The Liability Risk Retention Act: Background, Issues, and Current Legislation
The Liability Risk Retention Act:
Background, Issues, and Current Legislation
Updated April 21, 2008
Analyst in Economics
Government and Finance Division
The Liability Risk Retention Act:
Background, Issues, and Current Legislation
Risk retention groups (RRGs) and risk purchasing groups (RPGs) are alternative
insurance entities authorized by Congress to expand insurance supply through a
simplification of insurance regulation. The McCarran-Ferguson Act of 1945
generally leaves the regulation of the business of insurance to the individual states.
In 1981 and 1986, however, Congress crafted a narrow exception to the usual state
insurance regulations for these groups, largely exempting them from multiple state
oversight. Membership in risk retention and purchasing groups is limited to
commercial enterprises and governmental bodies, and the risks insured by these
groups are limited to liability risks.
Over the past two decades, interest — both in Congress and in the market — in
these groups has varied largely with the vagaries of the regular insurance market.
From 2001-2004, the insurance market was in one of its periodic “hard” markets and
regular insurance became increasingly expensive and sometimes unavailable. Since
2001, the numbers of risk retention groups rose dramatically and calls have been
heard to expand the scope of insurance that they are allowed to offer. At the same
time, some problems occurred in individual risk retention groups and cautionary
voices have also been raised. Although the market since 2005 has softened
somewhat, risk retention groups have continued to form in significant numbers.
The fundamental questions surrounding Liability Risk Retention Act (LRRA)
expansion are essentially the same as those addressed by Congress in prior
consideration of the issue. Stripping away jargon, this question can be posed as an
issue of availability vs. reliability. Those who would support expansion often focus
on a failure of the current insurance market, and the current regulatory system, to
make a sufficient supply of insurance available so that consumers who need
insurance can find it at a reasonable price. The question they pose is essentially:
“What happens to a community when a business, a school, or a doctor can not afford
or find insurance?” Those who would oppose expansion often focus on the dangers
in allowing insurance to be sold that is not subject to same regulatory standards as
“normal” insurance. The question this group poses is essentially: “What happens to
a community if the insurer from which this business, school, or doctor purchases
insurance ends up bankrupt or if the policy does not cover what needs to be
covered?” Legislation to extend the LRRA to commercial property insurance (H.R.
This report outlines the current regulatory structures affecting risk retention and
risk purchasing groups as well as the legislative and market history of these groups.
It also discusses the debate regarding possible expansion of these groups into areas
beyond commercial liability insurance. This report will be updated as significant
legislative events occur.
In troduction ......................................................1
Risk Retention and Purchasing Group Structure and Regulation.............2
The 1981 Product Liability Risk Retention Act.......................3
The 1986 Liability Risk Retention Act.............................5
RRGs and RPGs Since 1986.........................................5
Growth in the Risk Retention Market..............................5
Individual Difficulties Have Come Along with Growth................7
Policy Issues and Considerations..................................8
The Liability Risk Retention Act:
Background, Issues, and Current Legislation
The insurance industry, particularly property/casualty insurance,1 is known for
alternating periods of “hard” and “soft” markets. Turns in this cycle are typically
traced to unexpected changes in the investment climate, unexpected changes in
insurance payouts, or both. During a typical hard market, the supply of insurance
goes down, insurance prices go up, and underwriting standards become more
stringent. This often leads to consumers encountering difficulty in finding and
affording insurance. During a soft market, prices are typically flat, and insurers are
more willing to underwrite greater risks, so consumers typically do not face such
problems in obtaining insurance. Legislative attention tends to focus on insurance
matters during hard markets as constituents relate complaints about finding or
affording insurance to their legislators. Because regulation of the insurance market
was left to the states in the McCarran-Ferguson Act of 1945,2 however, the
legislature in question is most often a state legislature. Among the solutions offered
at the state level has been the creation of, or allowance for, “alternative” market
entities to increase the amount of insurance available to consumers. The alternative
market is made up of entities or arrangements that spread and finance risk like an
insurance company, but that operate outside the normal regulations governing the
world of “regular” insurance companies.3
Risk retention and purchasing groups (RRGs and RPGs) are alternative market
entities that have grown out of attempts at the federal level to expand insurance
supply by simplifying insurance regulation. In 1981 and 1986, Congress crafted a
narrow exception to the usual state insurance regulations for these groups, largely
exempting them from multiple state oversight. Interest in risk retention and
purchasing groups has increased over the past few years as prices for insurance have
climbed. Some have suggested that Congress needs to expand the narrow exception
that was made in the 1980s in order to expand the supply of insurance in areas
1 The insurance industry is typically broken down into life/health and property/casualty
insurance. Life/health is relatively straightforward, following its name, and includes annuity
products. Property/casualty is a more diverse group, including auto, homeowners,
professional liability, and many others. Property/casualty essentially refers to everything
that is not life or health insurance.
