Bill Hodson of Gulfstream Risk Advisors, Derrick White of SRS and Chris Payne of CLIC RRG discuss with Rebecca Delaney the benefits and challenges of using an RRG, as well as how members can provide stability
As companies seek to cover their own liability risks, Risk Retention Groups (RRGs) in the United States operate under the guidelines of the Federal Liability Risk Retention Act (LRRA) of 1986. This legislation allows plans to group self-insurance and group captives to form an insurance company to cover their liability risks on a multi-state basis with a single domicile license.
The state in which an RRG is domiciled is primarily responsible for the regulation and oversight of the group, explains Chris Payne, treasurer of CLIC RRG. A report by financial analytics firm Demotech found that in 2020, Vermont led with 84 RRGs, followed by South Carolina and the District of Columbia with 36 and 31 groups, respectively.
Since ownership is limited to RRG policyholders, these structures insure industries for professional liability, such as medical providers, product manufacturers, law enforcement officials and contractors. An RRG can support these industry sectors with insurance solutions for unique exposures where the traditional insurance market does not.
While the weak market conditions of the 2000s caused some carriers to undervalue certain liability exposures to maintain market share (which hurt RRGs in direct competition with these carriers), the more recent hardening of the market, social inflation and rising carrier rates for many liability lines benefited RRGs.
So says Bill Hodson, Managing Member of Gulfstream Risk Advisors. He observes that the main drivers of RRG formations in 2021 were persistently unfavorable traditional market conditions (pricing, capacity and coverage restrictions) for specialty liability coverages, such as medical malpractice and commercial motor liability.
“While traditional insurers and reinsurers continue to lick their various wounds from unprofitable underwriting and inadequate provisioning, we have seen many policyholders with own and well-managed risks being penalized by unprofitable policy pricing. viable and untenable terms and conditions that drain the coverage they really need,” says Hodson.
Derick White, managing director of the governance, risk and compliance practice at Strategic Risk Solutions, identifies that SRS formed a few RRGs in 2021, the main reason being the prolonged hard market.
He explains, “While single-parent captives can quickly organize their needs and form a pure captive, RRGs take longer to gather members and organize the RRG. As expected, new RRGs will form about a year after a confirmed hard market.
Hodson adds that there has recently been an emerging trend for RRG formations to take out both affordable and comprehensive cyber liability coverage, as well as emerging industries such as last mile delivery (regarding chain management supply and transportation) and cannabis operations.
“These recent trends follow the classic reason the RRG industry evolved (lack of available or affordable coverage) and entrepreneurs wanting to disrupt the traditional industry model,” notes Hodson.
As specialist insurers, the seamless membership of RRGs offers inherent advantages, as it means that they are better placed to meet the specific coverage and benefit needs of their member-insureds compared to large multi-line insurers.
White explains the benefits of risk sharing: “Similar to any group captive, the RRG structure allows each member to participate in levels of coverage that they could not sustain alone. Another advantage is that many RRGs offer tailored policies for the group as well as good collaboration between members allowing risk management practices to be shared.
Payne notes that as a cheaper alternative to the commercial insurance market, RRGs are more attractive to small and medium-sized businesses. Another financial advantage, the structure allows the payment of rebates to the insured members over time as a reward for collective profitability.
Although vulnerable to the same challenges as the commercial insurance market, the flexibility and customizable nature of an RRG means that it can overcome these problems with a streak of innovation that the traditional market often lacks.
According to Hodson, the most significant advantage of an RRG over other self-insurance structures is speed to market, as it can be formed to meet market needs and become operational quickly and efficiently. more efficiently thanks to the unique regulatory provisions.
He explains, “With the federally mandated benefit of RRGs of only having to notify the regulator in each jurisdiction where they issue policy, rather than having to go through a formal authorization and approval before issuing a policy, RRGs can meet the needs of their members and expand their operational footprint very quickly.
Common issues associated with operating an RRG vary by risk type and geography, but a common hurdle is start-up capital. Payne argues that coordinating all members to contribute their capital at the same time and explaining the risks and benefits of self-insurance poses a potential difficulty.
Hodson adds that, like the captive industry as a whole, there is simply a lack of education or understanding within the wider insurance industry about the niche of RRGs and how they work. . Therefore, RRGs who depend on the traditional broker network for business do not tend to receive many applications that are “perfectly suited” risks for them to write, he observes, because brokers who market risks may be unaware that the RRG exists, or may be biased against them.
With this lack of comprehensive long-term understanding, SRS’ White notes that members may exit the RRG during weaker market conditions when the trading market represents a cheaper option, then seek to return when trading rates rise again.
This threatens the inherent stability of an RRG. “A feature of long-established RRGs is having the support of their members, members with historical knowledge of the cyclical nature of the commercial insurance market,” says White.
Another challenge to the stability of an RRG, suggests Hodgson, is the potential misalignment of an insured member’s risk management and insurance purchase philosophy with the RRG mechanism, or the RRG itself.
He explains: “If an insured does not share the same long-term business relationship objectives inherent in the RRG mechanism, and is simply a price-sensitive hedge buyer, then they are in a better position to continue buying in the traditional market.
In ideological terms, an RRG can therefore provide stability by establishing and maintaining a coherent mission and vision. It is also important to have ongoing communications with the home regulator and to include the captive owners on the RRG board.
This is affirmed by Hodson, who adds that the long-term success of an RRG also depends on regulation, as well as the regulators themselves. He says, “Service providers guiding the formation or re-domestication of an RRG must diligently match purpose, structure, operational objectives and management to the home and regulators for the best long-term fit.”
Elaborating on the importance of strong corporate governance, Hodson continues: “On the surface, having and adhering to strong, proven guidelines for risk selection, underwriting and claims handling can provide stability to an RRG – but in my experience, the root of RRG stability is sound and consistent corporate governance. Even the smallest RRG must have the same rigorous corporate governance mechanism as a large traditional insurance company.
While it’s also important for an RRG to adapt its policy language and value-added services to better respond to the ever-changing market landscape, CLIC RRG’s Payne says the stability of an RRG ultimately depends on account of a solid capital base and profitable underwriting.
This is asserted by White, who reiterates that an RRG can ensure member retention in weak market conditions by requiring multi-year commitments, either by contract or by the ability to retain capital contributions for a few years after departure. of a member.
Looking at likely future trends in RRG formations, Payne predicts that RRGs and the broader captive industry will continue to thrive by capitalizing on the benefits of prolonged difficult market conditions.
Consistent with the fact that the hard market will see an increase in RRG formations, White adds that he expects “new and creative uses of the LRRA to occur with expanded use of ‘contractual liability’ covers in within the RRGs”.
“In 2022, I expect continued RRG training in the areas of medical malpractice, assisted living, and delivery logistics, as well as increased investigation into training for cannabis operations. I’m also not holding my breath that Congress will amend the LRRA to allow first-party coverage anytime soon,” Hodson concludes.