Risk Retention Groups

Study guide: Exam 6U

A Risk Retention Group (RRG) is a liability insurance company owned by its own insureds, who share similar or related liability exposures, formed under the federal Liability Risk Retention Act of 1986 (LRRA). An RRG is chartered and licensed as a liability insurer in one state — its domicile — and may then write in every other state after only registering there, because the LRRA preempts most non-domiciliary state insurance law.

$\text{Owners} = \text{Insureds}$

Why it exists. The LRRA expanded the Product Liability Risk Retention Act of 1981 to all commercial liability after the liability-insurance availability crisis of the mid-1980s, when buyers such as physicians, contractors and municipalities could not find coverage at any price. Pooling within a homogeneous group of owners is a way to self-insure a line the commercial market has left.
What an RRG may write: liability coverage only, for its members' businesses or activities. It may not write property insurance, workers' compensation or personal lines. Members must be engaged in similar or related businesses so their liability exposures are alike — a physicians' RRG, a trucking RRG, a nursing-home RRG.
One regulator for solvency. The domiciliary state licenses, examines and supervises the RRG's solvency. A non-domiciliary state may require only a limited set of things: registration, premium taxes, compliance with its unfair claims practices laws, participation in residual market mechanisms, a copy of the annual financial statement — certified by an independent accountant and including an opinion on loss and LAE reserves by an actuary or qualified loss reserve specialist — and compliance with a court injunction if the RRG is found to be in hazardous financial condition.
No guaranty fund. State law may not make an RRG a member of a state insurance guaranty fund, so an RRG's insureds are unprotected if it fails. Every RRG policy must carry a prominent notice to that effect, stating that the RRG may not be subject to all of the state's insurance laws and that state insolvency guaranty funds are not available.
Purchasing groups are the LRRA's other vehicle: a group of similar buyers that purchases liability insurance from an insurer, rather than owning one. The group bears no risk; the insurer does.
Regulatory concern. Because solvency rests on one domicile — often a captive-friendly state — regulators worry about domicile shopping, thin capitalisation and governance by service providers rather than owners. The NAIC's response has been to apply its solvency accreditation standards to a state's supervision of the multi-state RRGs it domiciles, including those formed as captives. Compare Excess and Surplus Lines, the other route by which a buyer reaches coverage outside the admitted market, and Specialized Insurance Topics.

What Can the Contractors' RRG Write? Forty regional building contractors form an RRG domiciled in Vermont. They want it to cover their (a) general liability, (b) commercial auto liability, (c) workers' compensation, (d) equipment and building property, and (e) the owners' personal auto policies. They operate in Vermont, New York and Texas.

Which can the RRG write, and what must it do to write in New York and Texas?

Answer

(a) General liability — yes. Commercial liability arising from the members' common business is exactly what the LRRA covers.

(b) Commercial auto liability — yes, as liability arising from the business. (Physical damage to the vehicles is property and is not.)

(c) Workers' compensation — no. The LRRA excludes it.

(d) Property — no. An RRG writes liability only.

(e) Personal auto — no. Personal lines are excluded.

For (c)–(e) the contractors need the admitted market, a surplus lines placement, or another vehicle such as a captive.

Writing in New York and Texas. Only Vermont licenses and supervises the RRG. New York and Texas can require it to register, pay premium tax, file its annual statement and actuarial opinion, follow their unfair claims practices laws, and join their residual market mechanisms — but they cannot require a separate licence, impose their rate and form approval, or make it join a guaranty fund.

When an RRG Fails A physicians' medical professional liability RRG becomes insolvent with $\$40$ million of unpaid claims and $\$15$ million of assets. Its insureds practise in six states. What protection do claimants have, and what does the case say about the RRG model?

Answer Protection: none beyond the $\$15$ million of assets, distributed in liquidation under the domiciliary state's supervision. No guaranty fund responds in any of the six states, so the $\$25$ million shortfall falls on the physicians, who face their claims personally, and on the injured claimants. The policy's mandatory notice warned of exactly this.

What it shows:

The RRG's advantages — one set of rules, lower cost, coverage when the market will not provide it — come from being outside the full state system, and the guaranty fund is part of what is given up.

Five of the six states had no solvency oversight at all, except the power to seek an injunction once the group was already in hazardous condition. Everything depended on one regulator.

The members are both owners and insureds, so in a failure they lose twice: their capital, and their coverage.