Record Number of Risk Retention Groups Formed in 2003
Never before in the history of the Liability Risk Retention Act (LRRA) have so many risk retention groups (RRGs) formed in any one year. From January to December, 58 RRGs formed and seven RRGs retired, bringing the total number of operating RRGs at year-end to an all time high of 141.
The business area in which the greatest number of RRGs formed was healthcare, accounting for 47 of the 58 new RRGs. Breaking down the healthcare area into its sub-areas, hospitals and their affiliates account for the largest number of RRG formations (23), with RRGs providing liability coverages for physician groups coming in second (13), and RRGs insuring long term care facilities, including nursing homes and assisted living facilities, coming in third (11).
Other business areas in which an increasing number of RRGs are forming are property development, with new RRGs insuring contractors, and transportation, in which a growing number of RRGs are insuring trucking operations.
Ten states were selected as domiciles by the 58 RRGs formed this year, including Alabama, Arizona, District of Columbia, Florida, Hawaii, Kentucky, Montana, Nevada, South Carolina and Vermont.
The state in which the greatest number of RRGs became domiciled was South Carolina, accounting for 22 formations, followed by Vermont with 18. The District of Columbia was the third most active domicile, with seven RRG formations, followed by Arizona with four and Nevada with two.
The reason for this record number of formations stems from the hard market, particularly in the healthcare area, as an ever-increasing number of carriers have stopped writing medical malpractice coverage, either withdrawing from the market or going out of business.
Another driving force behind RRG formations is the drying up of the fronting market, leaving many captive programs with little alternative except that provided by the LRRA.
Under the LRRA, a federal law enacted in 1986 in response to the U.S. “liability crisis,” an RRG’s domiciliary state is of key importance, serving as the primary regulatory authority of the RRG, with non-domiciliary states given limited authority to regulate only in areas specified by the LRRA.
In passing the LRRA, Congress created an alternative to the traditional insurance market, empowering insureds to take control of their insurance buying destinies through formation of RRGs—insurance companies owned by their members—and purchasing groups (PGs)—groups of insurance buyers who purchase from insurers.
The LRRA requires that both RRGs and PGs be comprised of members who are engaged in similar businesses or activities that expose them to similar types of liabilities.
While the LRRA preempts state regulation for both RRGs and PGs, the preemption is much greater for RRGs. Under the Act, once an RRG is licensed by its state of domicile, it can begin to operate nationally upon filing the requisite documents required by state and federal law.
The LRRA prohibits discrimination against non-resident agents/brokers, and in many cases, the only way a non-resident surplus lines broker can place coverage outside of his or her home state is through a PG.
Given the continued likelihood of the hard liability market throughout 2004, many more RRGs can be expected to form, not only in the healthcare area but in other business areas as well, such as trucking and contractors.
Karen Cutts is managing editor and publisher of the Risk Retention Reporter based in Pasadena, Calif., that serves as the authoritative information source for the risk retention and purchasing group marketplace. Cutts, an attorney, served as associate editor of the Insurance Journal from 1985 to 1987. For more information on RRGs and PGs, visit the Risk Retention Reporter Web site at www.rrr.com.