House Financial Services Subcommittee on Housing and Insurance Hearing
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"Legislative Proposals to Reform Domestic Insurance Policy": H.R.605, the "Insurance Consumer Protection and Solvency Act of 2013"; H.R.4557, the "Policyholder Protection Act of 2014"; the "Risk Retention Modernization Act of 2014"; the "Insurance Data Protection Act of 2014"; and H.R.4510, the "Insurance Capital Standards Clarification Act of 2014."
Mr. Chairman, Ranking Member Capuano, and Members of the Subcommittee:
Thank you for the opportunity to testify as part of the Subcommittee's Hearing on "Legislative Proposals to Reform Domestic Insurance Policy" in favor of the Risk Retention Modernization Act of 2014, which would permit established risk retention groups (RRGs) to offer additional forms of commercial insurance coverage to their members (other than group health, life, or disability insurance or workers compensation insurance). I am a Vice President of
I am happy to report that the legislation also is supported by
We are pleased that the leading trade associations representing property casualty insurance companies, captive insurers, and risk management professionals see the wisdom in the modernization of the 1986 Liability Risk Retention Act (LRRA).
My written statement provides a brief description of the missions of the three risk retention groups (RRGs) I'm representing, reviews the Congressional intent behind the 1986 LRRA, discusses the successes of the LRRA, and explains how modernization of the LRRA to include other forms of commercial insurance such as property, auto physical damage, business interruption, and cyber risk insurance will:
. Increase capacity, choice, and market competition for lines of commercial insurance coverage, such as property, auto physical damage, business interruption, and cyber risk;
. Create efficiencies for members of RRGs who will no longer be forced to seek coverage elsewhere for commercial lines that RRGs cannot offer;
. Enable independent brokers and agents to gain efficiencies by offering package policies for all property and casualty exposures to churches, nonprofits, schools and universities and other organizations that typically buy package policies that don't include tailored risk management programs;
. Facilitate improved coverage and risk management for other lines of commercial insurance for the churches, educational institutions, nonprofits, medical groups, and others who purchase insurance through RRGs;
. Lower the overall cost of risk to RRGs and their members; and
. Enable RRGs to provide stable coverage and pricing for other lines of commercial insurance and insulate these lines from the cyclical nature of the larger commercial insurance market.
A. About United Educators, ANI, and
United Educators, ANI, and
In response to skyrocketing insurance rates and, in some instances, a complete inability to obtain coverage, United Educators was created in 1987 by educational institutions for educational institutions with the sole purpose of providing a stable, high-quality, specialized alternative to commercial insurance. Today, United Educators is owned and governed by its 1,200 member schools, colleges, and universities throughout
United Educators' 27-year history and solid financial track record demonstrate successful execution of the LRRA concept. The selection of United Educators as a 2013
ANI is part of the
As risk retention groups, United Educators, ANI, and
B. The Goals of the Risk Retention Act Amendments of 1986
During the mid-1980s,
As insurance premiums skyrocketed regardless of loss history, educational institutions became one casualty of this disaster. Schools and colleges had difficulty finding liability insurance, and the little that was available was astronomically expensive and ill-suited to their needs.
Charities were casualties as well. ANI's President & CEO,
Between 1984 and 1986, general liability insurance premiums increased 200 percent or more for one out of four charitable nonprofit organizations in
During the 99th
House Report 99-8655, page 7.
The answer to this crisis was an expanded role for RRGs, which are unique, industry-specific groups of similarly-situated entities, with similar risk exposures, that pool their risk to self-insure their liability risks on a group basis. Initially, RRG's were authorized to offer product liability insurance in 1981. In passing the 1986 Amendments permitting RRGs to offer all lines of liability insurance (save for workers' compensation insurance),
Supporters of the 1986 Amendments expressed the belief that allowing risk retention groups to provide all types of commercial liability insurance would foster rational underwriting and insurance pricing. They anticipated a positive, overall increase in the nation's insurance capacity and some moderation of the painful cycles in the availability of insurance from commercial carriers.
