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March 24
10:47 2020

Public Policy Analysis & Opinion

By Kevin P. Hennosy


The Risk Retention Group expansion debate rallies industry groups

This month’s column concerns a serious public policy issue in Congress, which concerns the business of insurance.

But first, a rant about how the American education system fails to explain how the government works.

Catch and release

Sometimes, in my darkest moods, I want to direct a national “catch and release” campaign directed at high school civics teachers.

Do not get me wrong. I have no interest in recording their height or weight, and no desire to affix a tag on their ear to facilitate tracking their movements and habits. No! One can purchase that information from numerous Internet platforms, without all the legal questions that arise from detaining and tagging fellow citizens.

Consideration of legislation aimed at expanding the operating jurisdiction of RRGs attracts advocates for many parochial interests.

I just want to correct several shortcomings in American Secondary Education, which end up doing damage. To borrow a phrase from George Carlin, those shortcomings can “bend your mind, curve your spine, and lose the war for the Allies.”

First, we need to correct the constant misuse of the word “Federalism.” As explained by the late, great professor Samuel H. Beer, a federal system makes one nation.

The United States Constitution is a “federal” document that makes a nation of the American people based on ideas rather than blood, belief, or other ancient elements. The document delegates the one nation’s common interest to the federal government, and it delegates parochial interests to the localities, or states. As the nation matures, of course, it will share more interests, so the jurisdiction of the federal government will expand.

Too many civics teachers confuse the term “federal” with “confederation.” They ignorantly recount yarns about how Federalism is a compact of independent states, which preserves rights for those states. This misinformation leads to all sorts of problems, such as civil war and other unuseful propositions.

In addition, civics teachers describe the regulatory process as some pristine exercise in debate or applied philosophy. The “transparency” in the rulemaking process fostered by “‘Public’ Notices’” and “‘Public’ Hearings’” encourages participation by citizens and assures regulation in the public interest, according to those civics teachers.

Take another deep quaff of the Kool Aid before picking up that serpent, Virginia!

More often, in the absence of an ugly scandal, competing commercial interests appeal to regulators to create rules designed to serve the commercial interests’ own parochial aims. Most citizens live out their lives without ever seeing a Public Notice of Public Hearing; however, lobbyists and lobbying law firms work hard to maintain their presence on distribution lists.

A gathering of several hundred lobbyists “does not transparency make.” Quite the contrary.

But I digress.

RRG expansion?

What prompted me to think about these obscure issues is the recent dust-up on Capitol Hill concerning Risk Retention Groups (RRGs). Consideration of legislation aimed at expanding the operating jurisdiction of RRGs attracts advocates for many parochial interests.

As most Rough Notes readers will know, RRGs provide their member-owners with commercial liability coverage. Congress responded to repeated “crises” in commercial liability insurance subsectors and allowed for creation of these risk transfer mechanisms through legislation passed in 1981 and amended in 1986.

To encourage formation of member-owned groups, Congress removed RRGsfrom many but not all aspects of the state-by-state insurance regulatory system.

On January 31, 2020, the Subcom-mittee on Housing, Community Development and Insurance of the Committee on Financial Services of the U.S. House of Representatives conducted a hearing expanding RRG jurisdiction.

Walked away

Proponents for RRGs want Congress to use its constitutional primary juris-diction over “the business of insurance” to expand the products offered by select representatives of those nontraditional insurance entities.

Pamela E. Davis, founder, president and CEO of the Nonprofits Insurance Alliance (NIA), testified: “Nonprofits never wanted to be in the insurance business, but were forced into it to be able to continue to serve our communities.” NIA is an insurance cooperative composed of four distinct 501(c)(3) nonprofit organizations, including Alliance of Nonprofits for Insurance, Risk Retention Group, which provides liability insurance to nonprofits with operations outside of California.

Davis described her organization as providing service to more than 20,000 small and medium-sized nonprofit organizations. “These little nonprofits got into the business of insurance because the commercial carriers walked away from them,” she said.

No crisis?

Not so fast, said advocates for traditional insurance companies, such as the National Association of Insurance Commissioners (NAIC) and the National Association of Mutual Insurance Companies (NAMIC).

