Regulating RRGs As Captives Shows Better Solvency Record

Those states regulating risk retention groups as captives historically have had a far better solvency record than states that regulate them as traditional insurers.

Even excluding the large number of RRG formations occurring since 2000, the track record of states regulating RRGs as captives, versus those regulating them as traditional insurers, is still significantly better.

Of the 25 states that have enacted captive laws, 19 authorize RRGs to form as captive insurers. Captive laws provide advantages to start-up companies, such as RRGs. These include lower capital and surplus requirements, the use of letters of credit, and greater flexibility with regard to investments.

Of the 360 RRGs that have formed under the Liability Risk Retention Act--the 1986 law requiring that RRGs become licensed in a state under the state's insurance laws--89 percent (321) have been regulated under state captive laws, while 11 percent (39) have been regulated as traditional property-casualty carriers.

Out of the RRGs that have been regulated as captives, only eight--just 2.5 percent--have been declared insolvent and placed in liquidation.

By contrast, of the 39 RRGs that were regulated as traditional insurers, 12 (30.7 percent) were declared insolvent and placed in liquidation.

Data suggest that RRGs regulated in captive domiciles where regulators have greater experience and expertise are less likely to become insolvent.

Moreover, captive regulators appear to have taken action more quickly in closing down troubled RRGs.

Those RRGs regulated as captives operated for an average of 4.7 years before regulators moved to shut them down, while RRGs regulated as traditional insurers were allowed to operate for an average of 7.9 years before action was taken against them.

Karen Cutts is editor and publisher of the "Risk Retention Reporter" in Pasadena, Calif. Visit www.rrr.com for information on risk retention groups and purchasing groups.