2 15 U.S.C. 1011 et seq.
3 The alternative market ‘s share of the U.S. commercial insurance market has been
estimated at 30%. See Insurance Information Institute, “Captives and Other Risk-Financing
Options,” at [http://www.iii.org/media/hottopics/insurance/test3].
outside of the liability coverage allowed under the current law. Legislation that
would extend the Liability Risk Retention Act (LRRA) to commercial property
insurance and introduce other reforms in the law was introduced by Representative
Dennis Moore (along with Representatives Deborah Price, John Campbell, and Ron
Klein) on April 15, 2008. This bill, H.R. 5792, was addressed in an April 16 hearing
“Examining Proposals on Insurance Regulatory Reform” held by the House Financial
Services Subcommittee on Capital Markets, Insurance, and Government Sponsored
Risk Retention and Purchasing Group
Structure and Regulation
Risk retention groups are required by current federal law4 to be state-chartered
insurance companies; they are allowed to insure commercial liability risks, such as
the risk that a physician will be found liable for medial malpractice, but not other
property/casualty risks, such as the risk that a physician’s office might burn down.
These insurance companies also must be owned by the members of the group. All
policies issued by a risk retention group must bear a federally mandated warning that
the policy is not regulated nor guaranteed in the same way as other insurance. Group
members are required to be businesses, including individual professionals such as
physicians and attorneys, or government entities, such as public universities, school
districts, and town or city administrations, who are engaged in a similar business or
face similar risks. The exact corporate structure of a risk retention group can vary.
Many are licensed as “captive” insurers,5 which typically have lower capital
requirements, but some are licensed as “regular” mutual insurers. Risk purchasing
groups are likewise groups of entities in a similar business or facing similar risks.
Instead of creating their own insurance company, these groups join together to
purchase commercial insurance from established insurance companies.
If risk retention groups must be licensed as an insurer under the existing laws
of an individual state, the obvious questions arise: What advantages do they possess?
Why go to the trouble and expense of creating such a group? The answers are in the
different regulatory treatment of these groups as they operate outside of the state
where they are chartered (or “domiciled”). Under normal circumstances, an insurer
who wishes to operate outside of its domiciliary state must receive a license and
submit to regulation from every state in which it wishes to do business. This means
complying with 51 different sets of state or district laws and regulations in order to
do business across the country. The impact of this multiplicity of regulation is
4 15 U.S.C. 3901 et seq.
5 A captive insurer is “[a]n enterprise with all the authority to perform as an insurance
company, but is organized by a parent company for the express purpose of providing the
parent company’s insurance.” From National Underwriter Company, Field Guide for
Property & Casualty Agents and Practitioners, glossary available at
[http://www.ifs-de.com/pages/glossary_files/Cgloss.htm]. See also
[http://www.captive.com]. Captives are typically licensed as insurers either in an individual
state or offshore, often in Bermuda or the Cayman Islands.
