US Congress passed the Product Liability Risk Retention Act in 1981 to allow risk retention groups (RRGs)—a new type of insurance vehicle—to cover product liability exposures.
US Congress passed the Product Liability Risk Retention Act in 1981 to allow risk retention groups (RRGs)—a new type of insurance vehicle—to cover product liability exposures.
In 1986, Congress expanded the act to include commercial liability, renaming it the Liabilty Risk Retention Act (LRRA).
As Douglas Powell, senior financial analyst at Demotech explains, the need for RRGs arose when property and casualty insurer appetites for underwriting certain liability exposures began to tighten.
“[The] LRRA was signed into law in the US to provide a mechanism for the placement of liability insurance coverage and created a new form of insurance carrier, an RRG.”
The National Risk Retention Association (NRRA) —a non-profit trade group—was formed to protect the rights of its RRG members. Its website states that: “The Liability Risk Retention Act is a federal statute which is not overseen or regulated by any federal agency. The primary regulatory authority for a risk retention group is its state of domicile. Other states have regulatory authority curtailed by federal law.”
Chairman of the NRRA, Sanford Elsass, says: “The primary mission of NRRA is to defend the right of RRGs to operate free of most regulation in states other than their home state. RRGs were authorised by federal law—the LRRA—to write liability insurance throughout the US, so long as they are duly licensed and regulated in a single state.”
But Burke Coleman, general counsel and compliance manager at Demotech, explains: “While states generally have the power and duty to regulate the business of insurance, the LRRA exempts RRGs from much of the state regulation outside their home state.”
“Many non-domiciliary states are wary of RRGs because they cannot exercise the same regulatory authority that they have over other carriers operating in their jurisdiction.”
Elsass says that regulators in some US states believe that RRGs are a threat to state regulation, so they attempt to impose illegal fees, registration requirements, and other burdens that make it tough for RRGs to do business in their states.
He says: “Most RRGs are small companies with limited resources to assert their rights under the federal law. That’s when the NRRA gets involved. Our association is vigilant in monitoring threats to RRG operating authority and has headed off harmful actions by explaining the federal law to state and local entities that try to interfere with the legal operation of RRGs.”
“NRRA has won landmark cases in the federal courts and sponsored legislation to create an enforcement mechanism in the LRRA, so RRGs would not always have to go to court to assert their rights.”
While progress is being made to restrain biased regulatory treatment being placed on RRGs, there is still a way to travel before all non-domiciliary states adhere to the law.
Earlier this year, the US Court of Appeals for the Ninth Circuit supported a district court ruling in Nevada to allow RRGs the right to do business in the state.
In their decision, the judges said: “The LRRA broadly preempts ‘any state law, rule, regulation or order to the extent that such law, rule regulation or order would … make unlawful; or regulate, directly or indirectly the operation of a risk retention group’.”
Liability limitations
Unlike the majority of alternative risk transfer vehicles, RRGs are limited in that they can only write liability coverage. And while some people would see the restriction as a significant drawback, Robert Warren, client services manager at Demotech, explains that catering to a niche market was intentional.
He says: “The inability of professional service providers, public service representatives as well as other commercial and business ventures to access affordable, adequate liability coverage was the catalyst for the passage of the LRRA.”
“The availability and capacity for property coverage was not a part of the legislative initiative as adequate property insurance capacity has been available through the private market or public FAIR (fair access to insurance requirements) plans.”
Equally important as coverage limitations, according to Powell, is that in order to be an insured of an RRG, the insured must be an investor/shareholder of the group.
He says that as coverage options are restricted, RRGs tend to insure medical providers, product manufacturers, law enforcement officials and contractors. At the end of 2012, medical professional liability RRGs accounted for more than 50 percent of the RRG marketplace in terms of direct premium written.
Powell says: “RRGs are viewed as an enticing alternative to traditional insurance by some doctors willing to join together for their liability insurance, due to a section of the Affordable Healthcare Act offering incentives for healthcare providers to become part of ‘accountable care organisations’.”
Unlike traditional captive insurance companies that generally focus on a single parent structure, RRGs “are incorporated by numerous like-minded businesses with a specific industry,” says Powell.
Joseph Petrelli, president of Demotech, says: “RRGs offer liability insurance protection to those within a specific industry facing availability or affordability crises. Having multiple owners/members with similar liability coverage needs often leads to benefits from risk pooling, participation and experience sharing by members.”
State of control
Elsass feels that the increase in US states adopting captive insurance laws could help the situation.
He says: “As more states enact captive laws, they will hopefully develop professional staffs that understand the benefits and facilitate the operation of the captive industry and its various segments including risk retention groups. Today, more than 30 states have captive laws and we anticipate more.”
“While many states welcome the financial benefits of having such laws, they will be challenged to meet the high standards set by the ‘domicile’ states, such as Vermont and Hawaii, that have pioneered captive regulation over the years.”
But whatever may happen, Elsass says that the NRRA will continue to defend RRGs in the federal courts. “We’ll advocate for the industry in congress, state legislatures and even before the National Association of Insurance Commissioners.”
“NRRA is also expanding its educational role through our annual conference and member communications. Our members belong to NRRA because they know the association has the resources to support them when they come up against a powerful state.”