Now, my Right-Honorable friends at the NAIC will gag over my description of them above; however, I have watched the group for more than 30 years and I will stand by the description. At least I did not call them a “Do-Nothing” organization—the NAIC advocates for the insurance sector.

In written testimony delivered on the NAIC’s behalf, Director of the Missouri Department of Commerce and Insurance Chlora Lindley-Myers observed:

While we are aware that monoline commercial property coverage is less common, the fact that commercial property coverage for nonprofits is offered through a full business owner’s policy that contains both commercial liability and property coverages is not indicative of a market crisis.

Jon Bergner, assistant vice president of public policy and federal affairs at NAMIC, testified that no evidence existed for a crisis that justifies congressional action. He echoed another statement by the NAIC:

It defies logic that the state insurance commissioners, who have historically been the front lines of responding to insurance market disruptions, would be completely unaware if what would have to be such a sizable number of nonprofits were unable to find the insurance coverages they needed.

Theoretically, the advocate for NAMIC is correct, but theory and practice often diverge.

Since 2002, the NAIC has advocated a policy where insurance regulators simply assume the existence of competition in commercial markets. In addition, the NAIC recommends that state law place impediments before any regulator who seeks to test competitive activity in commercial markets.

In direct contradiction to the affirmative regulation called for in the McCarran-Ferguson Act of 1945, the NAIC Property and Casualty Commercial Rate and Policy Form Model Law (MDL 777) prohibits regulatory oversight of commercial lines:

A competitive market is presumed to exist unless the commissioner, after hearing, determines that a reasonable degree of competition does not exist in the market and the commissioner issues a ruling to that effect.

If Congress assumed the existence of competition in insurance markets, the institution never needed to pass the McCarran-Ferguson Act. Federal antitrust law polices competitive markets in the public interest.

While I trust Director Lindley-Myers as a good person and devoted public servant, I cannot extend my trust to the NAIC to analyze commercial market conditions.

Coverage and complaints

The NAIC testimony referred to a “full business owners policy,” which other advocates referred to as a “BOP.” Opponents of RRG expansion advise that these package policies allow non-profit groups to insure both liability and property risks with traditional carriers.

Davis’s testimony offered an assessment to the contrary:

In 2020, certain nonprofits are once again finding it difficult to obtain even “package” policies from commercial carriers. Several prominent commercial insurance companies that long competed for nonprofit business have announced that they are shutting their nonprofit programs and/or drastically reducing their willingness to offer coverage—particularly to child-serving and animal rescue organizations.

Regarding the NAIC’s insistence that complaints data do not reflect a market crisis, who really cares? Anyone who has tried to file a complaint with a state insurance department will intuitively understand that the data understate market problems. Most people have no idea where to complain. Many states place “Phone-Tree-Hell” between the public and personnel who might record complaints. Often, insurance department personnel receive training that encourages them to look for reasons not to take a complaint, such as “that product falls outside our department’s jurisdiction.”

Regulatory arbitrage

Oddly enough, the anti-RRG expansion bloc also raises questions of regulatory inefficiency and parochialism.

The Independent Insurance Agents and Brokers of America (IIABA) raised the issue that many policy analysts refer to as “regulatory arbitrage.” As financial arbitrage operations endeavor to profit from differences in asset prices across markets, regulatory arbitragers seek profit from public policy differences among jurisdictions.

The IIABA testimony observed: “Interestingly, the vast majority of RRGs are domiciled in only five states (Vermont, South Carolina, Nevada, Hawaii, and Arizona) and the District of Columbia, but RRGs write predominately outside their state of domicile. This suggests that federal preemption of multi-state regulation has allowed RRGs to choose their domicile state based on certain regulatory advantages.”

The NAMIC testimony fleshed out some of those differences, which drive profits to RRGs:

For example, RRGs generally do not have to file rate and form filings —a key check on improper market conduct—and they may use GAAP accounting principles as opposed to statutory accounting principles, SAP being widely understood to be more conservative in terms of investments and reserving requirements. In the end, attempts by state regulators to tailor the regulatory conditions in their state would not apply equally to all companies operating there.


Efforts to “tailor the regulatory conditions” rarely serve the public interest. Instead, tailoring regulatory conditions invites parochial battles, or efforts to “put in the fix.” Such parochialism only offers the pretense of regulation and weakens public confidence in government.

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.

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