issuing captive
insurance policies has implications for commercial insurance firms as well. This is one
issue that we expect to explore in subsequent deliberations.
The Board also recognizes that these recommendations could require additional EPA
evaluative criteria. The Board has heard differing opinions about whether these criteria
could be established through guidance, or whether notice and comment rulemaking
should be pursued. The question of how the Agency should proceed is beyond the scope
of the Board. We note that although rulemaking is strongly preferred by State
environmental regulators, it can be time and resource intensive. We also understand that
while guidance could be issued more quickly, it is not binding, and EPA cannot require
more nationally consistent RCRA financial assurance measures in the absence of
amended Federal rules.
One option the Agency could consider, in the absence of amended rules, is to develop
information now which would assist State environmental regulators in evaluating entities
issuing captive insurance policies whose parents would not now pass the financial test or
who do not possess secure ratings themselves. This information could include examples
of best practices by licensing agencies such as those cited above as practices by the State
of Vermont. In creating this information, EPA could work with the State of Vermont,
other States and international licensing boards to outline critical elements of regulatory
oversight, articulate desirable working practices that may be insufficiently articulated in
the formal regulatory framework, and provide guidelines to evaluate whether licensing
agencies have sufficient resources to adequately enforce standards (e.g., fee for service to
assure adequate staffing).
Of course, an entity that utilizes a captive may continue to satisfy the financial assurance
requirements if it meets the financial test itself or secures the appropriate corporate
guarantee. In such cases, it would not be necessary to consider the captive's rating.
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\
\ UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
I WASHINGTON, D.C. 20460
25
OFFICE OF
SOLID WASTE AND
EMERGENCY RESPONSE
Mr. A. James Barnes
Chair, Environmental Financial Advisory Board
United States Environmental Protection Agency
1200 Pennsylvania Avenue NW
Washington, D.C. 20460
Dear Mr. Barnes:
Thank you for your letter of March 20, 2007, to Administrator Johnson on the
Environmental Financial Advisory Board's report that explores the use of captive insurance as a
financial assurance tool in the Agency's waste and remediation programs. My staff and I
appreciate all of the work the Board has done on this important topic, and recognize the Board's
consultation with a broad range of interested parties. EPA greatly appreciates the Board's
inclusion of State and EPA staff in many of its meetings on this topic. We find that the Board's
input on captive insurance, as well as other issues, is extremely valuable as we consider moving
forward with improvements to the RCRA financial assurance requirements.
In response to its charge, the Board presented several important findings and
recommendations on captive insurance that the Agency will take under advisement. Consistent
with the Board's findings with regard to the use of the financial test for financial assurance
purposes, the Board found that the use of independent credit analysis is a cost-effective
mechanism for demonstrating the financial strength of a captive insurer. We note that the Board
will also examine the issue of ratings as it looks at commercial insurers.
With respect to the Board's earlier recommendations on the financial test, I recently
directed my staff to initiate the Agency's Action Development Process (ADP) to more fully
analyze possible regulatory options concerning the RCRA Subtitle C financial test. By entering
into the ADP, EPA is acknowledging that the current financial test does present a number of
issues that need to be explored. One of the options that will be analyzed through this process is
the recommendation from the Board that EPA include an independent ratings requirement to
Alternative I of the current financial test. Although initiating the ADP is the first step in
pursuing regulatory alternatives, a possible outcome of the process could be to address these
concerns through implementation assistance rather than pursuing regulatory changes.
Internet Address (URL) • http://www.epa.gov
Recycled/Recyclable • Printed with Vegetable Oil Based Inks on 100% Postconsurner, Process Chlorine Free Recycled Paper
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EPA appreciates the expertise and experience that the Board brings and values the
insights it can provide. EPA looks forward to receiving the findings in response to the other
questions presented to the Board.
Sincerely,
Susan Parker Bodine
Assistant Administrator
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