Although the insurance industry as a whole is experiencing a hard market which has led to increased interest in alternative risk financing, risk retention groups (RRGs) are behind other types of captive structures in terms of new formations. This was discussed at the annual Vermont Captive Insurance Association (VCIA) conference last week in a panel which identified that out of the 38 new captives formed in Vermont in 2020, only two were RRGs. RRGs are a type of captive structure in which companies with similar insurance requirements pool their risks and form a group insurance company that operates under state-regulated guidelines; however, they are different to other types of captives as they only write liability coverage. Moderated by Christine Brown, assistant director of captive insurance at the State of Vermont Department of Financial Regulation, the panel described Vermont as a historically leading RRG domicile following the Liability Risk Retention Act (LRRA) in 1986, as RRG formations tend to follow market cycles, with a general uptick at the end of a hardening market period. For example, at the end of the first hard market in 1993, Vermont had 21 healthcare RRGs, which increased to 163 (making up 60.4 per cent of total RRG formations) in 2008. In the current hard market, the panellists indicated that although the number of operational RRGs is likely to increase, it is unlikely to be on the same scale as witnessed in the 2000s. Healthcare was identified as a historically leading (but not dominant) sector followed by government and institutions. However, the panel also noted there is diversity in formations, as most business sectors have mature RRGs while the transportation sector is poised for growth. The panel noted that today, healthcare RRGs write approximately 20 per cent of all medical malpractice (MPL) coverage nationally, with Vermont home to 15 established structures that have been active for over 20 years. In particular, MCIC Vermont was highlighted as one of the ten largest MPL carriers in the country. Chris Heckman, chief risk officer at MCIC Vermont, explained: “One of the key items to achieving long-term stability is having a clear mission and vision that is reinforced with all of the stakeholders, employees and regulators.” “That is not to say that your mission and vision will not change over time — in fact, that flexibility will actually help bring stability to the RRG,” he added. Other factors to ensure stability include integrating the owners of the captive structure into the board, ongoing communication with the home regulator, and adaptation of policy language and value-added services to the evolving market landscape. Heckman also identified capital as a key component to maintaining long-term stability through market cycles, affirming: “Building capital and establishing appropriate target ratios is important. It may be that your capital targets will change over time, and whether it is reserves to surplus or written premium to surplus, you need to set targets with your board that ultimately support your mission.” “The final key to long-term stability in market cycles is reinsurance,” Heckman continued. “Depending on where your RRG is in its maturity, your utilisation of reinsurance will vary. Rest assured this is also going to change over time, as whether you are buying treaty or facultative, aggregate or excess of loss protection, your needs will change.” The advantages of RRGs as a captive structure was concurred by Tim Herr, risk management officer at Recreation RRG, which was formed to address the issue of niche recreational activities (specifically hang gliding and paragliding) having difficulty finding and maintaining insurance in the traditional market in a national capacity. While commercial carriers had an aversion to writing this specific risk owing to a lack of loss data and understanding of how to manage this risk, an RRG was a viable solution because it operated in multiple states and insureds were able to both commit to managing their own risk and supply sufficient capital to support the insured risk. Herr added: “The key benefits of an RRG are that you get to have tailored coverage and policy language — you are no longer putting a square peg in a round hole like we were in the traditional insurance market.” Although he acknowledged there can be a challenge in finding reinsurance partners and in non-domiciliary states attempting to regulate in violation of LRRA, Herr concluded that RRGs also provide the advantages of direct paper, pricing stability, and preemption of state insurance regulations.
