Government Accountability Office Study Backs Clarification of Risk Retention Group Legislation

Jan 13, 2012

The following article was published in PropertyCasualty 360º on January 12, 2012:

GAO Study Backs Clarification of RRG Legislation

By Arthur D. Postal

The Government Accountability Office has recommended that Congress pass legislation clarifying certain provisions of the Liability Risk Retention Act (LRRA), including registration requirements, fees and coverage.

In a report released yesterday, the GAO says risk-retention groups appear profitable; that most of their new business appears health-related and that their share of the commercial liability market has increased from 2003 to 2010.

“While some RRG representatives and state regulators supported this legislation, others expressed concerns about whether RRGs would be adequately capitalized to write commercial-property insurance and about federal involvement in state regulation,” the report says.

The report goes on to say that some regulators with whom GAO spoke to indicated that their actions toward non-domiciled RRGs reflect an effort to “use their limited regulatory authority to protect insureds in their states as well as address concerns about RRG solvency.”

The National Association of Insurance Commissioners (NAIC), which supports amending of the 1986 federal law, wants the law “clarified” to limit the preemptive authority of the current legislation, and to make it clear that risk retention groups must pay premium taxes, registration fees and also to pay for oversight by the state insurance agency in each state.

Proposed legislation would amend the LRRA, which allows risk retention groups to operate through the laws of the state in which the group is domiciled, to allow RRGs to provide commercial property insurance and also include a federal arbitrator to resolve disputes between RRGs and state insurance regulators.

While supporting the NAIC’s request for clarification, the GAO gave the risk-retention industry a clean bill of health.

GAO says that “certain indicators” suggest that the financial condition of the industry in aggregate generally is profitable, that its share of the commercial liability market has grown from 1.17 percent in 2003 to about 3 percent in 2010.

Robert H. Myers Jr., general counsel to the National Risk Retention Association, says the GAO report “reminds us that RRGs in recent years have shown healthy growth, which reflects both financial strength and profitability.”

Myers also says the report discusses the enhancement of regulation by the states that charter RRGs. “All of this shows that the industry is maturing and becoming an important part of the market, particularly in the area of healthcare liability,” says Myers.

He notes that the report also points out, however, that certain regulatory issues—fees, registration, and discrimination, for example—remain problematic and “continue to impose upon the industry a substantial regulatory burden.”

Underscoring growth, the report says RRGs wrote $1.8 billion in insurance in 2003 and in 2010 wrote $2.5 billion in insurance. Recent growth came through writing of health-related risks. “Other financial indicators, such as ratios of RRG premiums earned compared to claims paid—also suggest profitability,” the GAO report says.

In 2010, more than 80 percent of RRGs were domiciled inVermont,South Carolina, theDistrict of Columbia,Nevada,Hawaii, andArizona, but RRGs wrote about 95 percent of their premiums outside their state of domicile, the GAO says.

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