particularly high in insurance, as compared with other businesses, because both the
prices and the content of insurance policies are highly regulated in most states. This
perceived burden of multiple state regulatory systems is also the primary argument
cited currently by some in the insurance industry for creating a federal charter to
replace or supplement the current state system.6
Risk retention groups are exempted by federal law from the requirement to be
licensed in all states in which they operate as well as from other state laws regulating
the business of insurance. They must register and file documentation with a state’s
insurance regulator, but after this filing, they are essentially free to do business in that
state. This exemption from state law extends to most laws on the business of
insurance, but laws such as those on fraudulent trade practices, nondiscrimination,
and unfair claim settlement practices still apply. They also must pay state premium
taxes as regular insurers do. In addition, a non-domiciliary state’s insurance regulator
is empowered to monitor the financial solvency of a group, including requiring that
a group submit to a financial condition examination if the chartering state regulator
refuses to do such an exam, and seeking an injunction to force it to cease doing
business if the group is in hazardous financial condition. This regulatory oversight
is less than that accorded regular insurance companies, however, and some observers
fear that this might lead to an increased danger of such groups becoming insolvent.
In the case of a risk retention group insolvency, the policyholders have no recourse
to a state guaranty fund because membership in these funds is specifically prohibited
by the federal statute.
Risk purchasing groups are given a similar, but more limited, exemption from
state law. Many states have laws, known as “fictitious grouping laws,” that
specifically prohibit or limit groups from purchasing insurance for the members of
the group, particularly if the group exists solely for the purchase of insurance. State
insurance regulators use these laws to protect consumers and ensure solvency. Risk
purchasing groups are exempted from these laws and from countersignature laws,
which are laws requiring a local broker’s or agent’s signature on an insurance
contract. Otherwise, they are regulated by each state in which they operate. The
insurance that such groups purchase on behalf of their members must meet the laws
and regulations of the state that is designated as the domicile of that group.
The 1981 Product Liability Risk Retention Act
The first “Product Liability Risk Retention Act” was introduced in 1979, and
an amended version became P.L. 97-45 in 1981. Its origin can be traced to an
interagency task force created by the White House in 19757 to examine difficulties
6 For more information on the optional federal chartering issue, see CRS Report RL32789,
Insurance Regulation: Issues and Background, by Baird Webel.
7 Interagency Task Force on Product Liability. Its final report was published by the
in the availability of product liability insurance. Among the proposals discussed by
the task force’s report was the possible creation of alternatives to the traditional
insurance market. The 1981 act was relatively narrow, limiting risk retention groups
and risk purchasing groups to insurance covering product liability8 as well as
completed operations liability.9 The 1981 act also limited members of these groups
to “product manufacturers, wholesalers, distributors and retailers.”10 Risk retention
groups had to be chartered, and thus regulated, as an insurer in one of the United
States, including the District of Columbia, or in Bermuda or the Cayman Islands.11
The act specifically exempted risk retention groups from most regulation by any state
in which they operate, aside from the chartering state. This federal exemption,
however, did not cover laws that were not specific to the business of insurance, such
as fraud or deceptive practice laws. The act also preempted any state laws preventing
risk purchasing groups from purchasing the same narrow range of insurance as that
allowed to be offered by risk retention groups.
By the time the act became law in September 1981, the market difficulties that
prompted so much attention had largely passed. With regular commercial insurance
available and relatively inexpensive, there was little incentive for companies to
undertake the expense of forming risk retention or purchasing groups, and only three
of the former and four of the latter were formed in the first four years of the act’s
Despite the lack of market action, congressional interest in the issue continued.
In 1983, a Clarification of the Risk Retention Act (S. 1046, eventually P.L. 98-193)
was passed by voice votes of both the House and the Senate. This act was a response
to a model state law suggested by the National Association of Insurance
Commissioners (NAIC).12 This suggested model law referenced the various state tort
laws in its definition of “product liability” rather than following the definition passed
Department of Commerce in 1977 (NTIS PB-273-320).
8 “Products liability refers to the liability of a manufacturer or seller for injury caused by his
product to the person or property of a buyer or third party.” See CRS Report RL33423,
Products Liability: A Legal Overview, by Henry Cohen and Vanessa K. Burrows, for
9 Completed operations liability insurance generally covers claims arising after the
completion of a project (for example, if a contractor finished a house, but a defect was found
some time later).
