Softening Market Drives PG Formations

The soft market appears once again to be driving purchasinggroup growth, which is no surprise. Market cycles have shaped theexpansion and development of such facilities since passage of theLiability Risk Retention Act in 1986, with formations increasing insoft markets and declining in hard markets.

This is how it works: The Liability Risk Retention Act createdtwo entities to address the liability needs of commercialinsureds–purchasing groups and risk retention groups. Purchasinggroups are comprised of homogeneous insureds who buy liabilitycoverage from admitted insurers, surplus lines carriers or riskretention groups.

By contrast, RRGs–also comprised of homogeneous insureds–areliability insurance companies owned by their members, who obtainliability coverage directly from the RRG.

While RRGs need to be capitalized, PGs require no capitalizationand hence are much easier to form. Most RRGs have “lock-in”provisions which impede members from removing their capital for aperiod of time, while members of PGs are free to leave and obtaincoverage elsewhere. In addition, PGs can be brought to market in amatter of months, whereas getting an RRG up and running could takea year or more.

As the traditional insurance market softens, more carriers arewilling to take on program business because of the freer flow ofcapital and their improving reserve positions.

Eleven PGs formed and 14 were retired in the first three monthsof this year, compared with seven formations and 25 retirementsduring the same period last year.

The last hard market cycle, which began roughly in 2000, had aunique impact on PG formations, revealed by the abrupt drop-offstarting in 2001 and the corresponding increase in retirements. Theaccompanying graph shows PG formations and retirements during firstquarters from 2000 to 2005.

Karen Cutts is editor and publisher of the “Risk RetentionReporter” in Pasadena, Calif. Visit www.rrr.com for information onrisk retention groups and purchasing groups.