In the 20-year history of the Liability Risk Retention Act, the use of risk retention groups and purchasing groups--entities created by Congress to provide liability insurance to commercial insurance buyers--has been shaped by the hard and soft markets.
During hard markets--when liability insurance becomes unaffordable and unavailable as insurers raise rates, cease writing business, or nonrenew coverage--RRGs are formed in greater numbers. By contrast, during soft markets--when insurers lower rates and broaden coverage--PGs form in greater numbers.
In observing RRG and PG formations over the life of the law, what's of particular interest is the sea change that took place after 2001. Prior to then, the average number of RRGs formed between 1990 and 2000 was 5.6 per year. This is compared with 92.6 PGs formed during the same time.
Since 2001, the average number of RRGs formed per year through 2006 is 33.6, compared with an average per year for PGs during the same period of 45.1.
As the market hardened in 2002, the number of RRGs and PGs formed during the year began showing signs of change--PG formations slightly doubled the number of RRG formations.
However, during the next two hard-market years--2003 and 2004--history was made when, for the first time, the annual number of RRG formations exceeded those of PGs. In 2005, as the market continued to soften, PG formations again exceeded RRG formations.
In May 2006, the number of RRG and PG formations for the first five months of the year were roughly equal, prompting the Risk Retention Reporter to publish a story titled, "Equal Numbers of RRG/PG 2006 Formations Present Conundrum."
As illustrated in the accompanying graph, however, formations at year-end 2006 ended on a more typical note: PG formations exceeded those of RRGs in both 2005 and 2006, although RRG formations still remained strong at more than half those of PGs (29 RRGs versus 51 PGs).
As the market in 2007 remains soft, the number of PGs is likely to continue climbing. But unlike soft markets prior to 2001, RRGs are also likely to continue their upward climb, albeit more slowly than during the hard markets years of 2003 and 2004.
