U.S. Government Accountability Office: Clarifications Could Facilitate States’ Liability Risk Retention Act Implementation; Regulators Surveyed
Jan 17, 2012
In 2005, to better protect Risk Retention Group (“RRG”) insureds, the U.S. Government Accountability Office (“GAO”) recommended the implementation of more uniform, baseline state regulatory standards, including corporate governance standards.
Since then, the National Association of Insurance Commissioners (“NAIC”) has revised its accreditation standards to more closely align with those for traditional insurers, which are subject to oversight in each state in which they operate. (For example, all financial examinations of RRGs that have commenced during or after 2011 should use the risk-focused examination process.) The NAIC also has begun developing corporate governance standards that it plans to implement in the next few years.
Current pending legislation would amend the Liability Risk Retention Act (“LRRA”) to allow RRGs to provide commercial property insurance and also include a federal arbitrator to resolve disputes between RRGs and state insurance regulators. 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. Concerns were also voiced about federal involvement in state regulation.
On January 9, 2012, the GAO issued a report in which it stated that clarification of LRRA could facilitate states’ implementation and varying interpretations of the law that have led to uncertainty and disagreements among RRGs and state insurance regulators. The GAO recommended that, while continuing to facilitate the formation and efficient operation of RRGs, Congress may wish to consider clarifying certain LRRA provisions, such as whether RRG registration requirements beyond those currently specified in LRRA are permitted in non-domiciliary states, and whether fees in addition to premium and other taxes could be charged to RRGs by non-domiciliary states in which they operate.
Congress may also wish to consider providing a more specific definition of the types of insurance coverage permitted under LRRA, the GAO said.
Further, the GAO report describes changes in the financial condition of the RRG industry from 2004 to 2010 and explores the regulatory treatment of RRGs across domiciliary and non-domiciliary states. It also examines changes to federal and state regulatory practices relating to RRGs since 2004.
In creating the report, the GAO analyzed RRG financial data, surveyed state insurance regulators (with a 96 percent response rate) and interviewed RRG industry representatives.
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