As the soft market slowly comes to an end, the high rate of survival for risk retention groups bodes well for the RRG marketplace.
While expectations for 2011 are not particularly high, the year has gotten off to a dynamic start with four new RRGs licensed in the first weeks of the year. Industry professionals are hopeful for the RRG market right now—more so now than they have been in recent years.
The early years of the last decade saw rapid growth in the number of risk retention groups which rose from only 65 in 2000 to a peak of 262 in 2008. In the following year, 2009, formations slumped and retirements soared, and the number of operating RRGs fell to 252. After so many volatile years of growth and shrinking, at the beginning of 2010, industry analysts were uncertain where the market would go.
The RRG industry in 2010 was nearly flat. After nine retirements during the first quarter, the rate of retirements dropped sharply, with only five in the next three quarters and ending the year with 14 altogether. While many RRGs were rumored to be in the works at various times, only 13 were licensed in 2010. The net result was that the number of operating RRGs fell in 2010 from 252 to 251. It appears that the free fall, in terms of numbers of RRGs, experienced by the industry since 2008, has come to a halt.
Both formations and retirements were low in the last three quarters of 2010 and the pattern appears to be continuing into 2011. Even though there are several RRGs rumored to be retiring soon, several others were licensed in the early part of 2011. At this time, it looks as if the number of operating RRGs will see little change in the first half of 2011.
Of the nine business areas in which RRGs operate, seven areas gained RRGs in 2010, while only five had retirements. Healthcare gained five RRGs and lost seven, resulting in two less operating RRGs than at year end 2009 and six less than the high of 160 groups recorded at the end of 2008. Property Development gained one RRG but lost three, ending the year with 24 operating RRGs—a sharp decline from the high of 33 in 2008.
District of Columbia and Montana licensed the most new RRGs in 2010—four each. With only one retirement for Montana, this represented a net gain of three, bringing the total number of RRGs domiciled there to 15 groups. D.C. had three RRG retirements for a total gain of one RRG—bringing their total number of operating RRGs to 35.
D.C. is now closing in on South Carolina for the second largest domicile. 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 RRG formations, only licensed two new RRGs last year.
RETIREMENTS NOW 150
In January 2009, shortly after the number of RRGs peaked, the total number of RRGs that had retired since the enactment of the Liability Risk Retention Act of 1986 was 118. By December 2010, another 32 RRGs had retired, bringing the total number of retired RRGs up to150.
The reasons for retirement can be divided into three major categories—voluntary dissolutions, mergers or conversions, and insolvencies.
• Of the 150 RRGs that have retired since 1987, 92 have voluntarily dissolved, 30 were merged or converted into a traditional insurer or RRG, and 28 became insolvent.
• Of the 32 groups that retired during the last two years, 22 voluntarily dissolved, five RRGs merged or converted into other insurers or RRGs, and five became insolvent.
• Of the 22 voluntary dissolutions in the last two years, 20 RRGs had been operational but ceased to do business and had gone into runoff.
• Only two had never become operational.
• In contrast, in the period leading up to January 2009, almost half of the RRGs that went into voluntary dissolution had never become operational.
• Of the five mergers or conversions, all of which involved RRGs formed between 2003 and 2007, three involved mergers into a traditional insurer and two involved mergers into another RRG. There were no conversions to either a traditional insurer or captive, unlike the prior period when many retiring RRGs took that route.
• The five insolvencies in the last two years involved RRGs that formed between 2003 and 2008. Two were domiciled in Arizona and one each in Vermont, South Carolina, and Delaware. Four of the five were involved in some aspect of the trucking business area, and four of the five are now in liquidation.
Despite the spate of recent retirements, RRGs have shown surprising resiliency, with an overall survival rate of 63 percent. At the beginning of the hard market, in February 2002, RRGs had only a 51 percent chance of surviving. The rate of survival for RRGs from 2002 unto 2010 is 73 percent, more than 20 points higher than the previous rate.
While the soft market is expected to continue in 2011, indicators are showing that RRGs should experience growth this year, albeit slight growth. However, as the risk retention industry has been shrinking since 2008, growth of any amount can only be seen as a positive sign.