The number of operating risk retention groups formed under the Liability Risk Retention Act reached an historic high in September 2006, increasing to 238, according to the 19th Annual Survey of Risk Retention Groups, conducted by the Risk Retention Reporter.
However, the dramatic surge of RRG formations–which began in 2003 and continued throughout 2004–slowed to a more moderate pace in 2005 and 2006, as the market has softened for liability coverages, making insurance more available and affordable.
Still, risk retention group premium for 2006 is projected to increase by a hefty 13.3 percent, to another all-time high of $2.77 billion.
Health care continues to account for the lion's share of new RRG formations, the survey found. Two other business areas–property development and transportation–show substantial growth, however, including both new RRG formations as well as expanding operations for existing RRGs.
Fifty-eight new RRGs were formed during the survey period–from January 2005 to September 2006–including 33 formations in 2005 and 25 from the beginning of this year through September 2006.
Health care accounted for the greatest number of 2005-2006 RRG formations (34), with half of the RRGs formed to insure physicians.
New RRGs have also formed in other business areas, including:
o Property development (11), providing coverage to contractors and home service franchisees.
o Transportation (7), providing liability coverages for trucking companies, taxicab operators and messenger companies.
o Manufacturing & commerce (3), providing liability coverages for obligors of extended service contracts.
Still uncertain is what impact the recommendations made by the U.S. Government Accountability Office, in its report to Congress, will have on RRGs.
Currently, two National Association of Insurance Commissioners committees–the RRG Task Force and the RRG Working Group–which have met for more than a year, are in the process of developing uniform minimum standards for the regulation of RRGs pursuant to the GAO report.
Another area of uncertainty is whether Congress will take up the question of a LRRA amendment in the 2007 session. This is complicated by the uncertainty following the change in control of Congress over to the Democrats next year.
So far, the impact of Hurricanes Katrina and Rita that hit the Gulf States last year, causing disruptions in reinsurance and property markets, do not appear to have troubled the RRG market. RRGs with strong business plans and sufficient capitalization continue to be attractive reinsurance candidates.
Always a challenge for potential RRGs is raising capital.
While this year's survey finds continued uncertainties for RRGs in light of the GAO report recommendations, as well as NAIC discussions that may result in increased regulation on RRGs and the economic impact of natural disasters on the property-casualty industry, growth is expected to continue.
With nearly half the states having enacted captive laws under which risk retention groups can form, RRGs now have a wider choice in domicile selection.
o Nevada was selected by 28 percent of RRGs that formed in 2006.
o South Carolina was chosen by 24 percent of new RRGs.
o The District of Columbia was selected by 45 percent of RRGs during the first nine months of last year. For the same period this year, only 16 percent chose it as their domicile.
Other domiciles selected by RRGs in 2006 through September include: Montana (three RRGs), Vermont (two RRGs), along with one each for Arizona, Delaware and Texas.
The full report–"2006 Risk Retention Reporter Survey of Risk Retention Group Premium and Number of Insureds"–can be ordered at www.rrr.com.
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