The House Committee report explained the expected benefits of the proposed amendments:
Since a risk retention group is simply a group of businesses or others who join together to set up their own insurance company only to issue insurance policies to themselves, it was believed that by encouraging such groups, the subjective element in underwriting could be reduced. The risk retention group would know its own loss experience and could adhere closely to it in setting rates. It was also believed that the 1981 Act, by providing alternatives to traditional insurance, would promote greater competition among insurers to "encourage private insurers to set rates to reflect experience as accurately as possible."
House Report 97-190, page 4. ...the Committee believes that creation of self-insurance groups can provide much-needed new capacity. Additionally, according to the
C. The LRRA Success Story
The focused approach of RRGs has resulted in aggregate operating performances that are, according to rating agency
1. RRGs Provide Tailored Coverage with Stable Pricing for Their Industry's Unique Risks
Since its inception,
When
Many
In addition,
Similarly, a standard liability package through United Educators provides coverage for risks such as sexual assault, sexual molestation, international study, and sports injuries, which is often unavailable through other insurers but critical to educational institutions. United Educators also offers an educators legal liability policy, which provides broad protection against a wide range of potential claims that are unique to education such as denial of tenure and failure to educate. Likewise, ANI offers general liability, improper sexual conduct liability, auto liability, social services professional liability, and directors and officers liability, including employment practices - - insurance coverage essential to tax-exempt organizations. All three RRGs have had their share of large "shock losses", ranging from sexual abuse by trusted figures to fatal van accidents and the deaths of children in foster care. Traditional carriers opportunistically come in and out of these markets, creating instability and inefficiencies. In contrast, all three of these RRGs are strong and consistently continuing to meet the ever-changing needs of their members.
2. RRGs Deliver Industry-specific Risk Management Services
Because RRGs serve a single industry, unlike a traditional insurance carrier that must serve many industries, RRGs are able to develop risk management practices and materials that are tailored to their members.
Since its inception, United Educators has been a thought leader in addressing risks that are unique to education. For example:
. When the
. Recently,
. United Educators is also a leader in the effort to raise awareness of traumatic brain injury (TBI) in sports, to change behavior, to keep student athletes safe and, ultimately, to reduce TBI claims.
United Educators members have access to a wide variety of practical, education-specific resources, including online courses and other risk management tools, to improve their awareness of liability issues and to strengthen their ability to avoid or control losses. United Educators risk management advice often bridges liability and property issues, which are often intertwined. For example, United Educators helped educational institutions devastated by Hurricane Katrina. And United Educators risk management training led to the successful evacuation of students during wildfires on the
Like United Educators, ANI provides free risk management services to its nonprofit members, including driver training, employment-related and pre-termination consultations, a treasure trove of online risk management materials, an audiovisual library, webinars, and online board tools. It also offers other essential services to nonprofits such as background checks, disaster recovery and planning, drug screening, and motor vehicle record checks at cost or at a substantial discount.
D. The Time is Right for
Now is the time for
Doing so would increase market competition for property and other types of coverage and facilitate more effective, segment-specific pricing. Too often, churches, charities, educational institutions, and other organizations find themselves under-insured when the typical commercial carrier fails to understand the issues RRGs handle on a regular basis - such as swimming pools on campus, stadiums, and the use of vehicles by students or volunteers.
Moreover, entities insured by RRGs that must buy property insurance from traditional carriers may be adversely affected by trends involving natural disasters such as tornadoes. Traditional commercial carriers understandably react to changing weather patterns and consequent catastrophic losses with much higher pricing, deductibles, or even refusal to continue to provide coverage for certain natural disasters in certain geographic zones.
In contrast, as member-owned entities, RRGs proactively address tough coverage realities through risk-based research, actuarial-based pricing, and coverage levels that are designed to be sustainable. And, any resulting profits are passed on to members, keeping their operating expenses down.
Property: The focus of an RRG on an industry's unique risks means that the RRG will understand the property risks of its members better than conventional insurance carriers will. For example,
Examples of ways that property coverages for churches, nonprofits, and educational institutions differ from other commercial enterprises include:
. Budgeting: A property carrier may demand certain changes within 90 days. If the demand, though, covers an issue such as retrofitting churches or dormitories with sprinklers, the church's or college's budget process and occupancy schedules generally cannot operate on a 90-day schedule.
