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(9/19/05) The United States Government Accountability Office (GAO) has issued its report on regulatory issues impacting risk retention groups. The report has three components: the GAO Abstract (viewable from the GAO web site); the GAO Highlights (1-page pdf document); and the Full GAO Report (120-page pdf).

What is the Liability Risk Retention Act?

Risk Retention Stats 136k PDF

CICA would like to give a special thanks to our friends at Risk Retention Reporter (www.rrr.com) for providing us with these statistics and information from their October 2003 Issue. As an added benefit to CICA Members, the Risk Retention Reporter and related publications can be purchased at a discount rate of 20% off to all new subscribers. Order forms are available at www.rrr.com/order.

The Liability Risk Retention Act (LRRA) is a federal law that was passed by Congress in 1986 to help U.S. businesses, professionals, and municipalities obtain liability insurance, which had become either unaffordable or unavailable due to the "liability crisis" in the United States.

How does the Risk Retention Act work?
In passing the Liability Risk Retention Act, Congress provided insurance buyers with a marketplace solution to the "liability crisis," enabling them to have greater control of their liability insurance programs. To achieve this goal, Congress created two entities -- risk retention groups (RRGs) and purchasing groups (PGs).

What is a risk retention group?
A risk retention group (RRG) is a liability insurance company that is owned by its members. Under the Liability Risk Retention Act (LRRA), RRGs must be domiciled in a state. Once licensed by its state of domicile, an RRG can insure members in all states. Because the LRRA is a federal law, it preempts state regulation, making it much easier for RRGs to operate nationally. As insurance companies, RRGs retain risk.

What is a purchasing group?
A purchasing group (PG) is comprised of insurance buyers who band together, typically on a national basis, to purchase their liability insurance coverage from an insurance company, including a company operating on an admitted basis, a surplus lines basis, or a risk retention group. As the name implies, the PG serves as an insurance purchasing vehicle for its members.

What is the difference between risk retention groups and purchasing groups?
The primary difference between risk retention groups (RRGs) and purchasing groups (PGs) is that RRGs retain risk while PGs do not. PGs purchase insurance from an insurer, which issues the policies and serves as the risk bearer. RRGs, as insurers, issue policies to their members and bear risk. Another key difference between the two entities is that RRGs typically require members to capitalize the company whereas PGs require no capital. Other differences derive from the way in which the two entities are regulated, both under the Liability Risk Retention Act (LRRA), as well as state laws. Another difference has to do with reinsurance, which almost all RRGs purchase.

What are the similarities between risk retention groups and purchasing groups?
For both risk retention groups (RRGs) and purchasing groups (PGs), the Liability Risk Retention Act (LRRA) requires that members be homogeneous, i.e. engaged in similar businesses or activities that expose them to similar liabilities. This is an important similarity, as PGs can reorganize into RRGs at a future time.

What kinds of insurance coverage do risk retention groups and purchasing groups provide?
For both risk retention groups (RRGs) and purchasing groups (PGs), the type of insurance coverage permitted is set forth in the Liability Risk Retention Act's (LRRA's) definition of "liability," which includes all types of third party liability, such as general liability, errors and omissions, directors and officers, medical malpractice, professional liability, products liability, and so forth. The LRRA does not extend to workers compensation, property insurance, or to personal lines insurance, such as homeowners and personal auto insurance coverage.

What are the advantages of risk retention groups?
As insurance companies owned by their members, some of the key advantages offered by risk retention groups (RRGs) to their members relate to the control members obtain over their liability programs. This control often translates into lower rates, broader coverage, effective loss control/risk management programs, participation by RRG members in favorable loss experience, access to reinsurance markets, and stability of coverage, notwithstanding insurance market cycles.

What are the advantages of purchasing groups?
Purchasing groups (PGs) provide advantages for their members, their insurers, and the agents/brokers who administer the group program. For PG members, the PG offers tailor-made coverage, broader coverage terms, lower rates, loss control/risk management programs, and often provides rewards for good loss experience, such as dividends in the form of credits against next year's premium. For insurers, PGs offer the ability to achieve greater profitability. For agents and brokers, PGs offer the ability to add value to transactions and retain business.

