As the soft market slowly comes to an end, the high rate ofsurvival for risk retention groups bodes well for the RRGmarketplace.

While expectations for 2011 are not particularly high, the yearhas gotten off to a dynamic start with four new RRGs licensed inthe first weeks of the year. Industry professionals are hopeful forthe RRG market right now—more so now than they have been in recentyears.

The early years of the last decade saw rapid growth in thenumber of risk retention groups which rose from only 65 in 2000 toa peak of 262 in 2008. In the following year, 2009, formationsslumped and retirements soared, and the number of operating RRGsfell to 252. After so many volatile years of growth and shrinking,at the beginning of 2010, industry analysts were uncertain wherethe market would go.

The RRG industry in 2010 was nearlyflat. After nine retirements during the first quarter, the rate ofretirements dropped sharply, with only five in the next threequarters and ending the year with 14 altogether. While many RRGswere rumored to be in the works at various times, only 13 werelicensed in 2010. The net result was that the number of operatingRRGs fell in 2010 from 252 to 251. It appears that the free fall,in terms of numbers of RRGs, experienced by the industry since2008, has come to a halt.

Both formations and retirements were low in the last threequarters of 2010 and the pattern appears to be continuing into2011. Even though there are several RRGs rumored to be retiringsoon, several others were licensed in the early part of 2011. Atthis time, it looks as if the number of operating RRGs will seelittle change in the first half of 2011.

Of the nine business areas in which RRGs operate, seven areasgained RRGs in 2010, while only five had retirements. Healthcaregained five RRGs and lost seven, resulting in two less operatingRRGs than at year end 2009 and six less than the high of 160 groupsrecorded at the end of 2008. Property Development gained one RRGbut lost three, ending the year with 24 operating RRGs—a sharpdecline from the high of 33 in 2008.

District of Columbia and Montana licensed the most new RRGs in2010—four each. With only one retirement for Montana, thisrepresented a net gain of three, bringing the total number of RRGsdomiciled there to 15 groups. D.C. had three RRG retirements for atotal gain of one RRG—bringing their total number of operating RRGsto 35.

D.C. is now closing in on South Carolina for the second largestdomicile. South Carolina did not license any new groups in 2010,but lost three, to end the year with 37 domiciled RRGs.

Vermont, the leading domicile, and generally a leader in RRGformations, only licensed two new RRGs last year.

RETIREMENTS NOW 150

In January 2009, shortly after the number of RRGs peaked, thetotal number of RRGs that had retired since the enactment of theLiability Risk Retention Act of 1986 was 118. By December 2010,another 32 RRGs had retired, bringing the total number of retiredRRGs up to150.

The reasons for retirement can bedivided into three major categories—voluntary dissolutions, mergersor conversions, and insolvencies.

• Of the 150 RRGs that have retired since 1987, 92 havevoluntarily dissolved, 30 were merged or converted into atraditional insurer or RRG, and 28 became insolvent.
• Of the 32 groups that retired during the last two years, 22voluntarily dissolved, five RRGs merged or converted into otherinsurers or RRGs, and five became insolvent.
• Of the 22 voluntary dissolutions in the last two years, 20 RRGshad been operational but ceased to do business and had gone intorunoff.
• Only two had never become operational.
• In contrast, in the period leading up to January 2009, almosthalf of the RRGs that went into voluntary dissolution had neverbecome operational.
• Of the five mergers or conversions, all of which involved RRGsformed between 2003 and 2007, three involved mergers into atraditional insurer and two involved mergers into another RRG.There were no conversions to either a traditional insurer orcaptive, unlike the prior period when many retiring RRGs took thatroute.
• The five insolvencies in the last two years involved RRGs thatformed between 2003 and 2008. Two were domiciled in Arizona and oneeach in Vermont, South Carolina, and Delaware. Four of the fivewere involved in some aspect of the trucking business area, andfour of the five are now in liquidation.

Despite the spate of recent retirements, RRGs have shownsurprising resiliency, with an overall survival rate of 63 percent.At the beginning of the hard market, in February 2002, RRGs hadonly a 51 percent chance of surviving. The rate of survival forRRGs from 2002 unto 2010 is 73 percent, more than 20 points higherthan the previous rate.

While the soft market is expected to continue in 2011,indicators are showing that RRGs should experience growth thisyear, albeit slight growth. However, as the risk retention industryhas been shrinking since 2008, growth of any amount can only beseen as a positive sign.