Bill Introduced To Expand RRG Lines

Legislation was introduced in the House last night that would expand the authority of risk retention groups to provide commercial property insurance to their members.

One of the key justifications for the legislation is to help coastal communities increase capacity to insure businesses for catastrophe coverage, which has been reduced in the wake of 2005 hurricanes, according to advocates of the bill.

Risk retention groups are currently limited to providing liability coverage.

Cliff Roberti, director of government relations for the Self-Insurance Institute of America, said the self-retention industry and its supporters in Congress “will be working hard to get this important piece of legislation into law this year.”

He cautioned that because it is an election year, “I do not want to oversell the industry on the prospect” that the bill will be enacted this year, but “I believe there is an appetite in Congress to attach this measure to other important, noncontroversial, incremental reform legislation, which would help the overall outlook for passage.”

The legislation would also modernize current risk retention laws, first passed by Congress in 1981 and expanded in 1986. It would allow risk purchasing groups to procure commercial property insurance for their members.

The bill, the Increasing Insurance Coverage Options for Consumers Act, H.R. 5792, was introduced by Representatives Dennis Moore, D-Kan., and Deborah Pryce, R-Ohio.

Representatives John Campbell, R-Calif., and Ron Klein, D-Fla., signed on as original co-sponsors of the legislation.

It was introduced in advance of today's hearing on insurance regulation that will hear testimony about a Treasury plan to increase federal involvement in insurance regulation that the Capital Markets Subcommittee of the House Financial Services Committee scheduled.

Scheduled as a witness was Larry Mirel, a lawyer at Wiley Rein LLP in Washington, D.C. and former Washington, D.C. insurance commissioner. The hearing was to explore insurance regulatory issues as they affect self-retention groups.

Rep. Moore, who is a senior member of the House Financial Services Committee, said the bill he is sponsoring “will build upon the success of these groups in improving capacity in the liability marketplace by expanding coverage to commercial property coverage.”

“At the same time, it will shore up corporate governance standards for these entities to ensure that the groups are operating in the best interest of their members,” he said. “The bipartisan support for this legislation is a testament to the need for this reform.”

The uniform corporate governance standards that the legislation proposes to upgrade include strengthened safety and soundness requirements, enhanced disclosures, stringent financial standards, and establishment of a fiduciary duty for officials of risk retention groups.

The corporate governance standards were added to the legislation because a 2005 study by the Government Accountability Office found that RRGs needed more oversight and transparency.

The GAO report also found that the act's partial preemption of state insurance laws has resulted in divergent state standards and limited regulator confidence in the system.

Rep. Pryce commented, pointing out that “risk retention groups proved their effectiveness when the traditional liability insurance industry became cost-prohibitive to a number of sectors in our economy like malpractice insurance, higher education and public housing.”

She added that, with enhanced regulation, “risk retention groups should be expanded to provide affordable coverage to areas of our economy that have proven difficult to price, such as catastrophic coverage.”

The minimum corporate governance standards that the legislation will mandate include requiring a majority of independent directors on the board, limiting service provider terms, requiring a written charter with minimum safety and soundness protections, and requiring creation of independent audit committees. It will also require adoption of written standards for governance, business conduct and ethics, and reporting of noncompliance to regulators.

The bill also says that RRGs will only be allowed to provide commercial property coverage if their domiciliary state has adopted minimum safety and soundness requirements. These must include prohibiting excess exposure to individual risks, setting standards for size or sophistication for RRG members, and establishing solvency requirements, the bill says.

The Risk and Insurance Management Society, Inc., today issued a statement supporting the bill, saying the important legislation represents “a much-needed step forward in increasing coverage options for commercial property insurance.”

Terry Fleming, member of RIMS board of directors and director of risk management for Montgomery County, Md., said, “RIMS approves of the Increasing Insurance Coverage Options for Consumers Act of 2008. Risk retention groups provide competition in the marketplace, helping to increase coverage availability and keep costs reasonable.”

SIIA President Dick Goff said the bill clarifies the Liability Risk Retention Act's federal preemption “to assure risk retention groups that they will be able to do business as the original act intended.”

It will also clarify that risk retention groups can provide coverage in any state “with no interference from nonchartering state regulators,” he said.

The National Risk Retention Association applauded the bill's introduction, calling it “a good first step.”

“NRRA supports good governance for RRGs, and this legislation sets guidelines for it,” said Wendy Fisher, chair of NRRA's Government Affairs Committee. “Moreover, it helps to clarify the limitation on the regulatory authority of states where the RRG may do business but is not be chartered.”

“The ability to offer property in conjunction with liability coverage will be a benefit to members of RRGs, which now have to obtain their property insurance from another carrier,” said NRRA Board Chair Rebecca Smart. “It will simply be more efficient to do both as part of the underwriting process.”