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INDIANAPOLIS-Soft commercial insurance market conditions have claimed a risk retention group formed to help members cope with now-distant hard market conditions.
American Justice Insurance Reciprocal (A Risk Retention Group), which is sponsored by the National Sheriffs' Assn. of Alexandria, Va., has agreed in principle to move its existing book of business to Chicago-based CNA Insurance Cos.
The move reflects competitive market conditions, Tom Dickman, vp of JWF Specialty Co. in Indianapolis, said last week.
JWF Specialty administers the Indianapolis-based group. AJIR was formed in 1990 to succeed the troubled Star Pool, an NSA-sponsored, Illinois-domiciled self-insurance pool that was the target of a half-dozen cease-and-desist orders during its brief existence (BI, Feb. 5, 1990).
The continuing soft liability market may force other risk retention groups to reconsider whether their current underwriting practices best meet their members' needs, observers say.
AJIR's decision is "fairly self-explanatory," said Mr. Dickman. Even successful alternative risk vehicles find the current marketplace "difficult" to operate in, he said.
In a March 20 letter announcing the plan to 140 AJIR subscribers, mostly sheriffs' departments and agents, the risk retention group reported that it had posted "mixed results" last year. Although premium volume grew 12% to $4.25 million, surplus dropped 13.4% to $1.44 million. "This decrease is primarily attributable to an increase in claim losses incurred during 1996, resulting in an overall net loss of $489,757. National competition for AJIR continues to be intense, making it increasingly difficult to maintain market share and still increase subscriber surplus," according to the letter.
"We still exceed the minimum surplus requirement of Indiana," stressed Mr. Dickman, who added that there was no particular reason for last year's increase in losses.
"CNA will be writing new business, and we're going to be encouraging our members to move to the CNA program," said Mr. Dickman. CNA will not, however, be assuming AJIR's existing liabilities, he said.
In the March 20 letter, AJIR noted that "subject to final approval from AJIR's subscribers and the Indiana Department of Insurance, AJIR has agreed in principle to move its existing book of business to CNA during 1997."
"We're in the process of determining what those procedures will be," said Mr. Dickman.
"We're not dissolving the reciprocal until such a time as a proper reinsurance agreement is put in place that is acceptable to the members and the Indiana Department of Insurance," he said.
"AJIR will continue to honor all its existing contractual obligations until such time as they are closed and cease to exist, or transferred through an acceptable reinsurance arrangement on behalf of its subscribers. Once these obligations are fulfilled, any remaining assets will be dispersed equitably per AJIR's Subscriber's Agreement," according to the March 20 letter.
CNA was interested in the business, and JWF Specialty was looking for a new partner, said a spokeswoman for CNA.
The insurer is underwriting the entire program via its Columbia Casualty Co. subsidiary, which is a non-admitted insurer. The program is being offered nationwide, through CNA's independent agent system.
The CNA program will offer public officials liability, law enforcement liability, emergency medical technician liability and employment practices liability. It will offer limits of up to $5 million, with higher limits possible in certain circumstances through reinsurance. There will be no coverage gaps during the transfer.
Two program managers will handle the business for CNA. Berkeley Risk Services Inc. of Minneapolis will handle everything but county business, while JWF Specialty will retain county business.
"JWF will continue to service all existing reported AJIR claims to their conclusion as well," said the letter announcing the shift.
Consultants with no ties to AJIR agree that soft market conditions are putting new pressures on risk retention groups.
"It's part of the maturation process for risk retention groups. As they continue to look at their financial outcomes and position in the marketplace, it may be sensible to occasionally look at alternatives to maintaining risk retention underwriting," said Paul W. Pinckney, a principal with Tillinghast-Towers Perrin in Irvine, Calif.
Mr. Pinckney said he is aware of "a couple of instances" where alternatives have been considered, including the merging of a major risk retention group with an offshore captive underwriting similar business.
"But we know of no specific instance where the risk retention group leadership has chosen the commercial market, although it's not tremendously remarkable since one of the driving factors with risk retention groups is looking out for members' best interests over time," Mr. Pinckney said.
The soft marketplace is a "very serious threat to risk retention groups right now," said Jane Rastallis, senior consultant in the risk and insurance practice in Watson Wyatt Worldwide's Boston office.
Reconsideration of the risk retention approach may be expected to continue because many of the groups have formed based on one or the other of two conflicting philosophies, said Ms. Rastallis.
At one extreme is the risk retention group formed by a "very solid" group that is committed to the risk retention group. Participants in this type of risk retention group maintain a close relationship with the group and share the view that "if they're doing things right, they'll always be doing things better than the commercial insurance marketplace," according to Ms. Rastallis.
In other risk retention groups, participants regard the risk retention group "as just another insurance source," Ms. Rastallis said. If members of such groups can find cheaper coverage elsewhere, they bolt, she said.
Meanwhile, in an unrelated development, the Colorado Department of Insurance continues to hold a risk retention group formed by dentists under a confidential order of supervision. The National Dental Mutual Insurance Co., A Risk Retention Group, was placed under supervision earlier this year.
Alan Schmitz, an attorney with the Denver law firm Hall & Evans, which represents the risk retention group, said that National Dental continues to pay claims and was put under supervision because its surplus was "skating close" to the $1.5 million minimum required under Colorado law.
The risk retention group was formed in 1986. In 1995, it had about 400 members and premium volume of $587,219.
The department refused to comment on the group's status, saying that such information was confidential.
Joanne Wojcik contributed to this report.