. Coverage: Existing business interruption coverage is generally ill-suited to churches, nonprofits, and tuition and state-supported educational institutions.
. Property valuation: Many churches and campuses have one or more historic buildings, for which property coverage at restoration value may be more appropriate than replacement cost.
. Varying deductibles by department: Various academic departments use different types of equipment. The biology department may need a low deductible on expensive laboratory equipment that would have to be replaced out of its own budget; the English department would not be faced with such high replacement costs for equipment.
Other Property Coverages: The same principle applies when churches, educational institutions, nonprofits and other RRG members have to obtain separate policies to cover embezzlement, computer equipment, and office furniture. It is inefficient and unnecessary to force these entities to obtain these coverages in one or more separate, stand-alone policies, unless they choose to forego the tailored coverage and focused risk management that an RRG can provide them.
Cyber Risk: In
The goal of the workshops was to find ways to conduct cyber risk consequence analysis and to model risk so that insurers can understand cyber risk and price it. The workshops have attempted to identify ways to share cyber incident information in an anonymous way to build actuarial tables for underwriters to price coverage and for risk managers to develop programs to minimize cyber risk. Although many large corporations are adopting the NIST Framework in light of the recent security breach of a major national retailer, Homeland Security is concerned about its ability to reach small- to medium-sized businesses.
RRGs, with their dual mission of providing insurance and industry-specific risk management, can reach many of those small businesses and nonprofits that Homeland Security hopes to reach. For example, if RRGs were permitted to write the other commercial components of cyber risk such as property and business interruption insurance, RRGs could reach many of those smaller businesses and nonprofits by not only providing cyber risk insurance covering property and liability risks, but by providing industry-specific ERM pursuant to the NIST Framework.
E. The Case for Modernization of the LRRA
A recent survey of insurance agents revealed that 83% were convinced that United Educators could price its products to a loss ratio that was below market due to its excellent risk management and education tools if it were permitted to write the full line of commercial products such as property and auto physical damage.
Permitting established RRGs with adequate capital and surplus to offer other forms of commercial insurance to their members, such as property, auto physical damage, business interruption insurance, and cyber risk, will add capital to, and increase competition in, the property and casualty insurance market. Nonprofits, small schools, churches, and other small businesses that are accustomed to purchasing package insurance policies will be able to obtain package policies without foregoing the customized coverage and risk management services offered by RRGs. These small entities, as well as their independent brokers and agents, will gain efficiencies through the availability of package policies from RRGs.
Because RRGs have a deep understanding of the unique risks facing their members, modernization of the LRRA will facilitate improved coverage and superior risk management for other lines of commercial insurance for churches, educational institutions, nonprofits, medical groups, and others who purchase insurance through RRGs. Allowing RRGs to write additional lines of commercial insurance also will reduce the overall cost of risk for these organizations that have shown a commitment to each other and to risk management. Finally, modernization of the LRRA will insulate members of RRGs from the cyclical nature of the property insurance market.
There may be some misunderstanding about what the LRRA modernization legislation will do and won't do. The discussion draft before the Subcommittee today would modernize the LRRA to permit only established RRGs with adequate capital and surplus to offer other forms of commercial insurance, beyond the commercial liability insurance currently permitted under the LRRA.
Our bill would permit RRGs to offer other forms of commercial insurance only if:
1. The RRG has been chartered or licensed as an insurance company under the laws of a state and authorized to engage in the business of insurance pursuant to that state's law;
2. The RRG has provided commercial liability insurance pursuant to such charter or licensing for a period of not less than five (5) consecutive years; and
3. The RRG maintains capital and surplus of at least
As drafted, the LRRA modernization legislation will ensure that the RRGs that qualify and decide to offer other forms of commercial insurance will do so to the benefit of their members, but only their members. The modernization provisions included in the discussion draft will create efficiencies for members of RRGs that will no longer be forced to seek additional coverage elsewhere and will insulate members of the RRGs from rate volatility associated with the cyclical nature of the larger commercial insurance market.
