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The recent National Risk Retention Association (NRRA) conference in Chicago provided an excellent opportunity to not only look back at the role risk retention groups (RRGs) have played, but also to look forward at their evolving and expanding role in the U.S. liability insurance market.
For those new to RRGs, they were first authorized by federal legislation called the Product Liability Risk Retention Act in 1981. The Federal Liability Risk Retention Act, passed in 1986, then significantly expanded the types of coverages eligible for RRGs. These pieces of legislation were in direct response to situations where the admitted insurance market was unwilling or unable to provide affordable coverage for products liability and subsequently medical professional liability (MPL) and certain general liability coverages.
In order to address these immediate and critical needs, regulatory authority of RRGs was given to the state of domicile. This allowed RRGs to form and issue policies in multiple states more quickly than new admitted insurers. In subsequent market crises RRGs were quick to fill voids left by the market withdrawals and insolvencies. For example, RRGs were critical to restoring available MPL markets during the crisis in the late 1990s and early 2000s when St. Paul withdrew from the market and several other MPL companies were declared insolvent (PHICO, MIIX, Reliance, Legion and Reciprocal of America). Since that time, several interesting things have happened.
RRGs have gone from only being markets of last resort during times of crisis to being a viable market alternative in all phases of the insurance underwriting cycle. RRGs that provided significant market capacity during crises haven’t seen their insureds return back to admitted markets when soft market conditions returned. In fact, RRGs and captive insurance companies continue to grow and control billions of dollars of premium, particularly in markets such as MPL and trucking liability. Rating agencies have aided this growth by providing ratings for RRGs so that insureds needing “A”-rated insurance can participate in an RRG. The growing number of insureds with the requisite knowledge and risk sophistication to retain material amounts of risk has also driven the continued growth and expansion of captives and the alternatives markets, including RRGs.
RRGs have also been able to benefit from the regulatory flexibility in ratemaking. This regulatory approach gives RRGs much more pricing flexibility than admitted carriers in states with restrictive rate regulation. Today, some state’s MPL markets continue to see consistent migration to RRGs despite soft pricing conditions in large part due to this flexibility. Large admitted companies have found that access to this rate regulatory flexibility is a distinct competitive advantage that allows RRG’s to grow in certain markets. As a result, many of the largest MPL insurers have developed creative partnerships with RRGs that provide them easier access to restrictive regulatory markets with more pricing flexibility.
In the modern casualty insurance market, with its sophisticated buyers and emphasis on speed to market, RRGs have grown from purely insurers of last resort in times of crisis into a viable market in all phases of the cycle. Today, this role has expanded to serving insureds formerly relegated to the admitted market.
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