Holding Company Act Release 27589
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27589; 70-9371)
Columbia Insurance Corporation, Ltd., et al.
Supplemental Order Authorizing Certain Activities of a Captive Insurance Subsidiary
October 31, 2002
Columbia Insurance Corporation, Ltd. ("CICL"), a wholly owned captive insurance subsidiary of Columbia Energy Group ("Columbia"), a registered holding company and a wholly owned subsidiary of NiSource Inc. ("NiSource"), also a registered holding company, and Columbia, (collectively, "Applicants"), Merrillville, Indiana, have filed a post-effective amendment ("Amendment") to their application-declaration filed previously with the Securities and Exchange Commission ("Commission") under sections 9(a), 10, and 12(b) of the Public Utility Holding Company Act of 1935, as amended ("Act"), and rules 45 and 54 under the Act. The Commission issued a notice of the proposed transaction on August 2, 2002 (HCAR No. 35-27558).
By order dated October 25, 1996 (HCAR No. 26596) ("1996 Order"), the Commission authorized Columbia to form and capitalize CICL to engage in the reinsurance of predictable losses under automobile and general liability and "all-risk" coverage of Columbia. By order dated July 23, 1999 (HCAR No. 27051) ("1999 Order") (together with 1996 Order, "Prior Orders") the Commission authorized Columbia to expand the reinsurance activities of CICL to include all predictable risks related to the business of Columbia and to establish one or more direct subsidiaries to engage in the proposed reinsurance activities.
Applicants now propose: (1) in instances where NiSource direct or indirect subsidiaries ("NiSource companies") do not require evidence of coverage1 from rated or admitted insurers, that CICL have the ability to underwrite risks of all NiSource companies directly;2 (2) that CICL underwrite directly corporate deductible or self-insured reimbursement risk, such as workers' compensation coverage of NiSource companies; and (3) that CICL provide controlled unrelated third-party business risk coverage in situations where providing this coverage would directly or indirectly benefit NiSource companies.3 Applicants state that these activities will not alter the risk profile of NiSource and NiSource companies, but will serve to increase the level of risk management control.
Applicants state that no additional staff would be required to operate CICL in the proposed matter and that the current managers will be retained to provide administrative services. Applicants further state that, except for the modifications proposed, all other terms, conditions and limitations under the Prior Orders will continue to apply.
Applicants state, for purposes of rule 54, that the conditions specified in rule 53(a) are satisfied and that none of the adverse conditions specified in rule 53(b) exist. As a result, the Commission will not consider the effect on the NiSource system of the capitalization or earnings of any NiSource subsidiary that is an exempt wholesale generator or foreign utility company,4 as each is defined in sections 32 and 33 of the Act, respectively, in determining whether to approve the proposed transactions.
Fees and expenses in the estimated amount of not more than $5,000 are expected to be incurred in connection with the proposed transactions. Applicants state that no state or federal commission, other than the Commission, has jurisdiction over the proposed transaction.
Due notice of the filing of the Amendment has been given in the manner prescribed under rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. On the basis of the facts in the record, it is found that the applicable standards of the Act and rules under the Act are satisfied, and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that the Amendment, as amended, be granted and permitted to become effective immediately, subject to the terms and conditions contained in rule 24 under the Act
For the Commission, by the Division of Investment Management, under delegated authority.
Margaret H. McFarland
1 Applicants state that this practice of providing evidence of coverage is known as "fronting" and is an accepted practice for underwriting risks where the insured requires evidence of coverage from rated or admitted (i.e., licensed in the particular state or states in which a risk is located) insurers for business or statutory reasons. They state that the practice of "fronting" creates additional cost to the insured. They further state that a captive reinsurer, such as CICL, that is not admitted (or licensed) to do business in the state where the risk is located is required to post a letter of credit or set aside funds in a trust fund in an amount equal to the expected ultimate losses under the reinsurance contract.
2 Applicants represent that by acting as a "front" company, CICL can eliminate as much as 40 percent of the premium charged on primary risk insurance policies and that this savings would benefit NiSource companies. They further represent that recently there has been a withdrawal of a number of primary insurance companies from the "fronting" market.
3 CICL proposes to provide performance bonds and construction-related insurance for contractors working on projects for NiSource subsidiaries.
4 NiSource does not hold any investments in foreign utility companies.