10 U.S. Congress, Senate Committee on Commerce, Science, and Transportation, Product
Liability Risk Retention Act of 1981, report to accompany S. 1096, 97th Cong., 1st sess.,
S.Rept. 97-102 (Washington, GPO, 1981), p. 1; and U.S. Congress, House Committee on
Energy and Commerce, Product Liability Risk Retention Act of 1981, report to accompanythst
H.R. 2120, 97 Cong., 1 sess., H.Rept. 97-190 (Washington, GPO, 1981), p. 7.
11 The authority to form risk retention groups outside of the United States was limited in
time, expiring on January 1, 1985.
12 The NAIC is the national trade association of state insurance regulators, which, among
other activities, publishes model laws to encourage harmonization of state insurance
by Congress in P.L. 97-45. The state tort laws tended to have a more narrow
definition than that desired by Congress. P.L. 98-193 specified clearly that the
definitions in the federal statute would be the controlling definitions for purposes of
the Risk Retention Act.13
The 1986 Liability Risk Retention Act
In the mid-1980s, the insurance market began to harden again and Congress
again heard of many problems faced by businesses and individuals in finding and
affording insurance. One of the congressional responses was to reconsider the 1981
act. Numerous bills were introduced to expand the provisions so that more
consumers might avail themselves of the additional insurance supply mechanism that
Congress had created.
Congress ultimately passed S. 2129 (eventually P.L. 99-563), which renamed
the 1981 act the “Liability Risk Retention Act” and brought the law to its present
form. P.L. 99-563 expanded the scope of the insurance to include most types of
commercial liability insurance and expanded the organizations that could form such
groups to include any business as well as state or local governments or governmental
entities as long as all the members of a single group were engaged in similar business
activities or were exposed to similar risks. This expansion, however, did not
retroactively include the small number of foreign-based risk retention groups. These
groups, formed under the temporary authority described above, were allowed to
continue in the area of product liability insurance but were not permitted to expand
into other kinds of commercial liability insurance. It also included changes designed
to allow some increased oversight of risk retention and purchasing groups, including
the requirement to file documentation in non-chartering states, and the right of non-
chartering commissioners to conduct examinations if the chartering state fails to do
so and to seek injunctions against groups in a hazardous financial situation. In
general, however, the clear intent of Congress remained to allow these groups to
operate throughout the country while being regulated largely, if not solely, by a single
state regulator, rather than facing 51 jurisdictions with very different laws and
RRGs and RPGs Since 1986
Growth in the Risk Retention Market
Market reaction to the expansion of the law was relatively swift. By 1988, 54
risk retention groups had been created with more than 43,000 insured and a total
premium amount of $250 million. The number climbed to 79 by 1990 and then
plateaued for the next 10 years, actually declining to 69 by 2001. The number of
insured and total premium amount, however, continued to increase, reaching over
13 For more discussion, see U.S. Congress, Senate Committee on Commerce, Science, and
Technology, Clarification of the Risk Retention Act, report to accompany S. 1046, 98thst
Cong., 1 sess., S.Rept. 98-172 (Washington, GPO, 1983).
more steady course, growing from 358 in 1988 to 756 in 2001, with premium amount
growing from $575 million in 1998 to an estimated $3 billion in 2001.14 Within the
aggregate statistics, there has been significant churning, as individual groups are
formed and retired based on the business decisions made by those seeking insurance.
In the period from 1987 to 2001, a total of 142 risk retention groups were formed and
some changed status to become a regular insurer or were absorbed by a regular
insurer, and some simply ceased operation when insurance on the regular market
became more affordable.15
The relative calm in the marketplace that prevailed through the 1990s and into
the new century ended quickly with the hardening of the insurance market in 2001.
This hard market has been ascribed to the downturn in both interest rates and the
stock market as well as to unexpected claims, particularly the estimated $35 billion
in insured losses due to the terrorist attacks on September 11, 2001. Making many
of the price increases even more dramatic has been the fact that the soft market of the
1990s lasted for so many years, leading to some complacency on the part of both
insurers and insureds.
Interest in risk retention groups increased along with the prices of insurance.
The number of RRGs increased to 90 in 2002, then 141 in 2003, and 177 in 2004.
