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Risk Retention Groups

Last Updated 5/31/19

Issue: Risk Retention Groups (RRGs) are liability insurance companies owned by its members. RRGs allow businesses with similar insurance needs to pool their risks and form an insurance company that they operate under state regulated guidelines. RRGs are formed using a combination of state and federal laws under the auspices of the Federal Liability Risk Retention Act (LRRA). All insureds of an RRG must be owners of the RRG, and all owners of the RRG must be insured. RRGs may be formed under a state's captive or traditional insurance laws. The RRG is domiciled in one state, but may do business in any other state by completing a registration process and designating the state’s commissioner as agent for service of process.

Unlike other captives, RRGs may write directly in states where they are registered without obtaining a license. In part because of this feature, RRGs are treated as multi-state insurance companies and are subject to NAIC accreditation standards, albeit modified to suit the unique nature of RRGs.

Overview: RRGs were originally limited to writing product liability insurance, but the federal act was amended in 1986 allowing various forms of commercial liability insurance. Currently, RRGs write more medical malpractice coverage than any other line of business. At the same time, while healthcare has historically accounted for a large percentage of RRG formations and numbers, it has also recently accounted for the majority of closures.

In 2014, the total number of active RRGs fell but RRG premium levels remained constant, according to Strategic Risk Solutions. The number of active RRGs dropped from 261 in 2012 to 238 in 2014. This number is slowly increasing again as 2018 saw 239 active RRGs and the market remains strong.

A 2018 report by rating agency Demotech revealed that RRGs remained financially stable, as cash, assets, and liabilities all increased since 2017 Q2. Policyholders' surplus also collectively increased 4.9%, adding almost $228 million. RRGs reported nearly $2 billion of direct premium written, a slight decrease of 2.3%. However, they saw an increase of 0.4% in net premium written since 2017 Q2, reporting nearly $1.2 billion. According to Demotech, the results suggest RRGs are adequately capitalized and are able to remain solvent if faced with adverse economic conditions or increased losses.

Status: At the request of Congress, the Government Accountability Office conducted studies of the RRG market to assess the impact of the LRRA. The GAO studies found RRGs had a small but important impact in their niche markets, and were generally successful. However, the study also concluded there were some weaknesses, and RRGs would benefit from more consistent regulation by the states. As a result, the NAIC worked to develop consistent guidelines for the states, which eventually became accreditation standards. The Risk Retention Group (E) Task Force is currently charged with reviewing the work of other NAIC groups related to financial solvency regulation and determining whether such should apply to RRGs through the accreditation standards.

Regulation of RRGs is limited by the LRRA to the state of domicile. That is, the LRRA preempts many of the typical rights and authorities of the non-domestic state. Under the NAIC accreditation program, regulation of multi-state RRGs is similar to the regulation of commercial insurers: RRGs must comply with the usual quarterly and annual filing requirements imposed on property and casualty insurance companies, including financial statements (Yellow Book format), Management's Discussion and Analysis (MD&A), risk-based capital (RBC) calculations, audited statements, actuarial opinions, etc. Regulators must perform quarterly surveillance procedures and conduct periodic examinations in accordance with the NAIC Financial Analysis Handbook and the Financial Condition Examiners Handbook. If a company is determined to be troubled, the regulator will follow the NAIC Troubled Company Handbook procedures.

Although the regulation of RRGs is similar to traditional insurers, there are some key differences. Many RRGs file their financial statements using GAAP accounting, which requires some extra analysis attention. Few RRGs, if any, are required to submit rate and form filings - rates are typically based on an actuarial analysis of the membership, and one of the advantages of captives, as noted with pure captives, is the ability to manuscript the policy to suit the needs of the membership. In addition, the LRRA specifically disallows RRGs from participating in state guaranty funds.