Not All Captive States Alike For RRGs
When the Liability Risk Retention Act was enacted in 1986, less than a dozen states had captive laws. Since that time, the number of states with captive laws has more than doubled, with 23 states having captive laws on their books as of year-end 2003.
Of these states, 16 permit risk retention groups to be formed under their captive laws. If an RRG were to form in a state with a captive law that did not permit formation of RRGs, the RRG would have to become licensed as an admitted insurer, subject to that state's capital and surplus rules and other requirements for traditional insurers. However, the RRG could still operate nationally because of the preemptions afforded to RRGs by the Liability Risk Retention Act.
The 1986 Liability Risk Retention Act requires that a risk retention group be "chartered or licensed…under the laws of a state and authorized to engage in the business of insurance under the laws of such state." The act identifies a "state" as "any state of the United States or the District of Columbia."
While RRGs can select any state as their state of domicile, in practice, RRGs most frequently select states that have enacted captive laws. These laws typically provide advantages that would not be available to an RRG if it formed under the states' traditional property-casualty law, including lower capital and surplus requirements, fewer restrictions on investments, and lower premium tax rates.
States permitting formation of RRGs under their captive laws most frequently define RRGs as industrial insured captives formed under the Liability Risk Retention Act or as association captives. The corporate forms of RRGs permitted by states' captive laws include stock companies, mutuals and reciprocals.
One state that does not currently permit RRGs to form under its captive law, New York, has or will introduce legislation that would enable formation of RRGs. However, under the proposed law, RRGs could not satisfy New York's financial responsibility requirements.
In some states, RRGs and captives have the same investment restrictions as commercial carriers, while in other states, there are no investment restrictions except those that can be imposed by the state's insurance commissioner if solvency is threatened.
The form of capital almost all states require is cash or an irrevocable letter of credit issued by a member bank of the U.S. Federal Reserve System chartered in the state and approved by the state's commissioner.
Premium tax for RRGs varies by state, with the tax declining as premium increases. Several states, including Vermont and South Carolina, have recently capped premium taxes at a maximum amount, while some states, such as Hawaii and Arizona, have no premium taxes for RRGs.
All states charge application fees for review of RRG applications. Some states also charge an independent review fee for outsourced applications.
Karen Cutts is managing editor and publisher of the "Risk Retention Reporter," a monthly newsletter based in Pasadena, Calif., that she founded shortly after passage of the 1986 Liability Risk Retention Act.
Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 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.
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