Time to Expand Risk Retention Law to Property

The Liability Risk Retention Act of 1986 (LRRA) was enacted for the specific purpose of providing options to businesses and non-profit organizations that were having trouble finding commercial liability insurance that suited their specific needs at prices they could afford. A new bill, HR 5792, “Increasing Insurance Coverage Options for Consumers Act of 2008,” would amend the LRRA to allow for risk retention groups to provide commercial property insurance, as well.

The insurance crisis in the early 1980s featured liability insurance of all kinds, and especially professional malpractice insurance. Today, there is a new insurance crisis. Because of the devastation caused by Hurricane Katrina and other major storms in 2005, commercial insurers are reevaluating their exposure in areas of concentrated catastrophic risk and in some cases are seeking to reduce their property insurance coverage in such areas. As a result, the cost of property insurance is rising everywhere and in some places is hard to obtain at any price.

The problem is worse for commercial property than for private homes because some of the mechanisms created by states to ease the problem, such as the Texas wind pool and the Florida catastrophe fund, provide coverage only for residential properties. And despite Congressional action to provide a federal backstop for terrorism risk insurance, commercial property owners in certain “high risk” cities are also struggling with the cost of obtaining terrorism risk insurance in the traditional market.

This has led to a renewed interest in the possibilities offered by the alternative risk market, which includes all kinds of self-insurance mechanisms such as captive insurance and risk retention groups. Risk retention groups in particular provide a way for businesses and non-profit organizations that are engaged in similar kinds of activities and face similar risks to band together and collectively provide insurance coverage to their members. Currently these risk retention groups may only offer liability insurance to their members. The new bill would allow them to offer property insurance coverage as well.

The measure does not call for a government solution to the property insurance crisis. No new responsibilities would be undertaken by any agency of the federal or state governments and no taxpayer money would be put at risk. This bill would simply provide consumers with another competitive option to manage their risk exposure in a difficult environment where capacity is limited.

Over more than two decades the risk retention law has been a proven success. It did what it was supposed to do. It helped ease the problems caused by contractions in the traditional insurance market by providing incentives for organizations facing similar risks to band together to deal collectively with their insurance problems through a self-insurance mechanism, the risk retention group.

Even limited as they currently are to liability risks, risk retention groups still write more than $2.5 billion a year in coverage for their members. If the pending bill is enacted, and risk retention groups are able to offer commercial property insurance, we anticipate that in a few years the amount of insurance written by risk retention groups will more than double, providing much needed capacity to areas prone to catastrophic risk. While still a small proportion of the total amount of liability and property insurance written in the United States, a risk retention group offers a number of important incentives to its members:

• Policies can be written that more precisely fit the risks of the member entities.
• Underwriting can be geared to the actual risks of the member companies, instead of their risks being averaged with the risks of other kinds of entities that may in fact be very different.
• A risk retention group allows more knowledgeable and professional risk management to take place, further reducing costs.
• Perhaps most important of all, the appeal of a risk retention group is that it can operate across state lines without having to be licensed in multiple jurisdictions and subject to overlapping regulatory authority.

Risk retention groups, like other forms of self-insured entities, are the providers of their own insurance. They have designed their own policy, so they are not likely to be fooled about what is covered and what is not. When a loss occurs they are not likely to cheat themselves out of compensation.

Of course this assumes that risk retention groups are truly run by, and for, their members. The GAO has pointed out that sometimes risk retention groups are run by people from the outside who do not necessarily have the best interests of their members in mind. Therefore, the GAO recommended, and this bill provides, safeguards to make sure that risk retention groups are truly self-governing. The Self-Insurance Institute of America strongly endorses those provisions of the bill. By setting federal standards for the governance of risk retention groups the bill will provide uniformity and better consumer protection.

Lawrence H. Mirel is an attorney with the Washington, D.C., law firm of Wiley Rein LLP. From 1999 to 2005 he served as Commissioner of Insurance, Securities and Banking for the District of Columbia.

Editor’s note: The above is an edited version of Mirel’s April 16, 2008, testimony before the U.S. House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises Hearing. Mirel testified on behalf of the Self-Insurance Institute of America Inc. in favor of HR 5792, “Increasing Insurance Coverage Options for Consumers Act of 2008,” sponsored by Representatives Ron Klein, Dennis Moore and Deborah Pryce.