Defying historical soft-market patterns, formations of risk retention groups and purchasing groups so far this year are running neck and neck–with 17 RRG formations and 18 purchasing group formations.
This is contrary to cycles over the last 19 years, where purchasing group formations were characteristically higher during a soft-market phase.
Typically during soft markets, traditional insurers lower rates to make liability insurance more available and affordable. This causes an increase in purchasing group formations and a decrease in self-insured RRG formations.
Conversely, during hard markets, when traditional insurers raise rates and restrict coverage, RRG formations increase and purchasing group formations decline.
Historical experience over the last 16 years shows that during soft markets–which most industry experts agree describes current conditions–purchasing group formations have exceeded RRG formations by more than 10-to-1.
During the soft market years from 1990 to 2001, purchasing groups formed at an average rate of 93 per year, compared with an average rate of RRG formation of 5.6 per year.
In 2001, with the advent of the hard market, the average rate of purchasing group formations declined to 44 per year–less than half the rate for the previous 11 years–compared with a dramatic increase in RRG formations to 35 per year, or more than six times the rate of the previous 11 years.
At the height of the hard market in 2003 and 2004, for the first time in the history of the Liability Risk Retention Act the number of RRG formations exceeded the number of purchasing group formations–consistent with the historical pattern in which RRG formations increase in hard markets while purchasing group formations decline.
In 2005, with the market softening, purchasing group formations once again increased, while RRG formations decreased.
However, even though RRG formations declined from the previous two years, they were still higher than in any of the last 15 years.
Moreover, during the first five months of 2006, with the market relatively soft, RRG and purchasing group formations are comparable, when past experience suggests that RRG formations should fall.
What accounts for this conundrum?
One explanation is that, although the market is soft for certain liability lines, spurring growth of purchasing groups, it remains hard for other lines–particularly health care, which accounted for 65 percent of all RRG formations from 2001 to 2005, and 76 percent of 2006 RRG formations.
Another factor which might account for the current growth of RRGs in soft markets alongside purchasing groups is the desire for a growing number of small and middle-market organizations to take control of liability programs through participation in alternative market mechanisms, such as RRGs.
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