Risk Retention Group Expansion: A Modest Yet Critical Proposal

A new drive is about to begin aimed at convincing Congress to pass legislation to expand the coverages risk retention groups can provide to member-owners.

The legislation is expected to be similar to a measure introduced during the last congressional session that would have allowed certain risk retention groups to cover policyholders' property risks.

A risk retention group (RRG) is a special group captive insurance company authorized under federal law. RRGs can write all casualty coverages for member-owners except workers compensation. RRGs can provide coverage to policyholders nationwide after meeting the licensing requirements of just one state. That one state licensing feature saves time and money as it eliminates the need for the RRG to get commercial insurers to issue policies in states where the RRG is not licensed.

Under that earlier measure, RRGs would have been able to write property coverages for policyholders that are nonprofit organizations with tax-exempt status or education-related institutions that are nonprofit organizations or governmental entities.

The earlier proposal, though, limited that expansion of coverage to RRGs that had been operating for at least 10 years, while the RRG would have to maintain capital and surplus of at least $10 million.

The proposed expansion, if approved during the current congressional session, would be the second since federal lawmakers decades ago passed the original Risk Retention Act. Under that 1981 law, a congressional response to soaring product liability insurance premiums, employers could form RRGs, which are special group captive insurers, and provide coverage to member-owners throughout the United States after meeting the licensing requirements of just one state.

The 1981 law, though, limited the coverage RRGs could provide to product liability and completed operations. As a result, just a handful of RRGs were set up in the years following the passage of the 1981 legislation.

Five years later, responding to soaring premiums for a broad range of liability insurance coverages, Congress expanded the Risk Retention Act to allow RRGs to write all commercial liability coverages, except workers compensation.

Buyers responded positively with dozens of RRGs being set up. Currently, 235 RRGs are licensed, according to the Risk Retention Reporter, a monthly newsletter that tracks the RRG industry.

The latest proposed expansion—limiting the ability to offer property insurance to just a sliver of RRGs—is far more modest than the expansion of eligible coverage that the 1986 law allowed.

But backers of the proposal say the latest proposed expansion, while limited to a relatively small number of RRGs, will meet a critical need for some organizations.

"Many small schools would benefit by being able to buy property coverage from their RRG rather than struggle to get coverage in the traditional market. There is a real need for this legislation," said Janice Abraham, president and CEO of United Educators Insurance, a Reciprocal Risk Retention Group, which is located in Bethesda, Maryland, and has been based in Vermont since 1987. It provides, among other things, general and legal liability coverages to its roughly 1,500 policyholder-owners.

Other RRG executives concur.

"The point we make, which additional research by third parties has recently confirmed, is that even in a very soft market, this stand-alone coverage for property and auto physical damage coverage appropriate for small and midsized nonprofits is not provided at all by commercial carriers, other than one specialty program now available," said Pamela Davis, president and CEO of Alliance of Nonprofits for Insurance, Risk Retention Group, which is located in Santa Cruz, California, and was licensed in Vermont in 2000. Ms. Davis says the vast majority of the RRG's 7,500 policyholders would opt for property coverage through the RRG if that option were permitted.

The insurance industry, though, is divided on whether such an expansion is needed.

"In the case of the narrow category of nonprofits, the proponents of this legislation have demonstrated that there are market inadequacies," said Joel Wood, senior vice president of government affairs for the Council of Insurance Agents and Brokers in Washington, DC.

Other insurance groups, though, have a different view of such an expansion.

"There is no marketplace need and no current justification for expanding the authority and scope of insurance products that RRGs may offer, as there was with the commercial liability insurance crisis in the 1980s, to warrant such a broad preemption of state law," said Jen McPhillips, vice president of federal government affairs with the Independent Insurance Agents and Brokers of America in Washington, DC.

Employer groups also have some misgivings about the proposal.

"Why should a property expansion be limited to nonprofits?" asked Joseph Deems, executive director of the National Risk Retention Association (NRRA), in Encino, California, which represents many of the nation's 235 RRGs.

Others say the soft market will make passage of the proposal an uphill battle.

Unlike in 1986 when Congress last expanded the Risk Retention Act, "[t]here is no crisis in coverage and prices," said Jon Harkavy, a member of NRRA's board of directors and vice president and general counsel of RRG manager Risk Services LLC in Washington, DC.

"There is not much support for expansion because of the soft market," added Robert H. Myers, NRRA general counsel and a partner with the law firm Morris, Manning & Martin LLP in Washington, DC.