RRG growth continues in soft market
A good alternative for smaller niches
By Michael J. Moody, MBA, ARM
The original federal legislation authorizing the establishment of risk retention groups (RRGs) arrived on the scene too late to provide much assistance in resolving hard market concerns in the commercial insurance market of the late 1970s. By the time the legislation was passed, the market had already begun another soft pricing cycle. But, it was a different story when a broadened version of the legislation was passed in 1986. This revised version arrived just in time to make a real difference in the alternative risk transfer (ART) market.
By the mid-1980s the commercial insurance market had provided insurance buyers from coast to coast with significant affordability and, in some cases, availability problems in many liability coverage areas. But the RRG legislation proved its mettle and in the intervening years has become a staple in today’s ART market.
Today’s RRG market
A recent issue of the “Risk Retention Reporter” provides some insight into the success of the RRG legislation. Despite being in the middle of a multi-year soft market, RRGs still managed to set a record high of 262 by the end of 2008. And while that was only a modest gain over 2007’s mark of 254, it continues to show the growing utilization of RRGs.
It should be noted that those 262 RRGs accounted for $2.57 billion in premium in 2008, slightly higher than the 2007 premium of $2.56 billion. Both were less than the record year of 2006 which had $2.64 billion. The “Risk Retention Reporter” indicates that “the majority of RRGs are holding their own in a competitive marketplace.”
Over the years, several industry segments have looked to RRGs to help solve liability problems for industry members. Diverse industry groups such as property development, transportation, leisure, and governmental entities have, at one time or another, turned to RRGs to help resolve insurance market distresses.
However, far and away, it has been the professional services segment that has utilized the legislation to help weather a hard insurance market. And within this group, historically, it has been the health care-related RRGs that have accounted for the vast majority of RRG growth. In fact, more than half of 2008’s premium came from health care RRGs. The growth trend over the past couple of years has been almost exclusively devoted to health care RRGs. However, not all recently formed RRGs have been health care-related.
Case in point
For example, 2004 saw the formation of the Claim Professionals Liability Insurance Company, RRG (CPLIC). And according to Joe Deems, general counsel for the company, CPLIC was formed primarily to provide errors and omissions coverage for independent insurance adjusters.
Deems notes that the sponsoring organization, the National Association of Independent Insurance Adjusters (NAIIA) had determined that, frequently, their members were “being placed in incorrect underwriting classifications by the insurance industry.” This was primarily due to the fact that the independent adjusters represented a group that was too small to warrant its own underwriting classification.
As a result, Deems points out, NAIIA members were being lumped in with other professions that had little in common with insurance adjusters. He said, “They were putting us in with everything from architects to accountants.”
Unfortunately for the average NAIIA member, if the member could get coverage, this incorrect classification frequently meant higher premiums, since insurance companies typically put adjusters in higher exposure groups than they should have been.
As a result, the association began studying the issue hoping to find a viable option for its members. One of the alternatives that was reviewed was a risk retention group. After an in-depth analysis, the RRG strategy was selected and, in 2004, the company was licensed in Vermont. The RRG has been experiencing orderly growth ever since, and the association believes that it has been more responsive to its members, Deems notes.
“Our needs are quite different than those of the health care RRG members,” he comments. Even in today’s soft market, where “health care professionals may have a number of options for coverage available to them, our members still cannot always find coverage and, where it is available, it is very expensive.” CPLIC was specifically designed to properly address these types of issues.
Deems points out that this has resulted in an RRG that is owned, operated and managed completely by insurance claim professionals. He says, “This provides us with a unique perspective on how an RRG should function. Our group has significant insight into the general insurance functions and more specifically into the claims management function.” He says this provides CPLIC with a different view of how to deal with losses or risk management than a group made up of other professions. “When it comes to claims management, they automatically get it,” he indicates. Deems adds that this insurance insight provides a competitive advantage that should help the RRG continue to perform well in the future.
The future of RRGs
In addition to his work for CPLIC, Deems chairs the Governmental Affairs Committee for the National Risk Retention Association (NRRA). At this point in time, he notes, there is quite a bit of uncertainty surrounding the entire financial services industry. This centers around, “the yet unknown form and direction that the federal regulation of the financial services industry will take.” But he does believe that it ultimately could benefit the ART market. “As the big carriers get more and more entangled with the federal legislation, it will cost them money.” And Deems continues, “This will result in their having to raise the price of their products, thus making the ART market more attractive.”
With regard to the changes to the existing LRRA legislation, one of the topics that has been raised in recent years is expansion into the property coverage area. Deems points out that last year HR 5792 was advanced to include property; however, it failed to move forward. But he believes that there will continue to be pressure to include property in the bill. He goes on to say that it will not be as easy as just adding property to the list of covered risks. “Property is unique,” he says, “It will require different underwriting as well as different capital requirements.”
Regardless of how the federal regulation of the financial services industry unfolds, Deems believes that the ART industry in general and specifically RRGs will continue to be an important part of the industry. One of the most important aspects of this is the concept of self-governance.
He states that it’s this key point that separates ART solutions from the rest of the insurance industry. It allows the insureds to play a vital role in the day-to-day management of their own insurance company. “When you have some say in the management and philosophy of your own insurance company, it cannot help but add a facet to the company that makes it more attractive to other professionals and provides for a good working program.” At the end of the day, Deems says, “It’s this controlling your destiny that is critical and is a key to the success of the risk retention industry.”
The captive movement has matured over the past 25 years or so and, as it has, more and more business owners are coming to realize that controlling their destiny requires striking out on their own. Whether it is through single-parent captives or risk retention groups, few insurance companies can match the specialized services and coverage options that the ART market can address.
CPLIC is just one more example of how the ART market can address a problem and find a solution that is better than the insurance market can provide. As the market hardens in the next few years, mid-sized agents and brokers need to monitor the ART market for potential solutions for their clients’ unique coverage issues.