LRRA Expansion Snagged By NAIC

Mr. Myers began with an update on the two-year bipartisan effort to expand the LRRA to include property coverage. Last year it looked like the expansion might succeed as a rider to the Terrorism Risk Insurance Act, but he said it was ruled "not germane" by the Senate Parliamentarian.

With other pressing business on Congress agenda, and an upcoming election, he said a general oversight hearing about risk retention may not happen until the next session early in 2004. This would be followed by a hearing in front of the full financial services subcommittee, he said.

One of the selling points of an expansion, he said, has been that a risk retention group offers competition in a hard market, which can pierce "the excessive prices of the conventional market." Even though the proposed expansion is "pretty benign" and the group has "tried to avoid enemies," Mr. Myers reported the emergence of two potential threats.

One is opposition by the Service Contract Industry Council, a group representing insurers that deal with service contracts, particularly in the warranty area.

While this group does not directly oppose expansion of the risk retention act, it wants to see that the issue of "undercapitalized risk retention groups dealing with service contractors" is addressed in the legislative process, he said.

The other, more serious obstacle, he noted, is the National Association of Insurance Commissioners. NAICs Property & Casualty Committee discussed the proposed resolution at a meeting in Chicago Sept. 16.

NRRA, he said, has "taken issue with several of the premises that underlie" NAICs position. These points were outlined in a letter sent to NAIC on Oct. 15.

"They take a run at the fact that risk retention groups are owned by their insureds and therefore there is not the diversity of risk," he noted. However, "The Mutual of Omaha has that problemtheyre owned by their risks," he said.

Mr. Myers explained that the most important misunderstanding is NAICs assumption that risk retention groups are more prone to insolvencies than property-casualty companies. "When you examine the facts, you realize that licensed companies and RRGs have a statistically comparable failure rate–about 1 percent," he said.

Mr. Myers continued that NAIC expressed concerns about the insolvency of a major RRG, which he identified as The National Warranty RRG, domiciled in Cayman and headquartered in Lincoln, Nebraska.

"My concern is because we had this one problem with National Warranty, we can extrapolate from that to think that we have a problem with 129 other groups that are domiciled in a state."

He noted that NAIC questioned whether there is a shortage of commercial property coverage. "Even though the marketplace is turning around for property and is softening, that doesnt mean there is not a demand for commercial property coverage," Mr. Myers said.

NAIC also concluded that the current regulatory framework for RRGs is "not adequate," he said. "But we believe it is adequate."

RRGs chartered in U.S. captive domiciles, he said, are "exemplary" because the captive laws are designed to look at these groups on an ongoing basis.

Mr. Myers stressed that there is "a fair amount of confusion in the insurance community about what RRGs can and cannot do." He said he would like to see NAIC appoint a study group to review the issue.

Jose Montemayor, Texas insurance commissioner and chairman of the Property & Casualty Insurance Committee, told National Underwriter there is "a lot of polarization" on the issue. "There are people who very much would like to see an expansion of the Risk Retention Acttheyre clearly in the minority within the NAIC."

He continued: "I would say, overwhelmingly, the fact that you have had some pretty spectacular failures, particularly in the area of auto warranty, is troubling in terms of this approach to RRGs and how appropriate they are to do different things."

Mr. Montemayor added that the current p-c market is "active and strong. I think were far from an environment that resembles the mid-80s liability crisesI think were far from that scenario at this time; there is plenty of capacity in the regulated market."

The NAIC, he said, would be "hard pressed to support the expansion of RRGs into personal lines like automobiles or homeowners. Because it lends itself to a sharing of risk that may not be appropriate."

Nevertheless, he noted, "I think there is a willingness to discuss it and evaluate it."

The next step, he said, is to discuss the issue and come up with a direction. If the NAIC does decide to oppose expansion of the act, he said, "we would take up a resolution regarding our position and communicate it to our Congressional leadership saying we dont think its a good idea and heres why."

Mr. Montemayor said he is concerned because of the lack of guaranty fund coverage. "Its a strong mark against them. I can tell you personally that I have got, in my state alone, probably a quarter-million warranty holders holding auto warranties that were backed by RRGs in something called an excess of liability contract that basically failed. I have people holding worthless paper with no backup and no recourse."

The issue, he said, is likely to get "an awful lot of attention and discussion within the NAIC. It came out of nowhere and its picking up a lot of dialogue."

With National Warranty Co. "youve got estimates of uncovered liability into the hundreds of millions of dollars, and what was left in the company when it went into receivership was $20 million-to-$30 million. That was a spectacular failure," he said. "I will tell you that nobody is neutral to it–I think there are some very strong feelings about this."

Mr. Montemayor said the NAICs next scheduled national meeting is in Anaheim in December. "I may call for a hearing then on this. That may be our next step," he said.

Tim Wagner, vice chair of the NAIC Property & Casualty Insurance Committee and Nebraska insurance commissioner in Lincoln, Neb., said he does not have an issue with expanding RRGs to include property coverage, but he does not want RRGs used for writing personal property coverage.

"I do have some issue with RRGs that are formed to facilitate the creation of risk rather than to share risk," he said. "I dont believe that RRGs were formed to allow entrepreneurs to get into the insurance business. They were legitimately formed for businesses to share risk. Thats the issue I tried to address."

"We had a very ugly situation [with National Warranty]," he said. "It went down in June and it involves large amounts of money and hundreds of thousands of people that may be left with nothing."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.