New Risk Retention Group Bill Would Allow Expansion Into Property Insurance

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 in 2008, but added that "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 Risk and Insurance Management Society issued a statement supporting the bill, saying it represents "a much-needed step forward in increasing coverage options for commercial property insurance."

Terry Fleming, a member of RIMS board of directors and director of risk management for Montgomery County, Md., explained that RIMS approves of the bill because "risk retention groups provide competition in the marketplace, helping to increase coverage availability and keep costs reasonable."

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."

To respond to concerns about the legitimacy of RRG and risk purchasing group governance, the bill would modernize current risk retention laws, first passed by Congress in 1981 and expanded in 1986.

The bill–the Increasing Insurance Coverage Options for Consumers Act, H.R. 5792–was introduced by Reps. Dennis Moore, D-Kan., and Deborah Pryce, R-Ohio, with Reps. John Campbell, R-Calif., and Ron Klein, D-Fla., signing on as original co-sponsors.

Rep. Moore, who is a senior member of the House Financial Services Committee, said his bill "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, he said, the bill will "shore up corporate governance standards for these entities to ensure that the groups are operating in the best interest of their members. 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 the act's partial preemption of state insurance laws has resulted in divergent state standards and limited regulator confidence in the system.

The bill was introduced in advance of an April 16 hearing on insurance regulation by the Capital Markets Subcommittee of the House Financial Services Committee, focusing on the Treasury Department's call for an optional federal charter.

Scheduled as a witness was Larry Mirel, a lawyer at Wiley Rein LLP in Washington, D.C., and former insurance commissioner for the nation's capital.

In a transcript of Mr. Mirel's testimony, he said "the GAO report pointed out that sometimes risk retention groups are run by people from the outside who do not necessarily have the best interests of their members in mind. Therefore, the GAO recommended, and this bill provides, safeguards to make sure that risk retention groups are truly self-governing."

He added in the transcript that SIIA "strongly endorses those provisions of the bill. By setting federal standards for the governance of risk retention groups, the bill will provide uniformity and better consumer protection."

Rep. Pryce noted 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 [property] 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.

The bill will also require adoption of written standards for governance, business conduct and ethics, and reporting of noncompliance to regulators.

The bill says 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.

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 clarify that RRGs can provide coverage in any state "with no interference from nonchartering state regulators," he added.