A combination of problems arising from the subprime mortgage debacle and the soft property-casualty insurance market took a toll on 2007 annual gross written premiums for risk retention groups, which declined by 3 percent to $2.5 billion, down $100 million from 2006.

The business area accounting for most of the 2007 premium decrease was property development, where RRGs insuring homebuilders and contractors are classified.

The premium slump was the greatest in the contractors sector, with 2007 premiums plummeting 35.2 percent to $1.6 billion. The next largest decrease arose from the homebuilders sector, where premium fell 30.8 percent to $41.65 million.

In fact, when RRGs in property development are taken out of the mix, 2007 RRG premiums actually showed a slight gain of 1.2 percent.

The slump in premiums from RRGs insuring contractors and homebuilders reflects the deep problems in the U.S. housing market, brought about by subprime lending practices, in which many mortgage lenders often made "NINJA" loans--loans to borrowers with no income, no jobs and no assets.

Housing starts for single-family homes, where the majority of contractors and homebuilders insured by RRGs operate, were off 40.5 percent from a year ago--the largest year-over-year drop since January 1991.

Given that the Federal Reserve recently downgraded its expectations for economic growth this year, citing damage from the housing slump and credit crunch, it is unlikely that RRGs in the property development sector will experience a rebound in 2008 or 2009 premium.

However, the premium picture is far brighter for RRGs providing professional liability insurance to physicians.

In the physicians sector, 2007 RRG premium showed its greatest gains, totaling $3.5 billion--an increase of 10.1 percent. Of the 14 new RRGs formed in 2007 to insure physicians, eight began operations and produced premium totaling $21.4 million, while six generated no 2007 premium.

For the first six months of 2008, there were nine RRG formations, compared to 18 RRG formations during the first six months of 2007.

In comparing retirements to other soft markets, RRGs appear to be holding their own, with retirements for the last two years almost neck and neck--eight RRGs retiring during the first six months of 2008, compared with nine for the same period last year.

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Special Reports /

Subprime Problems, Softening P-C Market Combine To Depress RRG Premium Growth

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