Economic Trends Might Chip Away at Strong RRG Combined Ratios

For the past five years, the combined ratios recorded by risk retention groups have improved and their net income has climbed. But now, overall economic trends may erode those strong results, according to experts.

Overall, RRG net income has risen from $134 million in 2005 to $247 million in 2009 -- and the overall combined ratio improved from 91.1 to 79.4, according to BestLink, which provides online access to A.M. Best's database of insurance information. The combined ratio results are due in part to improved loss ratios, said Nancy Gray, executive director of North America, Aon Global Insurance Managers. RRGs -- a liability insurance company owned by its member insureds -- did a great job at loss control and implementing loss prevention programs, which made reinsurance more affordable, she said. "It's about what can we learn from past losses and implementing a program to prevent such losses in the future."

Combined ratios may have also benefited from RRGs taking down reserves, said Janice Abraham, president and chief executive officer of the RRG, United Educators.

"The industry as a whole has been taking down reserves for the past several years. That has pretty much run its course," said Abraham, who sees the RRG industry's overall combined ratio "moving up significantly," possibly even above 100.

The market is very competitive, and "investment income is horrible," Abraham noted. Combined with a flat top line and low interest rates, these factors will impact net income, she said. "It's a challenging environment."

This can be seen in the net premiums written for RRGs. While premiums rose from $762 million in 2005 to $821 million in 2008, they fell to $781 million in 2009, according to BestLink.

"I think you'll see that again in '10," said Sanford "Sandy" Elsass, president and CEO of Uni-Ter Underwriting Management Corp. But "those who got to critical mass before the soft market are doing well," he noted.

If rates continue to soften, some of the smaller RRGs will have to look at alternative ways of doing business, possibly partnering up with others, selling outright or even contemplating an organized run-off, according to an Aug. 2, 2010 Best's Special Report.

Meanwhile, new RRG formations have stagnated, thanks to the current market. "I think we've plateaued for the moment, until there's more capital or there's a hard market," Elsass said. "But I don't see a hard market on the horizon."

But Abraham notes a hard market is inevitable. "The market will turn, we know that."

There have been some new risk retention group formations in the medical liability sector and for trucking groups, Gray said. However, trucking groups aren't forming for premium savings. It is to satisfy collateral requirements, Gray said, noting "It has gotten very expensive to get collateral," due to the credit crunch.

The majority of RRGs write medical professional liability insurance -- accounting for 60.4% of net premiums written, according to A.M. Best data. But while the larger RRGs are "doing quite well," the smaller RRGs are having a harder time in the medical sector, Gray said. Smaller physician groups have been joining hospital networks and pulling out of RRGs. And because of the soft market, some are seeking coverage in the commercial market. "Health care reform is making it more attractive for physicians to be part of a larger system as opposed to being out on their own," she said.

RRGs were formed by the 1981 Product Liability Risk Retention Act and the amended version, the Federal Liability Risk Retention Act of 1986. Under the law, RRGs may only write liability insurance.

For at least 10 years, there has been a bill in the works to allow RRGs to write property insurance, according to Abraham. "A month doesn't go by where I am not asked 'Why can't you provide property coverage?'"

Last Congressional session, the Risk Retention Modernization Act of 2010, sponsored by Rep. Dennis Moore, D-Kan., and co-sponsored by Reps. John Campbell, R-Calif., and Suzanne Kosmas, D-Fla., was introduced to allow RRGs to also write property insurance (Best's Review, August, 2010). The bill never moved past committee.

One of the sponsors, Moore, has retired from Congress, but Elsass is confident a new sponsor will step up to reintroduce the legislation.

Beyond the bill's property component, "really what's important to all risk retention groups is the arbitration and mediation clauses," Elsass said.

Under the current law, RRGs are regulated by their state of domicile. Despite this, nondomiciliary states often attempt to regulate RRGs. Challenging such attempts through the court system is an expensive and time-consuming option.

The bill would have the secretary of the U.S. Treasury determine if a regulation is pre-empted by the federal law. Either party may then seek judicial review in the U.S. Court of Appeals for the District of Columbia, according to the bill.

The new Congress may be supportive of the bill, Abraham said. She said she is "cautiously optimistic... but I've said that before."

The soft market means there is no great demand for new competitors in the property market, which makes passing the bill more difficult, Gray said. "I'm not sure at this point in time that 2011 will be the year," she said.

(By Rick Cornejo, managing editor, BestWeek: [email protected])