RRGs: JUST WHAT THE DOCTOR ORDERED
Flexible and focused, risk retention groups meet risk financing needs across a range of industries
By Michael J. Moody, MBA, ARM
The insurance industry historically has been known for its “up and down” pricing model. Many referred to this as the “seven-year pricing cycle.” Often you could set your watch by where the cycle was at any given time.
A game-changing situation arose during an extremely hard market that occurred in the mid-1970s. Insurers began to experience significant losses in the product liability sector. Insureds and their brokers were rapidly losing critical product liability coverage, and brokers thus were experiencing declines in sales revenue. The situation for manufacturers became so dire that Congress decided to step in. In 1981, it passed the Product Liability Risk Retention Act, which allowed manufacturers to start their own product liability insurance companies, commonly known as risk retention groups (RRGs). In fairly short order, the soft market returned. Similar coverage displacement in other liability lines, however, began to occur in the early 1980s. At this point—in 1986, actually—the Risk Retention Act was amended to encompass all liability lines. Since the mid-1980s, property/casualty pricing generally has remained soft. That changed in early2020 when the world began struggling to contain the COVID-19 pandemic. Among the countless negative impacts of the pandemic, the insurance industry may well face its share of long-term problems. It is this concern that motivated the Vermont Captive Insurance Association (VCIA) to explore the topic in a session titled “What the Next Hard Market and Pandemic Mean for RRGs” that was part of its virtual annual conference held in August.
As the market tries to come to grips with the COVID-I9 pandemic, it is hard to imagine that [risk retention groups] will not be an important part of the solution.
The session was moderated by Chris Diemel, managing editor of the Risk Retention Reporter. Diemel pointed out that an important first step for any potential RRG member or his broker should be to check the performance of the risk retention group in previous hard markets. He indicated that even before the pandemic, 2019 appeared to be heading for a hardening of the market. He noted that after some initial suspicion, the brokerage community has become much more accepting of the RRG structure because it gives insureds a viable approach to risk financing. Risk retention groups can be an attractive solution when the traditional insurance market withdraws from specific lines of coverage.
Even as risk retention groups have gained acceptance, however, they still face an array of issues. Anytime an RRG competes with the traditional insurance market, it has its work cut out for it. For example, Diemel commented, in the 1990s when competition in the commercial market was strong, most alternative approaches were abandoned. Risk retention group managers soon found out that their members were less interested because coverage cost was their most important concern.
According to Diemel, the protracted soft market has been challenging for risk retention groups. For the most part, he said, RRGs should be established as long-term solutions. Not only do they lose members during soft markets, he noted, but they also may run into financial difficulties. Startup operations often have a hard time because they can’t build up a sufficient capital base to weather the storm when members want to return to the traditional market. Among other things, this can result in an increase in insolvencies, he asserted.
The next speaker has significant experience in the risk retention group market. Mollie K. O’Brien, Esq., a 25-year veteran of RRGs, is vice president of claims and litigation for Premier Insurance Management Services. Most of her experience has centered on the healthcare industry, and she believes that “this is absolutely the best time to be in an RRG.” While any risk retention group faces hurdles to overcome, she noted that soft markets are always difficult to deal with. Because most traditional carriers write multiple lines, they could shift some of the risks and losses to other lines. Because RRGs are monoline insurers, they are unable to do any cost shifting, O’Brien observed.
Since passage of the Affordable Care Act in 2010, healthcare risk retention groups have experienced some profound changes, O’Brien said. Consolidations have caused the number of RRGs to decline; at the same time, the combined RRG experiences an immediate increase in capital. Although there are fewer risk retention groups, she commented, those that remain are well funded.
The final speaker, Brian E. Johnson, ACAS, MAAA, is chief underwriting officer of the Nonprofits Insurance Alliance. He indicated that the two main drivers in the insurance industry are capacity and profitability. Even as we head into a hard market, Johnson said that ample amounts of capacity are still available thanks to strong investment income. From Johnson’s perspective as someone who is involved with government entities, profitability continues to grow as the result of insurers’ actions to reduce statutes of limitations and restrict terms and conditions in commercial policies.
Risk retention groups, according to Johnson, provide several benefits for both members and their brokers. A key advantage is the ability to quickly change rates and/or forms as needed. These organizations also have industry-specific experience that the traditional commercial market lacks. Johnson also pointed out that RRGs can provide specialized services that can help reduce their overall costs.
All three of the speakers agreed that risk retention groups provide a source of coverage that during a hard market is often unavailable from traditional insurers. Truckers, child-care workers, lawyers, and healthcare workers all have successfully implemented RRG programs. Over time, most risk retention group managers have learned that soft commercial markets only last so long. As losses begin to mount, the piper must be paid.
Thirty-plus years have shown both members and their brokers that risk retention groups offer a viable long-term solution for their risk financing needs. As the market tries to come to grips with the COVID-19 pandemic, it is hard to imagine that they will not be an important part of the solution.
Michael J. Moody, MBA, ARM, is the retired managing director of Strategic Risk Financing, Inc. (SuRF), which was established to provide consulting services to captive and other alternative risk transfer mechanisms. As a contributor, he continues to promote the benefits of the ART market by providing current, objective information about the market, the structures being used, and the players involved.