House Financial Services Subcommittee Issues Testimony From Congressional Research Service
"
"The subject of today's hearing is insurance for nonprofit organizations. As the most recent legislative proposal on the issue (H.R. 3794 in the 114th
Background on Insurance Regulation and Markets
"Regulation of insurance markets was left to the states in the 1945 McCarran-Ferguson Act.1 This was a specific policy choice made by
"The insurance industry, particularly property/casualty insurance, is known for alternating periods of "hard" and "soft" markets. Turns in this cycle are typically traced to unexpected changes in the investment climate, or unexpected changes in insurance payouts, or both. During a typical hard market, the supply of insurance goes down, insurance prices go up, and underwriting standards become more stringent. This often leads to consumers encountering difficulty in finding and affording insurance. During a soft market, prices are typically flat, and insurers are more willing to underwrite greater risks, so consumers typically do not face such difficulties in obtaining insurance. In general, insurance markets have been soft for the last decade or so with large amounts of capital available worldwide. However, although the capital sources for insurance may be worldwide, the insurance policies themselves are very particular and specific products. Thus, specific lines of insurance or certain states may face market conditions that are quite different than the general market conditions seen by most market participants.
"Legislative attention often tends to focus on insurance matters during hard markets as constituents relate complaints about finding or affording insurance to their legislators, although the legislature in question is most often a state legislature. Among the solutions offered at the state level has been the creation of, or allowance for, "alternative" market entities to increase the amount of insurance available to consumers. The alternative market is made up of entities or arrangements that spread and finance risk similar to an insurance company, but that operate outside the normal regulations governing the world of "regular" insurance companies. Such alternatives include nonadmitted or "surplus lines" insurers7 and captive insurance companies.8
"In the 1970s and 1980s, liability insurance became difficult to find for a wide variety of entities. In response,
Risk Retention Groups: Structure and Regulation
"By current federal law,11 risk retention groups are required to be state-chartered insurance companies; RRGs are allowed to insure commercial liability risks, such as the risk that a physician will be found liable for medical malpractice, but not property risks, such as the risk that a physician's office might burn down. All policies issued by a risk retention group must bear a federally mandated warning that the policy is not regulated or guaranteed in the same way as other insurance. These insurance companies also must be owned by the members of the group. Group members are required to be businesses, including individual professionals such as physicians and attorneys, or government entities, such as public universities, school districts, and town or city administrations, that are engaged in a similar business or face similar risks. The exact corporate structure of an RRG can vary. Many are licensed as captive insurers, which may have lower capital requirements, but some are licensed as regular insurers.
"If risk retention groups must be licensed as an insurer under the existing laws of an individual state, two questions arise: (1) what advantages do they possess? and (2) why go to the trouble and expense of creating such a group? The answers are in the different regulatory treatment of these groups as they operate outside of the state in which they are chartered (or "domiciled"). Under normal circumstances, an insurer that wishes to operate outside of its domiciliary state must receive a license and submit to regulation from every state in which it wishes to do business. This means complying with up to 51 different sets of state or district laws and regulations in order to do business across the country. The impact of this multiplicity of regulation is particularly high in insurance, as compared with other businesses, because both the prices and the content of insurance policies are highly regulated in most states.
"Risk retention groups are exempted by federal law from the requirement to be licensed in all states in which they operate as well as from some other state laws regulating the business of insurance. RRGs must register and file documentation with a state's insurance regulator, but after this filing, they are essentially free to do business in that state. Although this exemption from state law extends to most laws on the business of insurance, laws such as those on fraudulent trade practices, nondiscrimination, and unfair claim settlement practices still apply. RRGs must also pay state premium taxes as regular insurers do. In addition, a non-domiciliary state's insurance regulator is empowered to monitor the financial solvency of a group, including requiring that a group submit to a financial condition examination if the chartering state regulator refuses to do such an exam, and seeking an injunction to force it to cease doing business if the group is in hazardous financial condition. This regulatory oversight is less than that accorded regular insurance companies, however, and some observers fear that this might lead to an increased danger of such groups becoming insolvent.
"The treatment of RRG policyholders in the unlikely event of an insolvency is one of the major differences that an RRG policyholder might experience compared with a policyholder of an insurer specifically licensed to operate in a state. In the case of most insurer insolvencies, the state-run guaranty funds step in to pay outstanding claims up to a certain limit even when the failed insurer's assets are insufficient to pay these claims.12 Financial assessments are then made on the remaining insurers in order to provide the funding necessary to do this.13 RRGs by federal statute, however, are prohibited from participating in the guaranty fund system. Thus, RRG policyholders would only be able to collect on claims to the extent that company assets existed to pay these claims and may face a more lengthy court process in order to receive payments.
