Risk retention groups are subject to the same challenges as the commercial marketplace but their ability to be nimble, react quickly and create unique guidelines for operation can help them overcome those issues
In the late 1970s, many businesses in the US were unable to obtain product liability coverage at any cost resulting in the US Congress needing to act.
The Liability Risk Retention Act was passed in 1986, which paved the way for risk retention groups (RRG).
This federal law allows the ability to form an insurance company operating throughout the US to cover their liability exposures. RRG can operate on a multi-state basis on a single domicile license. Also, ownership is restricted to the policyholders of the RRG.
RRGs are restricted to liability coverage, and tend to insure medical providers, product manufacturers, law enforcement officials and contractors, as well as other industries with professional liability.
Troy Winch, vice president, director of captive insurance at Risk Services, explains: “Once formed, RRGs provide a solution for groups that either need an insurance solution to a unique exposure or to support an industry sector not adequately supported by the traditional insurance market.”
“RRGs are speciality carriers, focusing on homogenous memberships and thus often able to better serve their member’s needs than large multi-line carriers,” he adds.
In 2020, risk retention groups (RRGs) continued to have a great deal of financial stability and remain committed to maintaining adequate capital to handle losses, according to Demotech’s Risk Retention Groups Report Favourable Results in 2020.
According to the author, Douglas Powell, senior financial analyst at Demotech, Vermont had the most RRG’s in 2020 than any other jurisdiction with 84 RRG domiciled.
The report adds that South Carolina was home to 36 RRGs, while the District of Columbia recorded a total of 31 RRGs. Hawaii and Nevada rounded out the top five states of domicile by having 15 and 12 RRGs, respectively.
Powell explains that RRGs reported direct written premium (DWP) for nine different lines of business in 2020, with 54.3 per cent in medical professional liability.
The report notes that medical professional liability, other liability and commercial auto liability lines continue to report year-over-year increases to DWP.
Despite “political and economic uncertainty”, the report found that RRGs remain financially stable while providing specialised coverage to their insureds.
Commenting on how well RRGs are doing in the current environment, Peter Johnson, senior actuarial consultant, property and casualty practice lead at Spring Consulting Group, says: “Coming into the pandemic in early 2020, some RRGs were already seeing difficult market conditions with low or negative earnings.”
He explains: “The exacerbated soft market conditions drove some carriers to the point of underpricing exposures to keep market share. This adversely impacted RRGs directly competing with these carriers. Certain medical malpractice RRGs saw this issue.”
Through the COVID-19 pandemic, the market continued to harden with rising carrier rates for many liability lines and which Johnson suggests could be a big benefit for RRGs that saw these rate competition issues.
“The social inflation issue, which is a current hot topic, is another thing to keep in mind and has had an impact on upward loss trends on certain liability lines and rates will need to respond accordingly,” Johnson adds.
Asserting that RRGs are still considered financially stable, Dennis Silvia, executive vice-president at Davies Captive Management, believes that it depends on a variety of factors. He points out: “Many states who have seen the developing financial issues with RRG programmes have begun to look at elevated capital requirements.”
Silvia explains: “For instance, even though the minimum capital requirement might be $1 million some states are asking for $1.5 million as the minimum capital in order to provide a financial buffer for the success of the programme.”
Earlier this year, the Alabama Captive Insurance Association (ACIA) revealed its 2021 captive bill amendments, which if passed, will see the introduction of three new alternative risk vessels, including one for RRGs.
The ACIA also collaborated with the Alabama Department of Insurance, which will see the department issue the RRG regulation to set the National Association of Insurance Commissioners RRG standards in one convenient place.
Bumps along the road
Reflecting on the challenges RRGs face, Winch suggests startup capital as the largest hurdle a new proposed RRG faces
Startup capital refers to the money that is required to start a new business, whether for office space, permits, licenses, inventory, product development and manufacturing, marketing or any other expense.
Winch explains: “As while the proposed membership typically represents an adequate capital base, getting all those members to contribute their capital at the same time, exclusive of their respective renewal dates, can be difficult.”
“This issue is often resolved by a third party supporting the RRG initial capital through the provision of a LOC or cash capital in exchange for a surplus note, that is then retired as the RRG membership capital base grows,” he adds.
Meanwhile, Johnson believes the challenges faced by RRGs often vary significantly by risk type and geography.
He explains: “Solvency risk is correlated with soft market cycles for RRGs, especially for those RRGs that are in direct competition with commercial carriers.”
“Part of the issue is competition in the commercial market during soft market cycles can lead to flat market rates for a long period of time or even rate decreases, thereby causing low/negative underwriting profit margins and possible surplus shortfalls if adverse loss experience persists. This was evident with certain medical professional liability and auto liability RRGs,” he adds.
As the insurance market continues to harden in 2021, Silvia states what he expects to see with RRGs over the next 12 months, he says: “The best RRG programmes with strong insurance leadership and management will grow and be successful for its insureds.”
Silvia explains: “Insurance hard markets are precipitated by difficult insurance problems related to coverages and or unexpected claims activity.”
“RRG programmes are subject to the same challenges as the commercial marketplace is but their ability to be nimble, react quickly and create unique guidelines for operation can help them overcome those issues in a way that the traditional marketplace can’t,” he concludes.
