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Jon Harkavy has been one of the primary voices for commercial insurance buyers before Congress and state insurance regulators for nearly two decades.
Mr. Harkavy currently is vp and general counsel of USA Risk Services Inc., an Arlington, Va.-based company that offers administrative and management services for group captives and self-insurance pools.
Mr. Harkavy also is president of the Coalition of Alternative Risk Funding Mechanisms, an organization representing state, national and international captive organizations on legislative and regulatory matters. Mr. Harkavy is a former director of the National Risk Retention Assn. and currently serves as chairman of the governmental and industry committee of the group.
From 1981 through 1989, Mr. Harkavy was the director of governmental affairs and general counsel of the Risk & Insurance Management Society Inc. During this time, Mr. Harkavy was instrumental in the passage of the Federal Liability Risk Retention Act Amendments of 1986.
While at RIMS, Mr. Harkavy lobbied on behalf of insurance buyers on numerous legislative and regulatory issues.
Mr. Harkavy, 45, has a law degree from Temple University and a bachelor's degree from Pennsylvania State University.
Mr. Harkavy discussed alternative risk financing, regulation and lobbying efforts with Associate Editor Deborah Shalowitz Cowans.
You, as much as anyone, have been a proponent of the alternative risk financing market. Why?
I have to put on a couple of hats. Putting on my old RIMS cap, when I was at RIMS I think the most formative lesson I learned was the 1986-1987 hard market.
It may never be replicated, but at that point risk managers were searching desperately for affordable coverage that wasn't there. What we saw then, as we see now, was that the mere existence of a viable alternative market gives the insurance consumer an escape hatch, or greater control of the traditional market.
I think that the prolonged existence of the soft market has a lot to do with the continued viability of the alternative risk market.
Switching hats a little, when I came into the business end of the business of insurance, I saw associations that truly had control of the business. The alternative market has provided associations a much better way of giving a better insurance product to their members and making more revenue off of it.
For agents, the alternative market offers some exciting potential solutions. Much like associations, many brokers and agents control their own books of business. Agents can set up agents captives, and we're seeing more of this now.
People talk about the alternative market sometimes as if there's some kind of a sinister, outside, third-party force coming in and taking over the marketplace. Really, it's just a restructuring of all the fiscal players.
Are alternative risk financing mechanisms still needed, seeing as the commercial insurance market is so competitive?
Yes. One of the reasons I feel the commercial market is so competitive is the existence of a viable alternative market. Probably even more important is the alternative market allows for an unbundling of services, which the policyholder and the marketplace wants. That would be very, very difficult if the alternative market didn't exist.
What is the future of alternative risk financing?
You have a situation where you're talking about 40% 45%of the market. Is it truly alternative anymore? Many of the startups I see now are not in the area of affordability or availability of coverage. It's a matter of control -- both of the future and of the revenue stream. I see a lot more hybrids -- of pools, captives, alternative market types and products put out by the traditional insurance industry.
Do you view the insurance industry as the enemy, a friend, a partner?
Everybody seems to have, for better or for worse, a more or less shared stake in outcomes now. In the vast majority of times, the pain that the alternative market feels is quickly felt by the rest of the industry. So in most cases I regard them as friends or partners with a particular interest.
The era of a confrontation between the alternative market and the traditional market is not over, but I would say that very close to 80%of the things that I see at the NAIC or the federal government are working in a cooperative as opposed to an adversarial position with the traditional insurance industry.
Insurers devote enormous resources to lobbying. Do risk managers devote enough?
Coming from the governmental affairs background that I do, my answer is probably not enough. But let's face it, given the concerns of specific industries, insurance lobbying is going to take a back seat.
And, risk managers are best served by a large degree of laissez faire market, so most of their problems are defeating something, as opposed to changing something radically.
During your tenure as a lobbyist for RIMS, what frustrated you about employer involvement in commercial insurance issues? What pleased you?
The problem that I saw at RIMS was that while captives and perhaps tort reform were very, very important to me, they just were not number one areas for corporate governmental affairs involvement. Very few risk managers saw lobbying as part of their role as risk managers. And I can't say I blame them. They're not paid as lobbyists, and they're not paid for changing the landscape.
But when you had an area that risk managers could really get their teeth into and understand, when they truly felt that their own interest was at stake and that they were being treated unfairly, the rallying cry and the enthusiasm and the support was wonderful. The ISO claims-made form is an example. This was an issue where every risk manager got involved. We got calls and letters from membership and we managed to force the NAIC to take action where clearly they weren't going to.
You helped get the Risk Retention Act of 1986 passed. Why did RIMS devote so much time to that?
