RRGs—A Last Look

Pretty catchy title, huh? I figured I might entice some of you to explore this article just based on the title alone. And, before anyone jumps to the conclusion that this article is about the potential demise of risk retention groups (RRGs), I will discourage you from that mindset. As my tenure with Captive.com comes to a close, I thought I might take a look at the captive insurance market segment that started the website back in 1995. More on that will be included in my final article later this month, but let's go back to RRGs and where things stand today.

There are multiple sources for information on the risk retention market. A.M. Best provides ratings for RRGs; the Risk Retention Reporter focuses solely on the industry; and Demotech, Inc., has collected and published data on RRGs annually, as well as provided ratings for the industry. This article draws on the information provided in "Risk Retention Groups Report Favorable Results in 2020," Analysis of Risk Retention Groups—Year-End 2020, by Douglas A Powell, senior financial analyst, Demotech, Inc., April 30, 2021.

Some historical context is probably warranted before looking at where things stand today. Due to hard market conditions in the late '70s and early '80s, Congress passed the Liability Risk Retention Act. The law effectively preempted state insurance departments from regulating or discriminating against risk retention groups. By 1987, approximately 45 RRGs had been formed to avail themselves of the federal regulation. While the actual reported numbers vary, by the year 2000, the number of active risk retention groups had only increased to around 65.

Fast-forward to year-end 2020. According to Demotech, there are now roughly 220 active RRGs domiciled in the United States. This works out to an annual compound rate of growth since 1987 of 4.8 percent, which suggests that RRGs remain a very niche-specific part of the overall captive insurance industry. The Risk Retention Reporter states that there are also more than 1,000 purchasing groups in the country, but for our analysis, we will confine ourselves to the RRG space.

There had been some supposition that the pandemic would create renewed interest in RRGs, but the year-end numbers don't support this hypothesis. It is possible there is a hidden number of RRG formations that haven't been reported yet, but there is no anecdotal evidence to suggest this fact.

Overall, Demotech reports that RRGs continue to be financially solvent, with some 69.7 percent of the population reporting surplus growth in 2020 of some $343 million. Direct written premiums increased by $233 million to $3.8 billion, a 6.4 percent increase. By far, medical professional liability insurance continues to be the dominant line of liability coverage provided by RRGs. In 2020, Demotech reports, med mal accounted for 54 percent of direct written premium, or some $2.0 billion. Other liability was the second-largest line at $1.4 billion.

Furthermore, Demotech goes on to say that RRGs reported an aggregate underwriting loss for 2020 of some $104 million, which translates into a combined ratio of 105.4 percent. However, these losses were more than offset by investment income and capital gains, allowing the industry to report a combined net income for the period of $271.7 million. This then translates into the 24th year in a row where the RRG market has reported aggregate net income.

In summary, Demotech concludes, "Despite political and economic uncertainty, RRGs remain financially stable while providing specialized coverage to their insureds. The financial ratios calculated based on the reported results of RRGs appear to be reasonable, keeping in mind that it is typical and expected that insurers' financial ratios tend to fluctuate over time."

Recently, we published an article titled "Insurance Landscape 2025—What's in It for Captive Insurers?" The same question in a microcosm could be asked of the risk retention space. When RRGs were initially approved, there was considerable speculation as to whether they represented the first chink in, to that point, the unassailable dominance of state insurance regulation. Some 34 years later, this doesn't seem to be the case.

As evidence, look no further than the numerous aborted attempts to expand the federal Liability Risk Retention Act to encompass property insurance. The latest, Nonprofit Property Protection Act (H.R. 4523), died a quiet death in the House Committee on Financial Services in the 116th Congress.

The following testimony from the National Association of Insurance Commissioners (NAIC) neatly summarizes the enormous hill RRGs need to overcome in order to become more than just a niche player. Chlora Lindley-Myers, director of the Missouri Department of Commerce and Insurance, testified January 29, 2020, on behalf of the NAIC to the US House Committee on Financial Services Subcommittee on Housing, Community Development, and Insurance, as follows: "We are seriously concerned that allowing RRGs to sell commercial property coverage would create more risks for the RRGs and, ultimately, their insureds. The limited oversight of non-domiciliary states in the RRG regulatory framework, coupled with the lack of state-run guaranty fund protection and increased risk of insolvencies associated with RRGs, could expose nonprofit organizations, and those who rely upon them, to unnecessary risks."

So, while I cut my insurance teeth working as the chief financial officer for an RRG, I don't see a future where the market becomes a significant part of the captive insurance landscape. Unfortunately, between the opposition from the NAIC, traditional insurers, and the continuing presence of some bad actors within the RRG space, the current status quo is likely to remain.

This article is written by John Foehl.