THERE IS GOOD AND BAD news in the Government Accountability Office's recent report on risk retention groups. The good news is that the report paints a picture—an accurate one, we believe—of a healthy and growing component of the alternative risk financing industry.

While still comprising a small share of the commercial liability market, RRGs' premium volume is growing. In 2010, the most recent year available, RRGs wrote about $2.5 billion in premiums, up sharply compared with $1.7 billion in 2003.

In some industries, RRGs have become a significant source of coverage. For example, more than 13% of premiums for medical professional liability coverage flowed into RRGs in 2010, according to the GAO report.

With an average combined ratio hovering in the 90% range since 2004, most RRGs are financially healthy.

But the bad news is the GAO's misunderstanding of the foundation of the federal law that authorizes RRGs.

Under the Liability Risk Retention Act, the role of states in which RRGs operate but are not licensed is sharply limited.

The federal law explicitly spells out what nondomiciliary states can do. Unless state actions, such as imposing premium taxes, are listed in the law, they are pre-empted.

That is why the GAO has it wrong when it said the law does not explicitly say whether insurance regulators in nondomiciliary states can or cannot impose fees on the groups. The law is not silent. It says clearly what nondomiciliary states can do—and imposing fees is not on that list.

The fee issue has plagued RRGs from the beginning. They clearly are impermissible. But the reality is that the cost of fighting them often exceeds the cost of paying them.

Given that cost/benefit analysis, RRGs often pay the fees—money that could have been used instead to add the groups' reserves, for example.

While we think the law is clear, if Congress does decide to take another look at the LRRA, we strongly suggest that legislators, in a single sentence, say that such fees are illegal. That would settle the matter once and for all.