GAO: Put A Leash On RRGs
The General Accounting Office told Congress that a loose law allows risk retention groups to operate in ways that do not always protect their solvency and the best interests of insureds.
In a report on the nation's rapidly growing RRG sector–which number nearly 200–the GAO said common regulatory standards and greater protections for group members are needed as most operate from six states where there is minimal control and there is a risk they could go insolvent.
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 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 them.
The federal law, GAO said, provides no governance protections to counteract potential conflicts of interest between insureds and management firms. "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."
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. GAO found some evidence to support regulator assertions that domiciliary states may be relaxing chartering or other requirements to attract RRGs.
Robert H. Meyers Jr., counsel to the National Risk Retention Association in Washington, said the group was pleased GAO acknowledged that RRGs had added availability and affordability to the market, which was the intent of Congress, but the group is concerned about some of recommendations for changes.
"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.
Callout:
GAO found RRGs accounted for $1.8 billion, or 1.17 percent of all commercial liability insurance in 2003
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