Risk Retention Groups Face Regulatory Challenges
Kurland, Orin M., Risk Management
"The state and federal regulatory tug-of-war is creating an unstable and uncertain future for this alternative risk financing mechanism."
With the advent of the 1981 Product Liability Risk Retention Act, and later with the Federal Liability Risk Retention Act of 1986, risk retention groups (RRGs) began to sprout up during the 1980s despite resistance from state insurance regulators. Today, that resistance has lessened, but the threats - from new regulation being contemplated by both the National Association of Insurance Commissioners (NAIC) and the U.S. Congress - to the RRGs' existence as a viable alternative risk financing mechanism still remain.
When Congress enacted the Risk Retention Acts of 1981 and 1986, it made it easier for insured with similar risk exposure spread across a number of states to obtain coverage. For the most part, these statutes: "eliminated the regulatory requirement for multiple admission or fronting in every state in which a risk was insured; permitted economies of scale in brokerage; and allowed efficiencies in loss prevention and claims management," said Philip Olsson, a partner with the Washington, D.C., law firm of Olsson, Frank & Weeda. "Yet, I have never seen such an unstable situation for captives and risk retention groups, as I've seen today," stated Jon Harkavy, vice president and general counsel of USA Risk Group in Arlington, Virginia. Speaking at the Vermont Captive Insurance Association's 8th Annual Conference held recently in Burlington, Vermont, Mr. Olsson and Mr. Harkavy were joined by a panel of industry experts who expressed concerns over both state and federal insurance regulation proposals and their effects on risk retention groups.
Regarding Proposals for increased federal regulation, the panel, by and large, showed reluctant support. "But extensive federal regulation begets bigness," Mr. Olsson stated, a comment that was very much indicative of the panelists' wariness over this issue. However, Mr. Harkavy's overall belief was that if the federal government can be convinced that the mechanisms to ensure RRG solvency are in place, RRGs "will pretty much be left alone to operate on a multistate basis."
As contemplated under the Risk Retention Act, an RRG must become licensed in a domicile and must meet the same "requirements that apply to a property/casualty insurer, subject to all the laws, rules and regulations of that domicile as they relate to property/ casualty insurers," noted Terence Cooke, senior vice president and corporate counsel for Home Owners Warranty Corp. in Arlington, Virginia. As such, Mr. Olsson pointed out that the Risk Retention Act also contains some extensive safeguards against abuse: "It requires multistate filings; allows examination by the insurance commissioner in any state if the domiciliary state has not begun an examination or has refused an examination; requires that risk retention groups comply in every state with state laws regarding deceptive of false or fraudulent acts or practices; and requires that RRGs comply with injunctions where a state commissioner petitions a court regarding hazardous financial conditions." However, Mr. Olsson felt that the NAIC has not fully utilized the ample enforcement tools that exist in the Risk Retention Act. Thus, "we find RRGs are too often criticized as operating in some sort of unregulated loophole. And that is just incorrect," he said.
Mr. Harkavy expressed concern that everybody has been focussing on the NAIC's work on the fronting issue, when the "real concern with the NAIC is risk-based capital. People are telling me that risk retention groups, captives, etc., all might have to come up with a lot more capital to survive under the new standards." It was Mr. Olsson's belief, however, that the "NAIC should be better able to work with the kind of rational preemption contained in the Liability Risk Retention Act, than it would with the more extensive preemption" being proposed by Congress. …