The total premium for RRGs increased to $1.2 billion in 2002, then $1.7 billion in
2003, and $2.2 billion in 2004. The number of RRG insureds, however, did not
follow the same pattern as the number of groups and the amount of premiums. The
insureds number peaked in 2001, at 172,713, then declined to 139,837 in 2002,
before growing to 145,582 in 2003, and 155,657 in 2004. Risk purchasing groups
also saw declines through this time period, dropping to 718 in 2002, 670 in 2003, and
654 in 2004. The total premium paid by RPGs, however, increased to an estimated
$4.6 billion in 2004.16
The market generally has softened since 2004 and RRG premium growth
reflects this softening, although the number of RRGs is still growing substantially:
219 RRGs were operating in 2005, 245 in 2006, and 257 in 2007. Total RRG
premiums grew to $2.4 billion in 2005, $2.6 billion in 2006, and $2.7 billion
(estimated) in 2007.17 Unfortunately, the reported survey results do not include risk
14 Statistics from 1988 to 2004 available from the Risk Retention Reporter website at
[http://www.rrr.com/education/growth.cfm]; the statistics on RPG premium are incomplete,
with a gap from 1994 to 2004. The $3 billion figure for 2001RPG premiums is no longer
on the website, although it appeared there in 2005.
15 See “Soft Market Fueled Risk Retention Group Retirements During 1990s,” Risk
Retention Reporter, February 2002.
16 Statistics from [http://www.rrr.com/education/growth.cfm].
17 2007 Study results from “2007 Risk Retention Reporter Survey of Risk Retention Group
Premium and Number of Insureds” Risk Retention Reporter, October 2007.
Risk retention group growth has occurred particularly in the health care arena.
In the 2004 survey, for example, 28 of the 41 new groups were insuring some form
of health care liability. In the 2007 study, the comparable number was 34 of 52 new
RRGs. Within healthcare, nursing homes are show the largest growth, going from
zero nursing home RRGs in 2002 to 20 at the end of 2005.18 The growth in health
care RRGs seems largely due to widely reported difficulties that health care providers
are encountering in obtaining medical malpractice insurance. In one interesting
reported case, a Pennsylvania Department of Public Welfare grant provided the initial
$5 million in capital for a Vermont-domiciled risk retention group with the purpose
of insuring nursing homes solely in Pennsylvania.19 Apparently, this occurred
because the chartering laws on the creation of smaller or captive insurers in Vermont
are more favorable than those in Pennsylvania.
Individual Difficulties Have Come Along with Growth
The growth of risk retention groups has not been without some problems. As
was noted above, the number of insured declined from 2001 to 2004. This was
largely due to the liquidation of three Tennessee-domiciled groups20 that insured
physicians, lawyers, and other professionals for professional liability. The
liquidation was forced by the insolvency of a regular Virginia-based insurer who had
provided reinsurance for these risk retention groups. Individual policyholders of
regular insurance are normally eligible for protection in the case of insolvency under
the various states’ guaranty funds; this, however, would typically apply only to those
directly insured by the Virginia company, not to policyholders of companies that are
reinsured by this company. These policyholders are considered creditors of the
company, not insureds, and thus have a lower priority claim on the assets of the failed
company. Further complicating the legal situation is the statutory prohibition on risk
retention group participation in state guaranty funds. Class action lawsuits21 have
been filed by insureds seeking guaranty fund protection for the insured along with
damages for other malfeasance and are still ongoing.22
18 “Premium Generated By Healthcare RRGs More Than Triples Since 2001,” Risk
Retention Reporter, December 2002.
19 Andrew Sargeant, USA Risk Group of Vermont, as quoted in “Sources of Capital for Risk
Retention Groups,” Risk Retention Reporter, June, 2003.
20 These groups were the American National Lawyers Insurance Reciprocal, Doctors
Insurance Reciprocal Risk Retention Group, and The Reciprocal Alliance.