The Risk Retention Act provided a means, other than going offshore, for policyholders to form in one state and operate nationwide free of form and rate regulation. It's just a structure, like a limited liability corporation or an "S" corporation. I just thought that an escape valve needed to be written that the NAIC or the individual state could not tread upon.
Why did the buyer succeed in that effort and not in others?
Congress was not going to pass tort reform; they were not going to change insurance regulation very much. But they wanted to show they were doing something. So you take what you can get.
The insurance company was lower than whale dung at the time. We managed to humanize insurance to the maximum extent possible with very, very sympathetic witnesses such as non-profit hospitals, nurse-midwives and municipalities.
It was not the large corporate risk manager that got this passed; it was the service providers that saw the opportunity and the mid- to smaller-sized commercial insureds.
What changes, if any, are needed to the Risk Retention Act?
Quite a few -- some tinkering, some major changes. Among risk retention groups, the biggest problem is that we need a mechanism that's simpler than having to go to federal court to adjudicate differences between risk retention groups and a state. Now, the burden is very much on the policyholder if a state wants to cause problems. A state can take all sorts of actions that we strongly feel are preempted by the Risk Retention Act, and if you're a risk retention group, you're in a constant quandary whether to roll over and play dead or sue them. That's one problem.
The second is the restrictions on what you can write. Right now it's liability only. But not everybody wants to bifurcate their insurance coverages. For example, a non-profit wanting auto insurance can get auto liability from a risk retention group, but what about property damage to your own auto?
Third, I think the purchasing group mechanism needs to be made easier so that an insurance company doesn't necessarily have to be licensed in every single state in which it operates and can operate with one form and rate.
Today only 68 risk retention groups operate. Does that mean the law was a failure?
No. We go back to the circular argument. If the Risk Retention Act didn't exist and the alternative market didn't exist, would the market be as soft as it is today? I really feel that risk retention groups and pools are nothing more than structures that you pull off the shelf when needed. It's valuable when you need it. I wouldn't look at the 68 groups and say failure. I'd say it's a soft market and the need has not been hugely present.
Louisiana in 1995 enacted legislation that would have imposed new regulations on risk retention groups. Do you see Louisiana as an example of regulator hostility to risk retention groups? If so, what is the NRRA doing to combat this?
Yes, although it was interesting how that developed. The impetus behind the passing of the bill was a spurned state property/casualty association that thought they were operating on an unlevel playing field.
Now, did regulators mind that they did that? No, because regulators by their nature don't like risk retention groups.
What the NRRA is doing about this is we point out the law, point out the problem. We'd like to think that if there's some good faith, we can hammer out the problems. In most cases, while there is some animus towards risk retention groups and purchasing groups, I like to believe that state officials do what the federal law requires them to do.
Why are regulators so hostile to risk retention groups?
A couple of reasons. If you're a regulator, you have a group that is operating, in your fiefdom, your franchise, without appropriate supervision by the state on the say-so of a regulator who in their mind has no real stake in the action. And there has been some degree of insolvencies. So if you combine both of those, yes, you're going to have some resentment.
Do you think this is going to change?
I think this is what you should expect for a while. What I'm hoping for is reluctant compliance with federal pre-emptions. And will regulators ever like risk retention groups? No, in my opinion.
More than 80%of domestic captives are licensed in Vermont. Why, then, is there a need for other domestic domiciles?
A couple of reasons. Whenever I have a fight with the NAIC, whenever I have a problem on the federal level, it's nice to have more than one insurance commissioner, more than a small congressional delegation to draw upon for support. Plus, as we all know, competition augurs well for consumers. The more choices that policyholders get, the better off they are.
Why should captives have special tax status?
I am not looking for captives to have a special tax status. What I'm looking for is for them to be treated like everyone else -- parity. You want to control your own destiny, you want to do a business function, which is to control risk, as cheaply or as efficiently as possible. You should have the benefits of deductions. You're just taking care of a business expense in the most efficient way.
Do you envision the day when so much business is handled by captives that future administrations will increase taxation of captives?
Yes. You can't have estimates of 40%or more of the commercial market being an alternative market without some people either trying to level the playing field or governments looking at it as a potential revenue source.
What do you feel has been your greatest success?
Helping pass the Risk Retention Act was very important, as was managing to coalesce the support of the risk managers against the ISO CGL policy.
More recently, what I see gradually happening and I'm very pleased with is a growing sense of solidarity among different domiciles and captive associations. Before, there was occasional interaction between them, but basically everybody was looking at things parochially. Now, they're working collectively for the greater good of the alternative market.