Morris Manning & Martin, LLP

LETTER FROM WASHINGTON - New Activity to Expand the Risk Retention Act

06.04.2007

With Congress tied up with the war in Iraq and the politics of transferring power from the Republicans to the Democrats, there has been little opportunity for work on insurance issues. The foremost insurance priority is extending the Terrorism Risk Insurance Act. Advancing the surplus lines legislation which passed the House in the last Congress is a close second. And, of course, all insurance issues are clouded by the impact of Hurricane Katrina and the desire of some politicians to use it as a cudgel against the insurance industry.

However, in the midst of this activity, the issue of expanding the Liability Risk Retention Act to include property coverage has resurfaced in a positive way. On April 24, in testimony before the Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises of the U.S. House of Representatives, Janice Abraham, president of United Educators, a risk retention group, called for expanding the Act to permit the RRG to provide property coverage. United Educators serves the education sector and insures colleges, universities, and schools. Ms. Abraham articulated the advantages that would occur by enabling the distinct risks of educational institutions to be underwritten for both liability and property, including pricing, loss control, and risk management. Interestingly, when the panel presenting to the Subcommittee, which broadly represented the insurance industry, was asked if any would oppose such an extension of authority for RRGs, none spoke in opposition.

What the testimony made clear was that RRGs only provide coverage to a small percent of the total commercial liability market, less than three percent, and that the coverage that is provided is generally to “niche” markets that otherwise do not have access to affordable insurance. Unstated, but also important, is that many traditional carriers reinsure the RRG risk, which means that RRGs have become accepted by the mainstream of the industry.

The testimony also made reference to the issues regarding RRG governance and regulation that were raised in the Government Accountability Office (GAO) report on RRGs. The GAO Report analyzed the growth of RRGs in the marketplace and highlighted several regulatory concerns, the foremost of which was that regulation by different RRG domiciles varied substantially, which could, if not corrected, result in RRG failures. While the data shows that RRGs are no more likely to fail than comparable commercial liability carriers, the concerns expressed by the GAO were taken to heart by the NAIC and, in particular, the captive states of domicile. The result was a two-year effort by two NAIC task forces to develop corporate governance and financial standards that would be required through the NAIC accreditation process. Given the different views and experience of the states and the affected industry, the task was not easy. Nonetheless, the process in now coming to a close and the results are being correctly perceived as fair and reasonable.

The efforts of the captive states and the NAIC to adopt common regulatory standards that address the GAO’s concerns has provided a lift to the proponents of expanding the Act to include property. It also has, and will, provide comfort to legislators that will need to vote on the issue.

Most recently, the Coalition to Expand the Risk Retention Act (CERRA), a non-partisan group of real estate, consumer, and insurance industry entities, adopted a statement of objectives and principles to clarify the issues. Essentially, the Coalition condensed the issues into two concrete proposals: (1) expanding RRG authority to permit the writing of commercial property, and (2) implementing the changes in operation and governance of RRGs stimulated by the GAO Report and studied by the NAIC and the captive states. These changes will include enhanced regulation through disclosure, consistent financial reporting and oversight, and governance rules that will ensure member/insured control of the RRG. Importantly, the change to the existing law, i.e., the proposed legislation, will be relatively simple, always a facilitator for Congressional adoption.

These activities – a legislative hearing, an established mechanism to enhance regulatory oversight, and the adoption of a road map for legislation – should lead to more productive Congressional activity than has occurred since the initial attempt to expand the Act as part of the TRIA legislation several years ago. We can only hope that Congress’ hectic schedule will permit it to pay attention to this prospective improvement.

Robert “Skip” Myers is a partner in the firm’s insurance group and practices in the areas of insurance regulation, antitrust, and trade association law. Skip received his bachelor’s degree from Princeton University and his law degree from the University of Virginia.