We know that there are traditional insurance companies and some insurance commissioners that see RRGs as a threat. This argument was made in 1986 and in some quarters continues to be made. However, RRGs are an innovative and highly-specialized way to offer small businesses and nonprofits more choice. They bring new capital to the market, keep prices down, and are rooted in stated-based regulations. We believe in the capitalism system and competition. While we acknowledge some might not like new entrants into the market, if they are well managed, well capitalized, and serving customers, we say this is the American way and we want to be part of it.
We are aware that some organizations that are concerned about the increased competition that modernization of the LRRA will create have labeled this competition as "unfair" competition. However, the truth is that the modernization legislation will add capital to the market and increase competition by offering more choice to the small portion of the market that RRGs serve such as nonprofits, churches, and small educational institutions.
Our bill is about increasing the availability of coverage and tailored risk management services to specific industry segments. It does so without giving RRGs any unfair advantage. RRGs have flourished not because of a lack of multi-state regulation. Instead, they have succeeded at a rate higher than conventional insurance carriers because of their mission-driven focus, tailored coverages, increased levels of specialized risk management, and their ownership by their members.
To the best of my knowledge, major conventional stock and mutual property insurance carriers have not chosen to sell to single industries. Traditional stock and mutual insurance property casualty insurance carriers serve any and all customers from any and all industries, while RRGs cannot. Lacking public shareholders, RRGs are limited to a concentrated focus on a single industry with an obligation to its owner insureds.
Given that RRGs are not seeking the ability to insure multiple industries, expansion of the LRRA to include other commercial coverages does not create any unfair advantage. Instead, it maintains all the checks and balances that
It is also important to note that RRGs are now subject to the
The LRRA modernization legislation does not seek to upend the LRRA. The proposed legislation does not:
. Authorize RRGs to offer personal lines of insurance;
. Authorize RRGs to offer group health, life, or disability insurance or workers' compensation insurance;
. Authorize RRGs to be subject to guaranty fund coverage;
. Alter domiciliary state solvency regulations nor state accreditation standards;
. Alter non-domiciliary state solvency regulations imposed on non-domiciled RRGs registered in those states or in any way alter a non-domiciliary state's current ability to call for an examination of an RRG nor call for compliance with any lawful orders of delinquency should an RRG be found to be financially impaired;
. Absolve an RRG's responsibility to comply with an injunction issued by a court upon the petition by a state insurance commissioner if an RRG is found to be in a hazardous financial condition or financially impaired;
. Waive an RRG's responsibility to comply with state laws regarding deceptive, false, or fraudulent acts or practices;
. Affect an RRGs current requirement to comply with unfair claims settlement practices laws; or
. Absolve an RRG from payment of applicable state premium taxes.
Instead, the amendments proposed to the LRRA by the modernization legislation will simply permit RRGs to offer their members - and only their members - the same comprehensive commercial insurance packages that are the norm in today's commercial marketplace, particularly for nonprofits and small educational institutions, without foregoing the customized coverage and risk management services offered by RRGs.
Some suggest that the unavailability today of certain lines of commercial insurance (or of typical commercial insurance package policies) for smaller entities like nonprofits and certain educational institutions does not rise to the same crisis level of the hard market of the 1980's. However, if RRGs truly were only a response to a crisis in capacity for liability insurance market, the industry would have shrunk when more capacity came into that market. That has been far from the case.
RRGs have demonstrated that, for certain types of organizations, collectively insuring each other is superior to relying on the traditional commercial insurance sector. RRGs can bring more capital to the current property casualty insurance market, thereby filling the unique needs of nonprofits, educational institutions, and churches while fostering healthy competition.
F. Conclusion
The genius of
Risk retention groups cannot solve all of the problems that exist in the commercial insurance market in America today. They are not a solution for homeowners and will not instantaneously provide coverage for all coastal institutions. Nevertheless, modernization of the Liability Risk Retention Act to include other commercial insurance lines such as property, fleet auto physical damage, business interruption, and cyber risk will create additional capacity to deal with natural as well as man-made catastrophes. Appropriate underwriting, capital, and risk management - fortes of RRGs - will continue to be in place to ensure long-term viability.
Thank you very much for the opportunity to address the Subcommittee on this important issue.
Read this original document at: http://financialservices.house.gov/UploadedFiles/HHRG-113-BA04-WState-JCarter-20140520.pdf
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