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RRG rules need more clarity from Congress

RRG rules need more clarity from Congress

WASHINGTON—A long-awaited report recommending that Congress clarify Liability Risk Retention Act provisions that include the types of coverage risk retention groups are allowed to write is a positive step, but getting Congress to act will be a challenge, industry experts say.

The report that the Government Accountability Office issued last week says Congress should revise some provisions of the 1986 law to reduce varying interpretations by state regulators and the courts.

The report suggests that those varying interpretations are “due in part to LRRA's silence on certain issues such as registration requirements, fees and the types of insurance coverage RRGs can write, sometimes resulting in litigation between state insurance regulators and RRGs.”

The GAO recommends that Congress clarify nondomiciliary state registration requirement and fee provisions, as well as provide a more specific definition of the types of coverage permitted under the LRRA.

The long-awaited report updates the GAO's last analysis of RRGs. In that 2005 report, the GAO recommended implementing more uniform state regulatory standards. Since then, the new report notes, the National Assn. of Insurance Commissioners has revised its accreditation standards to align RRG regulation more closely with that of traditional insurers, including a risk-focused examination process for all RRG financial examinations begun during or after 2011.

“There are some good things in it,” said Robert H. Myers Jr., managing partner of the Washington office and co-chair of the insurance and reinsurance practice at Morris Manning & Martin L.L.P. In particular, Mr. Myers, who is general counsel to the National Risk Retention Assn., cited the report's finding that the RRG industry has grown and is financially sound.

“There were two parts that I thought were great,” said David F. Provost, deputy commissioner of the Captive Insurance Division in the Vermont Department of Banking, Insurance, Securities and Health Care Administration. “One was that they recognized that the NAIC has made progress in addressing the concerns they had in the last report.”

“And their final conclusion was right on,” said Mr. Provost. “There are certain things in here that people are interpreting in various ways, and the law shouldn't be subject to interpretation.”

“If we have that much disagreement among reasonable people,” Congress should clarify the act, Mr. Provost said.

But Mr. Myers said the NRRA was disappointed the GAO didn't recommend the organization's suggestion to resolve disputes between RRGs and some state regulators.

“The GAO didn't really engage or come down with a recommendation regarding some of the issues we pointed out to them,” Mr. Myers said. “We think the act is clear.”

“We think the answer to this is what we have in our bill, H.R. 2126, which says the Treasury should exercise oversight,” Mr. Myers said of the bill that would grant Treasury the ability to resolve disputes.


While existing law anticipates that disputes would be resolved in federal court, “most RRGs are small and don't have the money,” he said.

Others also said the GAO report didn't go far enough.

While pleased that the GAO recommended congressional action, the NRRA is “disappointed that the agency's report failed to take a strong position in support of RRGs where certain states have imposed requirements that clearly are in direct conflict with the federal law,” said Sanford Elsass, president and CEO of Alpharetta, Ga.-based Uni-Ter Underwriting Management Corp. and NRRA chairman.

Longtime RRG industry practitioner Jon Harkavy also is disappointed with the GAO report. “Ambiguity is really not the issue in the law,” he said.

“I would suggest that no matter how precise you make the language, certain states are going to ignore it,” Mr. Harkavy said. “The only way you're going to get out of this 50-state Byzantine practice is some sort of federal intervention.”

Mr. Myers said that while the GAO didn't take “the next logical step,” the fact that it identified the differing interpretations of the LRRA as a problem in need of congressional action was “somewhat positive.” But most members of Congress seem to have many issues they consider greater priorities than RRGs, so “getting a law passed is a very difficult process.”

“We see a very fractious Congress,” said Mr. Harkavy. “And while the bill is very important to the risk retention group community, I don't see Congress speeding to act.”

While the GAO report's recommendation makes the next move one for Congress, Mr. Provost said the NAIC Risk Retention Group Task Force, which is considering what accreditation standards should apply to RRGs chartered under state captive insurance laws, will review the report.

“It will be almost the only thing that's left for the Risk Retention Group Task Force to look at,” he said.