21 Fullen v. General Reinsurance Corp., et al. (VLW 003-12-03), Herrick v. General
Reinsurance Corp., et al. (VLW 003-12-01), and Crenshaw Community Hospital v. General
Reinsurance Corp., et al. (VLW 003-12-02). See “Class-Action Suits Filed Against
Reciprocal Companies,” Virginia Lawyers Weekly, April 3, 2003, available at [http://
www.valawyersweekly.com/anlir14.cfm]. These three suits were subsequently consolidated
in the United States District Court for the Middle District of Tennessee (Memphis) as In re
Reciprocal of America (ROA) Sales Practices Litigation (MDL No. 1551).
22 For a more complete reporting, see “Policyholders of Reinsurance Group Reciprocal to
Get Partial Payment,” Richmond Times-Dispatch, October 20, 2003, and “Move to Liquidate
ROA Will Impact RRG Insureds and Others,” Risk Retention Reporter, May 2003, as well
Another risk retention group failure that has attracted considerable attention is
the insolvency of the National Warranty Insurance Risk Retention Group (hereafter
“National Warranty”). Although physically headquartered in Lincoln, Nebraska,
National Warranty was incorporated in the Cayman Islands. It was one of the
handful of companies that were incorporated outside of the United States before 1985
and was thus grandfathered out of regulation by any of the individual states. Prior
to its being declared insolvent in August 2003, it acted as an insurer of the
obligations taken on by its members, mainly marketing companies and auto
dealerships, who sold vehicle service contracts. Although the actual group was made
up of only approximately 580 members, the potential effect of the insolvency is more
widespread ,as these members sold contracts to or through more than 5,000 auto
dealerships in 49 states.23
The text of the LRRA requires insureds to be members and part owners of a risk
retention group; however, this line was apparently somewhat blurred in the National
Warranty case. National Warranty acted both as an administrator, adjusting claims
on behalf of its members, and as the insurer of these members.24 This dual role
apparently gave the impression that the final consumers were purchasing service
contracts directly from National Warranty rather than from the individual group
members. The insolvency thus resulted in confusion about to whom the consumers
should be making claims when they need repairs on their cars that should be covered
under the terms of the contracts. In 2003, accountants with KPMG, acting as “Joint
Official Liquidators” in the Cayman Islands insolvency proceedings, have indicated
that any consumer claims should be directed at the individual group members and
that National Warranty is not directly obligated to the consumers.25 While the
National Warranty liquidators did set up a process to accept U.S. claims in 2006, it
is unclear that many claims will be accepted.26
Policy Issues and Considerations
For several years, interest groups have made a concerted effort, including the
formation of a Council for Expanding the Risk Retention Act, to advocate expanding
the provisions of the Risk Retention Act to include commercial property and casualty
insurance, except for workers’ compensation insurance. In 2002, the National
Conference of Insurance Legislators approved a resolution supporting such an
as the previously cited article in Virginia Lawyers Weekly.
23 Figures from John Taylor, “Irate Consumers File Class-Action Suit against Lincoln, Neb.,
Firm,” Omaha World-Herald, September 23, 2003.
24 Caroline McDonald, “Lessons from National Warranty,” National Underwriter, Property
& Casualty/Risk & Benefits Management Edition, October 24, 2003.
