NAIC View Surprises Risk Retention Group Lobby

By Caroline McDonald

NU Online News Service, Oct. 23, 11:42 a.m.EDT?The general counsel for the National Risk RetentionAssociation told the group's membership this week that a change infederal law they are pushing has hit unforeseen opposition fromstate regulators.

News that the NRRA's two-year effort to expand the federalLiability Risk Retention Act is imperiled, just as it seemed to begathering momentum, was delivered by Robert H. "Skip" Meyers Jr.,NRRA general counsel, at a special conference meeting of the groupin Washington, D.C.

Later, a key state regulator told National Underwriterthat among his confreres the legislative change faces strongopposition and many questions.

Mr. Meyers, a partner with Morris, Manning & Martin, LLP,told NRRA members that regulators, though "willing to discuss" thematter, said they have concerns about the regulation of RRGs andthe ceding of personal risk of insureds to the RRG.

This is a "very big" issue for RRGs, he warned. "I think everygroup in NRRA and every RRG should be concerned," he said,referring to the language in a National Association of InsuranceCommissioners' resolution that is under discussion, which is highlycritical in some respects of RRGs or the regulatory structuresurrounding them."

Mr. Myers began with an update on the two-year bipartisan effortto expand the LRRA to include property coverage.

With other pressing business on Congress' agenda and an upcomingelection, he said a general oversight hearing about risk retentionmay not happen until the next session early in 2004. This would befollowed by a hearing in front of the full financial servicessubcommittee, he said.

One of the selling points of an expansion, he said, has beenthat a risk retention group offers competition in a hard market,which can pierce "the excessive prices of the conventional market."Even though the proposed expansion is "pretty benign," he said, andthe group has "tried to avoid enemies," Mr. Myers reported theemergence of two potential threats.

One is opposition by the Service Contract Industry Council, agroup representing insurers that deal with service contracts,particularly in the warranty area.

While this group does not directly oppose expansion of the RiskRetention Act, it wants to see that the issue of "undercapitalizedrisk retention groups dealing with service contractors" isaddressed in the legislative process, he said.

The other, more serious obstacle, he noted, is the NAIC. TheNAIC's Property & Casualty Committee discussed the proposedresolution at a Sept. 16 meeting in Chicago.

NRRA, he said, has "taken issue with several of the premisesthat underlie" NAIC's position. These points were outlined in aletter sent to NAIC on Oct. 15.

"They take a run at the fact that risk retention groups areowned by their insureds and therefore there is not the diversity ofrisk," he noted. However, "The Mutual of Omaha has thatproblem?they're owned by their risks," he said.

Mr. Myers explained that the most important misunderstanding isNAIC's assumption that risk retention groups are more prone toinsolvencies than property-casualty companies. "When you examinethe facts, you realize that licensed companies and RRGs have astatistically comparable failure rate--about 1 percent," hesaid.

Mr. Myers continued that NAIC expressed concerns about theinsolvency of a major RRG, which he identified as The NationalWarranty RRG, domiciled in Cayman with headquarters in Lincoln,Neb.

"My concern is because we had this one problem with NationalWarranty, we can extrapolate from that to think that we have aproblem with 129 other groups that are domiciled in a state."

Mr. Myers stressed that there is "a fair amount of confusion inthe insurance community about what RRGs can and cannot do." He saidhe would like to see NAIC appoint a study group to review theissue.

Jose Montemayor, Texas insurance commissioner and chairman ofthe Property & Casualty Insurance Committee, told NationalUnderwriter there is "a lot of polarization" on the issue."There are people who very much would like to see an expansion ofthe Risk Retention Act?they're clearly in the minority within theNAIC."

He continued: "I would say, overwhelmingly, the fact that youhave had some pretty spectacular failures, particularly in the areaof auto warranty, is troubling in terms of this approach to RRGsand how appropriate they are to do different things."

Mr. Montemayor added that the current p-c market is "active andstrong. I think we're far from an environment that resembles themid-80s liability crises? I think we're far from that scenario atthis time; there is plenty of capacity in the regulatedmarket."

Mr. Montemayor said he is concerned because of the lack ofguaranty fund coverage. "It's a strong mark against them. I cantell you personally that I have got, in my state alone, probably aquarter-million warranty holders holding auto warranties that werebacked by RRGs in something called an excess of liability contractthat basically failed. I have people holding worthless paper withno backup and no recourse."

The issue, he said, is likely to get "an awful lot of attentionand discussion within the NAIC, adding that he might call a hearingat the NAIC's next scheduled meeting in December in Anaheim,Calif.