Role of the
"Although the regulation of insurance is left up to each state, the states act in common through the
"The NAIC accreditation standards have specific standards for RRGs including the application of a variety of NAIC models to RRGs that are organized as captives and operate in multiple states.14 These standards were supplemented at the beginning of 2017 with the requirement that the NAIC Model Risk Retention Act15 be applied, particularly relatively new language relating to corporate governance. The question of corporate governance standards was specifically identified by the Government Accountability Office (GAO) in 200516 and also was the subject of previous legislation in Congress.17
Growth in the Risk Retention Market18
"Market reaction to the expansion of the LRRA in 1986 was relatively swift. By 1988, 52 risk retention groups had been created with more than 24,000 insureds and a total premium amount of
"The relative calm in the marketplace that prevailed through the 1990s ended quickly with the hardening of the insurance market in 2001. This hard market has been ascribed to the downturn in both interest rates and the stock market as well as to unexpected losses, particularly the approximately
"Risk retention group growth during the hard market of the early 2000s occurred particularly in the health care arena. In a 2004
"The liability insurance market generally has softened since 2005 or so and the years since the financial crisis of 2007-2009 have been marked by low interest rates and a relatively large supply of capital for most types of insurers. Medical malpractice insurance, which was the source of much RRG growth, has also seen a significant change in financial results, with relative claim amounts dropping and significantly improved profitability. As might be expected in softer market conditions, RRGs have not grown in the past decade as they had before. According to the 2008
Some Difficulties Have Come Along with Growth
"The growth of risk retention groups has not been without problems. Perhaps the most notable RGG failure was that of the
"The LRRA requires insureds to be members and part owners of an RRG; however, this line was apparently somewhat blurred in the National Warranty case. National Warranty acted both as an administrator, adjusting claims on behalf of its members, and as the insurer of these members.23 This dual role apparently gave the impression that the final consumers were purchasing service contracts directly from National Warranty rather than from the individual group members.
"In the aggregate, the total number of RRG failures is not particularly large, but the recent trend may provide reason for concern. The insurance rating service
Policy Issues and Considerations
"The fundamental questions surrounding potential LRRA expansion are essentially the same as those addressed by
"Arguments in support of expansion often focus on a failure of the insurance market, and the regulatory system, to make a sufficient supply of insurance available so that consumers who need insurance can find it at a reasonable price. The question posed is essentially: "What happens to a community when a business, a school, or a doctor cannot find or afford insurance?" A change in regulatory structure may not be the only way to answer this question; however, this is the path
"Arguments opposing expansion often focus on the dangers in allowing insurance to be sold that is not subject to the same regulatory standards as "normal" insurance. The question posed is essentially: "What happens to a community if the insurer from which this business, school, or doctor purchases insurance ends up bankrupt or if the policy does not cover what needs to be covered?" The requirements of the LRRA that RRG policyholders also be owners of the RRG provides somewhat of an answer to this as, presumably, the RRG policyholders/owners would not desire to purchase unreliable insurance. The same statute, however, prohibits RRG guaranty fund participation, thus ensuring that RRG policyholders will not have the same benefits in an insolvency compared with an insurer licensed in that state.
"Assessing the arguments on either side may be a challenge for
"Risk retention groups occupy a small part of the insurance market. The approximately
* * *
Footnotes:
1 P.L. 79-15, 15 U.S.C. sections1011 et seq. This act did not differentiate between different types of insurance, such as health, life, and property/casualty. While health insurance and life insurance are relatively straightforward as they are named, property/casualty is a more diverse group, including auto, homeowners, professional liability, and many others. Property/casualty essentially refers to everything that is not life or health insurance. Because the jurisdiction of this committee covers primarily life insurance and property/casualty insurance, this testimony focuses on these types of insurance as well.
2 P.L. 106-102.
3 P.L. 111-203; see also CRS Report R41372, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Insurance Provisions, by
4 P.L. 107-297, section105 which preempted any state approvals of insurance policy language excluding coverage of a terrorist attack.
5 For example, GLBA implemented federal oversight of financial holding companies including insurers if the holding company included a bank or a savings and loan. Dodd-Frank created a Federal Insurance Office which has the power to preempt state laws regulating insurance under certain circumstances.
6 P.L. 114-1, Title II. For more information, see CRS Report R43095,
7 Nonadmitted or surplus lines insurers are not licensed by the state in which they are selling insurance, but are permitted to do so under a narrow range of conditions, particularly when a specific type of insurance is not available from a licensed insurer in that state.
8 Captive insurers are: "Insurers that are created and wholly owned by one or more non-insurers, to provide owners with coverage. A form of self-insurance." From the
9 15 U.S.C. sections3901-3906, created by P.L. 97-45 and P.L. 99-563; for more detail on these laws, please see the Appendix.
10 The LRRA also provided for risk purchasing groups which allow for group purchasing of liability insurance.
11 15 U.S.C. sections3901 et seq.
12 Limits vary by state, typically
13 This is similar in concept to the deposit insurance provided to bank depositors by the
14 For more information on of the standards, see
15 NAIC, Model Risk Retention Act, #705,
16 See GAO, Risk Retention Groups: Common Regulatory Standards and Greater Member Protections Are Needed, GAO-05-536,
17 For example, H.R. 2126 in the 112th
18 Except where noted, statistics in this section are taken from successive annual surveys done by the
19 See "Soft Market Fueled Risk Retention Group Retirements During 1990s,"
20 "Premium Generated By Healthcare RRGs More Than Triples Since 2001,"
21 "2014
22 Figures from
23
24 An impairment is defined as "situations in which a company has been placed, via court order, into conservation, rehabilitation, and/or insolvent liquidation." See
25
26
27
28 "RRGs have had a small but important effect in increasing the availability and affordability of commercial liability insurance for certain groups." GAO, Risk Retention Groups: Common Regulatory Standards and Greater Member Protections Are Needed, GAO-05-536,
29 "RRG representatives opined that RRGs have expanded the availability of commercial liability insurance--particularly in niche market --but differed in their opinions of whether RRGs have improved its affordability," GAO, Risk Retention Groups: Clarifications Could Facilitate States' Implementation of the Liability Risk Retention Act, GAO-12-16,
This document was posted showing the date:
Sen. Wyden Issues Statement at Hearing on Graham-Cassidy-Heller-Johnson Proposal
House Financial Services Subcommittee Issues Testimony From BlackRock
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News