25 See the “Circular to Group Members” from KMPG Chartered Accountants, Grand
Cayman, Cayman Islands, posted on National Warranty website at
26 “National Warranty liquidators advertise for claims in USA Today,” Lincoln Journal Star,
October 13, 2006, available at [http://www.journalstar.com/articles/2006/10/14/business/
expansion, and a major consumer group, the Consumer Federation of America, has
written in support of the idea as well.27 Some insurance regulators, for example,
then-District of Columbia Commissioner Lawrence Mirel and then-Vermont Director
of Captive Insurance Leonard Crouse, also previously expressed their support for
expansion of the Risk Retention Act.28
Doubts about such an expansion, however, have also been raised. In NAIC
meetings, the most prominent doubter has been Nebraska’s insurance commissioner,
who has been at the forefront of dealing with the National Warranty insolvency. At
the September 2003 meeting, the NAIC was encouraged to adopt a draft resolution
that would put the group on record as opposing the expansion of risk retention
groups.29 Among the reasons cited in the resolution was the danger to consumers
from a limitation on states’ regulatory authority, the example of the National
Warranty failure, and the absence of an availability problem in property insurance
that has not been addressed by state-based solutions. No resolution has been adopted,
but a “Risk Retention Working Group” to examine issues surrounding risk retention
groups was created. Among other actions, this group has proposed corporate
governance standards for RRGs.30 The U.S. Government Accountability Office also
discussed problems in risk retention groups in a 2005 report entitled Risk Retention
Groups: Common Regulatory Standards and Greater Member Protections Are
N eeded .31
The fundamental questions surrounding LRRA expansion are essentially the
same as those addressed by Congress when the first act was passed in 1981, and
when it was expanded in 1986. Stripping away jargon, this question can be phrased
as an issue of availability vs. reliability. Those who would support expansion often
focus on a failure of the current insurance market, and the current regulatory system,
to make a sufficient supply of insurance available so that consumers who need
insurance can find it at a reasonable price. The question they pose is essentially:
“What happens to a community when a business, a school, or a doctor cannot find
or afford insurance?” Those who would oppose expansion often focus on the
dangers in allowing insurance to be sold that is not subject to same regulatory
standards as “normal” insurance. The question this group poses is essentially:
“What happens to a community if the insurer from which this business, school, or
doctor purchases insurance ends up bankrupt or if the policy does not cover what
needs to be covered?” The underlying basis for this question with regard to risk
27 See Consumer Federation of America, Creating Insurance Alternatives to Bring Down
Rates, at [http://www.consumerfed.org/risk_retention_act-expansion.PDF].
28 Lawrence Mirel, letter To Whom It May Concern, September 16, 2002, and Leonard
Crouse, letter To Whom It May Concern, May 15, 2002.
29 Meg Fletcher, “NAIC May Seek to Block RRG Expansion,” BI Daily News, September
30 The NAIC Risk Retention Group Task Force’s recent activities can be found on the NAIC
website at [http://www.naic.org/committees_e_risk_retention_group_tf.htm].
31 U.S. Government Accountability Office, Risk Retention Groups: Common Regulatory
Standards and Greater Member Protections Are Needed, GAO-05-536, August 2005,
available at [http://www.gao.gov/new.items/d05536.pdf].
retention groups seems to be the assumption that the single domiciliary state
regulator will do an insufficient job in protecting the consumers who live in other
states. H.R. 5792, discussed below, addresses some concerns raised in the past about
the “reliability” of risk retention groups through the provisions addressing corporate
governance structures and state consumer protection laws.
Secondary arguments are, of course, also made. Proponents point out that
because the insured are the owners of a risk retention group, they can see to it
themselves that the insurance provided is reliable. It is also argued that the rates of
failure of regular insurers and risk retention groups are nearly the same, and that the
recent failure of National Warranty is a unique situation since it was an offshore
group that was unaccountable to any state regulator. Doubters may counter by
questioning what sort of impact risk retention groups might have when, even with
their recent growth, they still occupy a fraction of a percent of the property/casualty
market. In addition, even if the failure rates are similar, the impact of a state-
regulated insurer failure is likely to be mitigated by its participation in state guaranty
funds, which are specifically unavailable to insurers operating under the Liability
Risk Retention Act.
Assessing the arguments on either side will be a challenge for Congress. The
broad question posed here as “availability vs. reliability” is in some sense a basic
philosophical question about the degree of regulation needed by insurance markets
and may not have an absolute empirical answer. Some see insurance philosophically
as a public good, akin to a basic utility, and one that must be highly regulated in price
and content to protect consumers. Others do not share this philosophy and feel
insurance should be lightly regulated, with the market dictating prices and content.
