War Brewing Between Risk Retention Groups

Some regulators persist in trying to undermine the risk retention group industry.

One could almost say an undeclared war is heating up between risk retention groups as an industry and those who think they pose a threat to state regulation. It's not conventional warfare with two sides lined up in battle formation. There are tribes, splinter groups and factions. The territory in dispute is how to regulate RRGs, and the battles are sporadic on a number of fronts.

Here's how the various sides line up:

The National Risk Retention Association has been defending the industry for 25 years in the courts, the halls of Congress, state legislatures and the insurance community. RRGs today are a force to be reckoned with in the alternative insurance market, with 254 companies writing a total of more than $2.5 billion gross premium in 2011.

Traditional insurers pose a constant challenge as they withdraw from writing liability insurance in hard markets but charge back in with aggressive price-cutting to take business away from RRGs when the market gets soft. Most RRGs are small companies with limited access to capital outside their own members'. More than half of the top 100 write less than $10 million premium a year; many write $5 million or less. This leaves them vulnerable to traditional insurers that can subsidize pricecutting with profits from other lines of business and have direct access to capital markets.

The federal government sometimes seems to be on both sides. The Liability Risk Retention Act as amended in 1986 gave RRGs the authority to operate nationally, with only limited regulation when licensed in a single state. Yet Congress over the years has refused to add an enforcement mechanism that would put teeth in the LRRA.

Last year, a bill was introduced in the U.S. House of Representatives that would create an arbitration mechanism. Unfortunately, Congress is focused exclusively on high-profile issues with the election coming up, so there's little or no prospect of passage this year.

Regulators in some states see the growing RRG industry as the opening salvo in a crusade for federal regulation of insurance. They went to the barricades and have been attempting to chip away at RRGs' operating authority ever since. The LRRA strictly limits the regulatory authority of states other than the state in which an RRG is licensed. Nonetheless, some nondomiciliary states throw up barriers in the form of registration requirements and excessive fees that clearly are not permitted under federal law. The registration requirement has become a weapon in the arsenal of opposition as non-domiciliary states attempt to assert regulatory control over RRGs.

The National Association of Insurance Commissioners continues to supply ammunition in the form of accreditation standards that can be used to prevent, or slow down, RRGs seeking to do business in non-domiciliary states. The NAIC is a private association of state insurance commissioners, but it acts like a regulator. For example, the NAIC certification program added a requirement that accredited states could not accept an examination report of an RRG domiciled in a non-accredited state unless an examiner from an accredited state had participated in the exam and assisted in preparing the exam report.

States that specialize in licensing RRGs, led by Vermont- the pioneer in captive regulation- set high standards to license RRGs and they conduct rigorous regulatory oversight of RRG operations. The domicile states are a bastion of support within the NAIC for the freedom of RRGs to operate nationally under the federal law.

As the battle lines began to be drawn, early leaders in the industry recognized the potential for disagreements over regulatory encroachment, so a group of RRGs formed NRRA as the voice of the industry.

Heading Into Battle

Over the years, the NRRA has been an uncompromising advocate for RRGs, engaging industry opponents in every skirmish or frontal attack; calling on Congress to reinforce the federal act; attempting to gain recognition for RRG operating authority in the NAIC; and lobbying at the state and local levels to head off illegal interference with RRG operations.

The NRRA monitors state legislative activity. Sometimes a preemptive strike is necessary to head off a later battle. Last year in New Jersey, Republican Gov. Chris Christie rejected a state Assembly bill that would have required taxicab drivers to obtain insurance from an insurer that is a member of the State Guaranty Association.

RRGs are prohibited under the federal law from joining state guaranty associations. If the bill had been signed into law, it would have closed down RRGs that write 65 percent of taxicab liability insurance in the state. Had the industry not been alert to this impending problem, the law might have been enacted, leading to a long and expensive federal court case.

The Last Resort

The federal courts are the last resort for RRGs assailed by attacks on their operating authority. Over the years, federal courts have ruled in favor of RRGs in disputes with state agencies. However, the cost and long delays involved in litigation often discourage RRGs from challenging unwarranted restrictions on their authority by state agencies. The NRRA joins forces with injured RRGs by filing amicus briefs with the courts, and has been successful in landmark cases.

Despite rulings favorable to the RRG sector, the quiet war of attrition wears on.

One example that's unfolded over the last two years is Alliance of Non-Profits for Insurance Risk Retention Group (ANI) v. Nevada. ANI has been issuing auto liability policies to nonprofit organizations in Nevada since 2001. In September, 2010, the Nevada Division of Insurance ordered ANI to stop writing insurance in the state because it was not an "authorized insurer" under state law. ANI filed a motion for summary judgment in U.S. District Court.

NRRA filed an amicus curiae brief along with several other organizations. The judge granted the motion, stating that federal law preempts Nevada statutes.

End of story? No. The state filed an appeal. ANI is awaiting a hearing or a decision by the state to withdraw the appeal. Because the case has now gone to the Ninth U.S. Circuit Court of Appeals, ANI and the NRRA will continue to incur additional costs. So far, none of these cases has gone to the U.S. Supreme Court.

GAO: Registration and Fees

Another skirmish between RRGs and states that try to curtail their operations is a report issued earlier this year by the Government Accountability Office. The report noted the need for legislation to "clarify" the law regarding fees and registration requirements imposed on RRGs by non-domiciliary states.

The NRRA quickly pointed out to the GAO that its report- influenced by the NAIC- misstates the law governing registration and fees. In a letter to the GAO, Joseph Deems, NRRA executive director, pointed out that registration requirements are limited by the "plain language" of the LRRA to submitting certain specific documents and that fees are confined to those specified in the act. "The primary problem created by the report is that its findings will be and already are being cited by regulators as reliable evidence of ambiguities in the LRRA- ambiguities that, in fact, do not exist," Deems wrote.

The Dodd-Frank Front

By creating the Federal Insurance Office, the Dodd-Frank Wall Street Reform Act opened what may be another front in the broader conflict between advocates of federal insurance regulation and the states. FIO is charged with making recommendations on how to modernize and improve insurance regulation.

FIO's 15-member Advisory Committee contains seven state regulators, which makes a proposal for broad-based federal regulation unlikely. RRGs occupy neutral ground but hope the FIO reinforces the pre-emption in the LRRA of most non-domiciliary state regulation of RRGs.

Nobody expects total victory in the conflict over RRG regulatory authority. However, conditions exist for a truce, or better still a win/win understanding. The NRRA does not advocate federal regulation of insurance. RRGs simply want Congress to provide for arbitration to settle disputes without going to the federal courts.

The NRRA recognizes the responsibility of insurance regulators to protect consumers in their states, and its members firmly believe that arbitration can achieve this objective when disputes arise. Maybe it's time for a peace conference.

Key Points

* The Situation: Risk retention groups must constantly fight for their rights under the Liability Risk Retention Act of 1986.

* The Back Story: Despite many attempts to undercut RRGs' authority, federal courts continue to affirm the LRRA's provisions.

* The Way Forward: Congress should enact an arbitration provision to settle disputes between RRGs and state regulators and agencies.

Regulators in some states see the growing RRG industry as the opening salvo in a crusade for federal regulation of insurance.

Best's Review contributor Sanford "Sandy" Elsass is chairman of the National Risk Retention Association and is president and CEO of Uni-Ter Underwriting Management Corp. He can be reached at [email protected]