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Efforts to expand risk retention group coverages fall short

Efforts to expand risk retention group coverages fall short

Risk retention groups have pressed federal lawmakers for nearly a dozen years to expand the coverages RRGs can provide, but they have yet to win broad congressional support.

Under the original Risk Retention Act passed by Congress in 1981, RRGs — which, unlike other types of captives, are allowed to do business in any state after meeting the licensing requirements of one state — could only write product liability and completed operations coverage for their policyholder-owners.

Five years later, Congress, responding to soaring premiums in the traditional market for a wide range of liability coverages, expanded the Risk Retention Act to allow RRGs to write all commercial casualty coverages except workers compensation.

That 1986 expansion had a huge effect on the RRG market. While only a handful of RRGs were formed after the passage of the 1981 legislation, several hundred RRGs have been licensed since the 1986 expansion was approved by Congress.

Lawmakers have discussed expanding the law to allow RRGs to cover property risks since 2006, but expansion proposals have yet to attract widespread congressional support.

A key reason no congressional action has been taken on the various expansion proposals is soft conditions in the traditional commercial market, observers say.

“We have had a soft market for so long that there is limited interest in expansion,” said Robert Myers, a partner with the law firm Morris, Manning & Martin L.L.P. in Washington.

“The product liability crisis of 1981 and general liability crisis of 1986 gave rise to the Risk Retention Act,” said Jon Harkavy, executive vice president and general counsel for captive and RRG manager Risk Services L.L.C. in Washington. “There has not been an equivalent insurance availability and affordability crisis for property to spur expansion of the Risk Retention Act.”

At the same time, the scope of RRG expansion has become more limited. While earlier proposals would have allowed all RRGs to offer property coverage, the most recent legislative proposals have been much narrower.

For example, legislation introduced in the last congressional session would have only expanded RRGs’ underwriting authority to allow the groups to provide property coverage for policyholders that are nonprofit organizations with tax-exempt status or educational and educational-related institutions that are nonprofit organizations or governmental entities.

In addition, an eligible RRG would need to have been operating for at least 10 years and maintain capital and surplus of at least $10 million.

Observers say chances are low that Congress will soon expand coverages RRGs can offer. The commercial property market is “functioning pretty well,” said Jeremy Brigham, a director in the Hartford, Connecticut, office of Willis Towers Watson P.L.C.

But some RRGs say they would welcome such an expansion.

“That kind of flexibility makes sense,” said Christopher Smith, Atlanta-based president and CEO of MCIC Vermont, a Reciprocal Risk Retention Group.

“Why should RRGs be limited in the coverages they offer? Allowing RRGs to expand outside of providing liability-only coverages could be a benefit to their members,” said Mark Tabler, chief operating officer of Physician Solutions Risk Retention Group, a Vermont-domiciled RRG, which provides professional liability coverage to about 400 physicians.

Backers of such an expansion say they will continue to press federal lawmakers to approve, at least for nonprofits, legislation to enable RRGs to cover property risks of their member-owners.

“We are continuing to work on this issue that is so important for nonprofit organizations,” said Pamela Davis, founder, president and CEO of Alliance of Nonprofits for Insurance, Risk Retention Group, which is headquartered in Santa Cruz, California, and was licensed in Vermont in 2000.

“We have demonstrated that small and midsized nonprofits are offered property from commercial carriers only in a ‘package’ policy with the liability and property combined. The stand-alone auto physical damage and property policies that these small nonprofit members of a risk retention group need are not available,” Ms. Davis added.



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