How many risk retention groups and purchasing groups are there?
At the end of 2003, there were 141 risk retention groups and 670 purchasing groups operating in the United States, according to the Risk Retention Reporter.

How much premium do risk retention groups and purchasing groups generate?
According to surveys conducted by the Risk Retention Reporter, RRG annual premium has increased from $250.2M in 1988 to an estimated $1.725.5M in 2003. PG annual gross premium is estimated to top the $3 billion mark.

Who keeps track of risk retention groups and purchasing groups?
The Risk Retention Reporter has been monitoring the formation of risk retention groups (RRGs) and purchasing groups (PGs) since 1987 with the cooperation of state insurance departments. Before offering insurance coverage to state residents, RRGs and PGs must register with state insurance departments in compliance with the Liability Risk Retention Act and state laws.

Who forms risk retention groups and purchasing groups?
Risk retention groups (RRGs) are often formed from trade and professional associations, which serve as the sponsor for the RRG liability insurance program. Purchasing groups (PGs) are most often formed by insurance professionals, including agents, brokers and insurers, based upon an identified need of commercial insurance buyers.

Who regulates risk retention groups and purchasing groups?
Although the Liability Risk Retention Act is a federal law, it has no enforcement mechanism of its own, and relies wholly on state insurance departments for its implementation. Because of the differences between risk retention groups (RRGs) and purchasing groups (PGs), the regulation differs for each of the entities. For risk retention groups (RRGs), the state in which the RRG is domiciled has primary regulatory authority over the entity. For purchasing groups (PGs), regulation entails not only the domiciliary state of the PG, but regulation of the PG's insurer, as well as its agent and/or broker.

Who regulates risk retention groups and purchasing groups?
The LRRA requires that members be homogeneous, i.e. engaged in similar businesses or activities that expose them to similar liabilities.

Federal Requirements RRGs must meet to comply with the provisions of the Act

Liability insurance only: Coverage provided by a RRG must be restricted to liability insurance, which is very broadly defined. Personal Risk Liability, Worker’s Compensation and Employers Liability, and Property & Casualty coverages are specifically forbidden to be underwritten by a RRG.
State of Domicile: A RRG must be a corporation or limited liability association chartered and licensed as a liability insurer and authorized to do business as an insurance company in its state of domicile.
Primary purpose and activity: The primary activity of an RRG must be the business of assuming and spreading all, or a portion of the liability exposure of its group member and its primary purpose must be the assumption and spreading of risk related insurance activity.
Members-only requirements
1. The owners of an RRG can only be persons who comprise its membership and who are insured by the group. A RRG may be owned by an organization if the membership comprises the insured members of the group.
2. The insured member/owners of a group can only include those engaging in a similar business or activities and having similar liability risk exposure.
3. A RRG cannot exclude any person from membership in the group solely to provide a competitive advantage for the group’s members.
Plan of operation: Before a group may offer insurance in any state that group must submit a plan of operation or feasibility study to the insurance commissioner in its state of domicile. Before a RRG may offer insurance in any other state in which it intends to do business, it must provide the Commissioner of Insurance of that state a copy of the plan of operation or feasibility study already submitted to its domiciliary commissioner.
Annual Statement: A RRG must provide a copy of its annual financial statement, certified by an independent public accountant and containing an actuarial opinion on loss reserves, to the insurance commissioner for each state in which the RRG operates.
RRG Domicile selection: One State must be selected to charter the RRG and the RRG is required to meet all the licensing requirements of that state. The determining factors in choosing a domicile state include Capital & Surplus requirements and Depository Requirements. Depository Requirements, if required, usually range from $100,000 to $500,000 in cash or other acceptable securities. Capital & Surplus requirements vary by state and most RRG owners have sought states with captive legislation. Captive legislation generally requires lower Capital & Surplus amounts. When considering domicile states, the most lenient is not always the best choice. By meeting more stringent licensing requirements, the RRG may receive less scrutiny by the non-chartering state regulators.
Business Plan/Feasibility Study: The Act requires the RRG to submit a business plan to the chartering state as well as all other states where the RRG has exposures. The business plan requirements vary by state but usually include five-year projections, details of lines of insurance and reinsurance arrangements, investment policies, ownership and proposed Capital & Surplus. Complete and credible data can be hard to obtain for a start-up operation, but a properly prepared and presented business plan adequately supported by capital and solid reinsurance will be well received by state regulators. It may be a requirement that the feasibility study be prepared by a qualified actuary.
Membership-ownership: RRG membership is limited to persons engaged in similar business or activities with respect to liability to which they are exposed. The RRG must be owned directly or indirectly by the members it insures.

