The future of risk retention groups lies firmly in the hands of state and federal legislators, explains Stacy Shapiro.

Risk retention groups (RRGs) have come a long way in the last 20 years since they were first allowed under US legislation. But changes are afoot that could either see the number of RRGs grow or contract in years to come. The fate of these alternative risk transfer vehicles is not necessarily in the hands of those who own them. It's mainly up to US state and federal legislators to determine the course of their future.

By definition, an RRG is a liability insurance company that is owned by its members who are usually in the same type of business. They are allowed to exist under the Liability Risk Retention Act of 1986 (LRRA), which pre-empts state regulation. Under the law, they can only write liability risks and must be domiciled in a US state, although they can write business nationally. RRGs are often regulated as captive insurance companies in the 30 onshore captive domiciles in the US. An RRG may underwrite nationwide, provided it properly registers with each state in which it proposes to solicit or write insurance. Like an insurance company, the RRG can also reinsure its risks.

Although there are no updated factual statistics, sources estimate that there are now 238 RRGs with estimated total premiums topping $3bn annually. As a factual snapshot, the 25 RRGs that are rated for their financial strength by AM Best have a policyholder surplus of approximately $593m and total assets of $1.69bn. Amongst those that are rated, (41%) are domiciled in Vermont with Hawaii vying for second position, according to AM Best. (Indeed, of the 750 or so captives in Vermont, about 14% are RRGs according to Vermont government data.)

About 43% that are rated by AM Best write medical malpractice insurance, with the rest writing other liabilities including auto but excluding product liability. This tallies with US federal government statistics which show that the biggest sector to own RRGs is the healthcare market, with property development, manufacturing and commerce also involved. Professional services, such as attorneys and architects, as well as government and institutions are also served by RRGs.

In the balance

With these kinds of statistics, the development of RRGs as an alternative to traditional liability insurance can be considered a huge success. But the fate of this sector of the alternative risk transfer market is in the balance. At the moment, 13 state regulators are reviewing ideas to form a set of model RRG regulations to be included in all state insurance legislation. These regulators are all on the National Association of Insurance Commissioners' (NAIC) risk retention group taskforce.

This NAIC taskforce, made up of two committees, has been in place since July 2005 when the US Government Accounting Office (GAO) recommended that state regulators devise a set of baseline minimum standards designed for the unique nature of RRGs and not traditional insurance companies. No uniform standards currently exist, which was raised as a concern for 36 of the 42 state insurance regulators who responded to a survey prior to the publication of the GAO report.

The report was commissioned by US House Representative Michael Oxley, chairman of the House Committee on Financial Services, because there had been some problems in the past, including 21 failures of RRGs. The NAIC taskforce is not expected to complete its discussions and make recommendations to the NAIC accreditation committee until the spring of 2007. And as it is the accreditation committee that will sign off on any model regulations, the process is not expected to be completed until at least the end of next year.

What will be included in these regulations is a matter of conjecture. Among the items discussed during a teleconference call in September, taskforce members addressed the issues raised by the GAO report, namely whether the NAIC's risk-based capital formula should apply; whether the Model Insurance Holding Company System should apply; and whether the rule on insurer's surplus per risk is appropriate for an RRG with under ten members.

But the NAIC taskforce has made no firm decisions as yet and these items are still very much in discussion, according to sources close to the group. The NAIC has been criticised for its slow reaction to the call by the GAO to issue standardised regulations for RRGs. Even Lawrence Cluff, assistant director of financial markets and community investment at the GAO who led the team that wrote the report, criticised the NAIC. At the time of publishing the report he said, "The talk is good, the action is problematic."

"There are two camps in the US on the recommendations within the GAO report," added Dick Goff, principal of captive consultancy Taft, recently. "Some think of doom and gloom and that the number of risk retention groups will reduce. Others are more positive and see opportunities. But the bottom line is that the NAIC can't think its way out of this."

Federal regulation

The GAO report also recommended that Congress amend the law (the LRRA) with regards to the ownership and governance of RRGs. Specifically, the report recommended that Congress:

- Requires RRG insureds to qualify as owners of the RRG by making a financial contribution to the capital and surplus of the RRG, above and beyond their premiums;

- Requires that all the insureds - and only the insureds - have the right to nominate and elect members of the RRG's governing body; and

- Establishes minimum governance requirements to better secure the operations of RRGs for the benefit of the insureds and safeguard assets for the ultimate purpose of paying claims.

So far Congress has not introduced any legislation that would amend the LRRA. However, some executives would like Congress to go one step further when it's amending the LRRA and allow property risks as well a liability risks to be written by RRGs. The call follows last year's devastating series of hurricanes, including Katrina, which cost insurers an estimated $60bn between them and pulverised the flood insurance market and the National Flood Insurance Program. This has made it difficult for property owners in coastal states to obtain flood insurance.

Earlier this year, the American Risk Retention Coalition (ARRC) was set up as an affiliate of the Self-Insurance Institute of America to get Congress to include "additional lines of coverage" within RRGs under amendments to the LRRA. "In addition, ARRC will advance the need for Congress to strengthen the preemption provisions of the LRRA to enable risk retention groups to operate nationwide on the basis of a single state regulatory agency having oversight of the operations of risk retention groups as is the intent of the LRRA," stated the organisation.

In July this year, the coalition also sent a letter to Richard Baker, chairman of the House Committee on Financial Services' subcommittee on capital markets, insurance and government sponsored enterprises, calling for an amendment to the the law to include property risks written by RRGs. "As you are well aware, there is an emerging crisis in the availability of property insurance in coastal states, just as the current hurricane season is upon us," the ARRC wrote to Baker in July. "There is something Congress can do quickly to ease the availability problem: amend the Liability Risk Retention Act to allow risk retention groups to offer property insurance to their members."

Expansion of the LRRA would offer immediate relief from the current availability crisis for property insurance in hurricane-prone states, the coalition added. And the letter had a good reception. "We've been well received by the fellows on the Hill," said Goff, who is also chairman of the ARRC. "That's extremely exciting."

- Stacy Shapiro is a freelance journalist.


A new use for RRGs has emerged which can be implemented under the existing federal legislation. A group of construction companies under the banner American Construction Benefits Group has set up the first RRG in Vermont to protect against the liability for excess costs of a self-funded employee benefit plan. It is, in effect, stop-loss insurance as the companies self-fund their employees' medical benefits and then pool to insure the contract liability of their benefits' plans, according to Dick Goff of captive consultancy Taft. Using RRGs to cover the employer's liability "will go off like a rocketship," he explained. "And there's plenty of international reinsurance capacity for this."

And a number of clients are thinking about following a similar path, added Karen Landry, a managing partner with captive insurance consultant Spring Consulting Group in Boston. Landry is considered to be the first person to spread the idea of RRGs for employee medical insurance plans in an article written about four years ago, when the market for these plans was stable.

There's serious interest now, she explains, as "there are fewer carriers to work with because of the consolidation of a number of companies in this field." Medical insurance costs are now rising, with rates increasing an average of 15% last year. "Employers are looking to risk retention groups because there are now fewer options," Landry explained.