RRGs Say Many States Cramp Their Style

The basic categories where states have either overreached or clearly violated the preemption of state regulation mandated by the LRRA identified by NRRA include:

? Improper assessment of fees.

? Impermissible requests for information.

? Making operation of RRGs in a state contingent upon regulatory review and approval.

In addition, the survey sought to determine whether regulatory overreaching of these states has interfered with or resulted in lost business opportunities, and what the estimated annual cost to RRGs for these regulatory practices for four years–2005 to 2008–would be.

As for improper assessment of fees, the LRRA permits individual states to require RRGs to "pay, on a nondiscriminatory basis, applicable premium taxes and other taxes which are levied on admitted and surplus lines insurers…under the laws of the state."

NRRA's position is that, based on what is permitted by the LRRA, the assessment of fees is improper. The survey found that 55 percent of RRGs said they were not subject to the improper assessment of fees, but 45 percent said that they were.

Almost all RRGs that answered "no" operated in five or fewer states. The RRGs that found the fees most objectionable were those that operated in multiple states, with a significant portion of RRGs operating in more than 20 states.

For an RRG operating in all states, the annual cost for registration fees is about $9,300, as well as $8,500 per year in renewal, filing, and/or other fees and assessments.

For several large premium-generating RRGs operating nationally, however, reported fees from states and municipalities were much higher. In fact, one RRG that operates in 50 states provided a spread sheet of annual costs for the years 2005 through 2007.

Including fees for renewal, continuation and statement filing fees, retaliatory fees, e-commerce fees, and fees based on premium assessed by local municipalities in three states–South Carolina, Kentucky and Louisiana–the cost for the three years totaled $173,314.

As for impermissible requests for information, the LRRA requires that specific documentation be filed by RRGs registering to operate in nondomiciliary states. This includes the plan of operation or feasibility study and annual financial statements. Some states, however, ask for information that goes far beyond that required by the LRRA.

According to the survey, 53 percent of respondents said they were not subject to impermissible requests for information, while 47 percent said they were.

An example provided by an RRG was a request by Massachusetts that upon renewal, RRGs fill out an application form used for admitted insurers. They were asked to provide biographical affidavits for the RRG's directors and officers. After complaints from many RRGs and RRG regulators, Massachusetts withdrew some of the more onerous requirements.

Then there is making operation in a state contingent upon regulatory review and approval. Whether a nondomiciliary state can, in effect, "second guess" the domiciliary state's determination that an RRG has been properly licensed under the LRRA and the domiciliary state's laws remains unresolved.

The survey found that while 56 percent of RRGs did not find that states made operation contingent upon regulatory review and approval, 44 percent found that they did.

The RRG that provides contractual liability, which operates in more than 20 states, provided specifics on the costs of these regulatory practices.

"The expense to our RRG has been 10.5 percent of our premium writings for each year, as we have had to use a front company in the states which would not register the RRG," the facility said. "In total this is approximately $1 million to date, but continues to increase as we lose business opportunity."

Another RRG that provides liability insurance coverage to truckers reported that "New York, Minnesota and Florida will not allow foreign-domiciled RRGs to operate in their states because their Departments of Transportation will not accept proof of financial responsibility filings from foreign domiciled RRGs." The RRG added that this "seems to be a clear violation of the federal [Liability] Risk Retention Act."

One RRG estimated costs of regulatory overreaching at $100,000 annually, noting that "regulatory red tape not only costs the RRGs but also costs the captive managers that have to take considerable hours dealing with these issues."

The LRRA prohibits nondomiciliary states from direct or indirect regulation of RRGs, allowing them to regulate nondomiciled RRGs only in specific areas. Nevertheless, 61 percent of respondents answered that a total of 39 states had engaged in some form of overreaching.

The seven states that topped the list were California, Florida, Massachusetts, Texas, Kentucky, Louisiana and North Carolina.

An example of state overreaching was provided by an RRG that paid a membership fee in Texas, which required that all insurers engaged in direct writing of liability insurance join the state's Joint Underwriting Association.

Protests by the RRG that it violated the LRRA provisions–that an RRG can only insure its members–were to no avail. In order to do business in Texas, the RRG paid the fee under protest.

RRGs reported several consequences of states overstepping their authority, including loss of business opportunity. Seventy percent of RRGs said states had not interfered with business opportunities–but 30 percent reported they had lost business as a result of state overreaching.

While the dollar cost arising from payment of fees can be readily determined, the financial impact resulting from loss of business opportunity is more difficult to ascertain.

One example of an RRG forced to obtain a fronting carrier in order to produce business in the state, that prohibited its direct operation, provides some insight into the issue.

While RRGs operating in multiple states find fees burdensome, the survey revealed that the largest costs to RRGs stem from states making operation of the RRG contingent upon regulatory review and approval.

Where the state prohibits operation outright, the RRG can obtain a fronting carrier, decide not to operate in that state, or bring a legal action. Where the state drags out the registration process, however, RRGs incur considerable cost in attempting to comply, retaining legal counsel to deal with state insurance regulators in the hopes of satisfying demands.

Legislation introduced into Congress last year to amend the LRRA (H.R. 5792) recognizes there may be instances where nondomiciliary states have attempted to "unlawfully regulate, directly or indirectly, the operation of an RRG."

Currently, the only recourse an RRG has to address state encroachment is to bring an action in federal court. However, given the resources of states compared to those RRGs, many of which are small insurers, RRGs are effectively left without a means of addressing state intrusion.

An opportunity to introduce an effective dispute resolution process into legislation that is expected to be re-introduced in the 2009 Congress could serve as the means of addressing long-standing RRG ills.

The dramatic growth of RRGs over the last eight years–from 65 at year-end 2000 to 262 at year-end 2008–indicates that state overreaching has not stymied the formation of RRGs. The gradual encroachment on LRRA preemptions, however, takes its toll on RRGs.

This sentiment expressed by a survey respondent has been echoed by many other RRGs:

"There are several states that make it very difficult to register, and while not clearly outside the law, [RRGs] would need to have the courts decide. It is so expensive to pursue such actions that the states are able to effectively discourage RRGs from pursuing business within their borders. Florida, for example, is very difficult about their registrations. It doesn't completely stop an RRG from doing business there–it just costs more to do so."

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