The General Accounting Office has told Congress that a loose law allows risk retention groups providing commercial liability insurance to operate in ways that do not always protect their solvency and insureds' best interests.
In a report on the nation's rapidly growing RRGs==which number nearly 200== the GAO said that common regulatory standards and greater protections for group members is needed as most operate from six states where there is minimal control and there is a risk they could go insolvent.
Reacting to the report, the National Risk Retention Association noted GAO's positive comments about the role of RRGs in creating availability of insurance, and that some of the negative findings involved subjective views and a dated event.
The Liability Risk Retention Act, which governs RRGs, does not specify characteristics of ownership and control, or establish governance safeguards, according to GAO.
The agency noted that the LRRA does not explicitly require that insureds contribute capital to the RRG or recognize that outside firms typically manage RRGs.
It found that some insurance regulators believe that members without "skin in the game" will have less interest in the success and operation of their RRG, and that RRGs would be chartered for purposes other than self-insurance==such as making profits for entrepreneurs who form and finance an RRG.
The federal law, GAO said, provides no governance protections to counteract potential conflicts of interest between insureds and management companies. "In fact, factors contributing to many RRG failures suggest that sometimes management companies have promoted their own interests at the expense of the insureds," the report said.
GAO did note that RRGs have had a "small but important effect in increasing the availability and affordability of commercial liability insurance for certain groups."
It found that RRGs have accounted for about $1.8 billion, or 1.17 percent of all commercial liability insurance in 2003.
GAO said RRG members have benefited from consistent prices, targeted coverage and programs designed to reduce risk, and that a recent shortage of affordable liability insurance prompted the creation of many new RRGs==with more groups forming between 2002 and 2004 than in the previous 15 years. The agency said about three quarters of the new RRGs offered medical malpractice coverage.
GAO faulted the federal act's partial preemption of state insurance laws, which it said has resulted in a regulatory environment characterized by widely varying state standards.
State requirements differ, GAO noted, because some states charter RRGs as captive insurance companies, which operate under fewer restrictions than do traditional insurers.
Rather than locating in the states where they conduct most of their business, most RRGs were found to have domiciled in six states that offer captive charters. The GAO said this included some states that have limited experience in regulating RRGs.
Because most RRGs (as captives) are not subject to the same uniform, baseline standards for solvency regulation as are traditional insurers, state requirements in important areas such as financial reporting also vary, according to GAO.
The agency noted that some regulators may have difficulty in assessing the financial condition of RRGs operating in their state because not all RRGs use the same accounting principles. GAO found some evidence exists to support regulator assertions that domiciliary states may be relaxing chartering or other requirements to attract RRGs.
Robert H. Meyers Jr., counsel to the NRRA in Washington, said the group was pleased GAO acknowledged that RRGs had added availability and affordability to the commercial insurance marketplace, which was the intent of Congress, but the group is concerned about some of recommendations for changes in standards and enforcement.
"Good regulation for RRGs is not the same as good regulation for traditional insurers. The NRRA is looking forward to contributing to the discussions that will be prompted by the report," he said.
Mr. Myers said some of the report is based on facts and some on interviews with people in industry, and "some of what they've done reflects subjective views."
Regarding solvency, he said, one of the cases mentioned==involving the Nebraska-based National Warranty RRG, which became insolvent==was "an aberration." It was regulated by the Cayman Islands, not by a U.S. domicile, and was grandfathered in with passage of the LRRA.
Mr. Myers said there had been an effort a couple of years ago to expand the LRRA legislation to permit RRGs to cover property, "but nothing is happening on that."
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