In general, the states, who have faced such basic insurance regulatory questions for
many years, have attempted to suit the amount of regulation to the perceived
sophistication of the consumer. Thus, the market for commercial insurance is usually
left relatively less regulated on the theory that the businesses purchasing in the
commercial market have the knowledge and experience to discern the intricacies of
insurance policies and companies, or at least hire professionals to make these
“reliability” judgments for them. Individual consumers are presumed to be less able
to accurately make these judgments; thus, the market for such insurance, particularly
homeowners and auto, tends to be much more highly regulated. Internationally, the
insurance markets in general have tended to be less regulated, particularly with regard
to the direct price and content controls found in some of the United States.32
The differential regulatory approach based on the sophistication of the consumer
can be seen, for example, in the operation of state guaranty funds. These funds are
intended to step in and pay claims arising from insolvent insurers, but they typically
have a relatively low cap on the amount that can be paid to each policyholder.
Keeping this amount low implies that consumers with relatively low claims,
presumably most individuals, will be nearly fully protected against loss, while
consumers with relatively high claims, presumably larger businesses, will be only
partially protected. This cap on guaranty fund claims also affects the direct
32 For a more in-depth discussion of insurance regulation, see CRS Report RL32138,
Revising Insurance Regulation: Policy Considerations, by Carolyn Cobb.
arguments surrounding risk retention groups. Because most risk retention group
members, as businesses, face potentially large claims, the value of guaranty fund
protection will be less to them than to individuals with presumably lower claims.
In assessing some of the more factual arguments, it is certainly true that risk
retention and purchasing groups occupy a very small part of the insurance market.
For comparison with the risk retention group totals, the total premium written in the
property/casualty market in 2006 was approximately $444 billion.33 Economic theory
suggests, however, that it is not necessary for a competitor to have a large market
share in order to have an impact on prices or availability. Anecdotal cases,
particularly ones such as the Pennsylvania nursing home risk retention group
mentioned above, also suggest that the act is expanding the availability of insurance,
especially in local situations with severe supply difficulties. The Department of
Commerce came to the conclusion in 1989 that the 1986 act had been successful in
addressing supply problems,34 and the GAO made similar findings in the previously
mentioned 2005 report.35
An assessment of risk retention and purchasing groups also may offer insight
into wider questions involving the federal role in insurance regulation. Particularly
since the passage of the Gramm-Leach-Bliley Act, some have advocated for an
increased federal role in insurance regulation, up to complete federalization of
regulation for all interstate insurers. Others have suggested some lesser federal role
to address specific problems they see caused by the multiplicity of state regulators,
such as slow approval times for products and overly burdensome rate or form
regulation. The two Risk Retention Acts are an example of one way previous
Congresses have tried to solve supply problems arising from, or exacerbated by, the
insurance regulatory system. The answer provided by these acts was essentially a
system of enforced mutual state recognition without broad federal regulation of
insurance. As such an example, these acts might provide some insight into how the
current Congress considers addressing problems in the insurance regulatory system
The Increasing Insurance Coverage Options for Consumers Act of 2008 was
introduced by Representative Dennis Moore, along with Representatives Deborah
33 See the Insurance Information Institute website at [http://financialservicefacts.org/-
34 See U.S. Department of Commerce, Liability Risk Retention Act of 1986: Operations
Report 1989, NTIS PB 90-123134.
35 “RRGs have had a small but important effect in increasing the availability and
affordability of commercial liability insurance for certain groups.” U.S. Government
Accountability Office, Risk Retention Groups: Common Regulatory Standards and Greater
Member Protections Are Needed, GAO-05-536, August 2005, p. 5.
Pryce, John Campbell, and Ron Klein, on April 15, 2008. It was referred to the
House Financial Services Committee. Hearings or markups specifically on H.R.
5792 have yet to be scheduled, however, the bill was discussed in a Subcommittee
on Capital Markets, Insurance, and Government Sponsored Enterprises hearing on
April 16, with one witness, Lawrence Mirel, testifying on behalf of the Self Insurance
Institute of America in support of the bill.
H.R. 5792 would amend federal law to allow the expansion into commercial
property insurance, while adding requirements on corporate governance including the
addition of independent directors on RRG boards and a fiduciary duty requirement
for RRG directors. The bill would require RRGs to be chartered in a state that has
adopted “appropriate” or “minimum” financial and solvency standards. It would also
strengthen the current preemption from state laws enjoyed by RRGs and RPGs.