RRG - Permitted State Regulation

Designation of Agent/Agent licensing: A RRG must register with and designate the State Insurance Commissioner, Director of Superintendent at its agent for the purpose of receiving service of process or other legal documents. A nonresident agent’s license is required for every state in which the RRG provides coverage. States cannot require countersignature by a resident agent.
Unfair Trade Practices: A RRG must comply with the unfair claim settlement practices laws and laws regarding deceptive, false or fraudulent acts or practices of each state in which it operates.
Taxes: A RRG will be required to pay applicable premium taxes at either the admitted or surplus lines rate.
Residual Markets/State Guaranty Funds: There is no protection or participation for the RRGs in the State Guaranty Funds. Every insurance policy issued by a RRG must contain the following notice in 10-point type. NOTICE: This policy is issued by your Risk Retention Group. Your Risk Retention Group may not be subject to all of the insurance laws and regulations of your state. State insurance insolvency guaranty funds are not available for your risk retention group. Federal law gives states the power to require RRG participation in any residual market funds in the state for the lines of coverage written by the RRG. These include auto liability assigned risk pools and JUAs for other liability coverages. A RRG needs to be aware of such possible assessments and provide a means for such a result of their participation in a state’s residual market funds.
Hazardous financial condition: If a non-domiciliary commissioner believes a group may be financially impaired, the RRG must submit to an examination by that commissioner to determine the RRG’s financial condition. This can only occur if the domiciliary commissioner has not or will not conduct an examination. A RRG must comply with a lawful order issued in a delinquency proceeding commenced by a state insurance commissioner if there has been a finding of financial impairment. A RRG must comply with an injunction issued by a court of competent jurisdiction, upon a petition by a state insurance commissioner alleging that the RRG is in a hazardous financial condition or is financially impaired.
Financial Responsibility Laws: A RRG is not exempted from meeting the applicable financial responsibility laws of any state. These may exist for auto liability as well as hazardous waste hauling and long haul trucking. The limits of liability provided by the RRG must meet the financial responsibility standards. Certain states may require that certain limits be provided by an admitted carrier of certain financial size and Best’s rating, which most RRGs will not meet. Often a surety bond or other security may be posted to meet these financial responsibility requirements.
Agents and Brokers: A state may require licensing of a RRG’s agents or brokers, except that a state may not impose any qualification or requirement which discriminates.
Admitted versus Non-admitted status: It is not clearly stated in the Act if RRGs are to be treated as admitted in non-chartered states. This has an impact on financial responsibility requirements. RRGs will likely take an aggressive stance and consider themselves as an admitted carrier based on the presumption privileges of the Federal Law until states attempt to deny them such status.

Advantages of RRGs:

Avoidance of multiple state filings and licensing requirements.
Member control over risk and litigation management issues.
Establishment of stable market for coverage and rates.
Elimination of market residuals.
Exemption from countersignature laws for agents and brokers.
No expense for fronting fees.
Unbundling of services.

Disadvantages of RRGs:

Risks are limited to liability insurance.
Not permitted to write outside business.
No guaranty fund availability for members.
May not be able to comply with proof of financial responsibility laws.

CICA would like to give a special thanks to our friends at Risk Retention Reporter (www.rrr.com) for providing us with these statistics and information from their October 2003 Issue.

Reprinted with permission from The Risk Retention Reporter, October 2003 Issue.