JLT Towner Insurance Management
The restrictions written into RRG reform are important to future expansions of the LRRA, says Dustin Partlow of JLT Towner Insurance Management
What will the new US Nonprofit Protection Act achieve?
The new US Nonprofit Protection Act will achieve the first amendment to the Liability Risk Retention Act of 1986 since the act’s original passage. For almost 30 years the act has gone without any adaptations and, as such, many believe an amendment is long overdue. The insurance industry and the risk retention group (RRG) industry have seen significant changes over the last 30 years, as one would imagine. As such, I think it is important to see that the federal law is being adapted over time to meet the needs of the industry and the consumer.
For a number of years, industry representatives have been trying to expand the coverages that RRGs are authorised to write to include commercial property coverage, among others. These attempts have failed. The most recent attempt is much more restrictive in terms of the RRGs that would be allowed to write these new lines of coverage. We think that these restrictions are very important. These other lines of coverage, such as property coverage, come with some significant inherent risks and are not appropriate for all RRGs. The current restrictions regarding surplus levels and operating history as contained in the act are very important to not only protect the consumer, but to also protect the RRG industry as a whole.
Essentially, many industry representatives believed it was best to have the Nonprofit Protection Act be very restrictive to try and minimise opposition and have a greater chance of getting the bill passed. Then the hope is that the scope of the bill can be expanded as its success plays out over time.
How will RRGs benefit from the expansion of the Liability Risk Retention Act?
The Nonprofit Protection Act in its current form is very restrictive and only applies to RRGs serving non-profit organisations, educational institutions and governmental entities. In addition, RRG needs to have 10 years of operating history, have capital and surplus of at least $10 million, and is limited to providing coverage for up to $50 million of total insured value for any one member. Given these restrictions, the number of RRGs that will be able to benefit from the expansion is quite minimal. However, we think the RRGs that will be able to take advantage of the revisions are those RRGs that, in general, are the best fit to write coverages such as commercial property coverage that, in general, are short-tailed, low frequency, high severity and generally less predictive. In general, these coverages only make sense for those well-established and well-capitalised RRGs.
There is a reason these coverages were restricted in the original act because in general, these are not a great fit for RRGs. However, that does not mean these coverages cannot be written successfully by RRGs, it just means to do so, proper restrictions need to be in place. In addition to the restrictions outlined, it is also going to be important for regulators of RRG jurisdictions in the US to set proper guidelines and to properly oversee these RRGs that will be able to write these expanded lines of coverage.
In general, the real benefit just comes in the fact that the act will be amended for the first time since 1986 and the hope is that this is just the start and that Congress will continue to adapt the law to the ever-changing needs of the insurance industry. Which, hopefully over time, will mean that more RRGs will have the opportunity to write these expanded lines of coverage where the facts and circumstances make sense.
How will the bill boost the RRG market?
Initially, the boost to the RRG market will be minimal. There will be a limited number of active RRGs that will be able to take advantage of this amendment. Given the restrictions regarding having 10 years of operating history, this bill will likely not spur any new RRG formations. However, if over time the restrictions are reduced or additional coverages are permitted, and the hope is that this is the first step in that direction, this would likely lead more groups to consider an RRG, which will likely lead to a boost in the RRG market.
The IIABA has recently opposed the bill as the association believes it will potentially harm consumers. What do you make of this argument?
In general, we believe this argument does have some merit. There are some inherent risks with writing certain lines of coverage, such as commercial property coverage. We think it would be bad for the industry if there were not proper restrictions put in place regarding the RRGs that could write these new lines of coverage. However, we feel that the bill in its current form has the proper restrictions in place to prevent harm to consumers. As long as the RRG has the necessary capital and surplus in place and these new lines of coverage are properly regulated by the RRG’s state of domicile, we feel the potential harm to the consumer is mitigated.
RRGs were criticised for being less capitalised than traditional insurers, and not being subject to important consumer protections such as mandatory participation in state guaranty funds. Do you agree with these criticisms? If so, why?
In general, no we do not agree with these criticisms. If you look at the track record for RRGs in general they have fared better than commercial insurers in terms insolvencies. Yes, they are generally less capitalised, however, in general, the RRG’s pool of insureds is also much more restrictive. Additionally, we believe that if RRGs were subject to participation in state guaranty funds, there is the potential that it may actually have a harmful effect on RRGs. By requiring mandatory participation in the state guaranty funds, it may lead to RRGs taking additional risks solely based on the fact that they know they have the protection in place should the RRG go insolvent.
So, although it may provide some additional protection to consumers, it may also lead to additional negligence by some RRGs that may lead to an increase in the number of RRG insolvencies, which would be harmful to both the RRG industry and the consumer.
