A move by North Carolina to limit use of risk retention groupsin the state has provoked a letter of protest from the NationalRisk Retention Association.

The Washington, D.C.-based NRRA sent a letter to the NorthCarolina Insurance Department stating that if passed in its currentform, House Bill 645, adopted in the House May 12 and sponsored byHugh Holliman, D-Davidson, would "discriminate against riskretention groups in a manner prohibited by federal law."

Under the Risk Retention Act groups of companies can bandtogether as self-insurers to provide coverage for hard-to-insureand homogeneous risks.

Robert H. "Skip" Myers Jr., general counsel for NRRA and anattorney with Morris, Manning & Martin LLP in Washington, D.C.,said, "Some states just don't want to give up on trying to excludeRRGs."

He explained that the bill includes a provision that "in orderto issue a contract liability insurance policy or service agreementreimbursement insurance you have to be a licensed admitted insureror a surplus lines company," adding that, "The definition ofinsurer they mention expressly excludes RRGs."

Mr. Myers said a similar letter was sent to North Dakota just afew months ago. "The issue arose in North Dakota, but it wasresolved," he said. "North Dakota took the offending provision outof the legislation after they received the letter."

Some of the states, he explained, may not realize the RiskRetention Act is a federal act. He said he hopes the letter will"make them cognizant that to do this would be a violation offederal law, and we cite them to the National Warranty Case inOregon in 1999, by the U.S. Court of Appeals."

In Oregon, he noted, "they said you had to be a member of theguaranty fund, which is what North Dakota said." The impact ofbeing required to be a member of the guaranty fund, he added, meantit indirectly excluded RRGs, which are prevented by federal lawfrom being members of guaranty funds.

In N.C., however, "they just go straight at it and say RRGs arenot 'insurance companies' for this purpose."

Their reasoning, Mr. Myers said, is to keep RRGs from issuingcontract liability or service agreement reimbursement policies. Thetheory is that RRGs "aren't financially stable, but the facts don'tbear that out," he said.

North Carolina is trying to prevent a situation like that of theNational Warranty Insurance Risk Retention Group, headquartered inLincoln Neb., which was declared insolvent in 2003.

"That RRG had problems at a lot of levels," he said. NationalWarranty "was originally domiciled in the Caymans. It had an officein Nebraska, and basically Cayman didn't regulate it and neitherdid Nebraska."

The real problem with service warranty agreements and autowarranty contracts, he added, is that "there is not adequateregulation at the primary level--the service contract issuer level.These insurance contracts are reimbursements and they almost attachat an excess level, when the company reaches a certain level ofpayments out. So it is an excess contract, a backup."

Problems ensue, he said, because administrators "don't alwaysreserve enough money at their level and then they turn to theinsurance company, which is only liable over certain limits."

From the regulator perspective, he explained, the problem isthat most insurance departments don't have jurisdiction over theadministrators.

"What the insurance regulator is trying to do is protectconsumers and gain some control, but they need to deal with it atthe primary level--at the contract administrator level--and in manycases they cannot," Mr. Myers added.