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last updated on March 30, 2007

RISK RETENTION ACT

THE ISSUE IS. Potential expansion of the Liability Risk Retention Act to allow risk retention groups and risk purchasing groups to provide additional lines of commercial insurance.

IT'S IMPORTANT BECAUSE. In 1981, Congress passed the Products Liability Risk Retention Act to allow risk retention groups ("RRGs") to cover product liability exposures. After several committee hearings in the 99th Congress, Congress expanded the 1981 Act to allow the RRGs to cover all casualty risks except workers compensation.

The revised law, the Liability Risk Retention Act ("LRRA" or "The Act") of 1986, was signed into law by President Reagan on Oct. 27, 1986. The LRRA currently applies to commercial lines liability coverage excluding workers' compensation, and does not apply to personal lines coverage. Under the Act, risk retention groups that meet certain licensing requirements of one state may operate nationwide. Except for the RRG's chartering state, the risk retention group is exempt from any state law, rule, or regulation that regulates or makes an RRG unlawful (with certain exceptions).

In the past, it was the opinion of Congressional leaders that an expansion of the Risk Retention Act of 1981 was needed to facilitate the operation of group insurance programs. Congress presumed that the Act's expansion would reduce costs, provide alternative mechanisms for insurance coverage, and promote greater premium competition among general liability insurers. As a result, it was believed that expanding the law would encourage insurers to set premium amounts that would compete with the new formations created under the new Act.

Additionally, there were increased discussions among various interest groups in the private sector about the need for amending the LRRA and broadening the Act to allow risk retention and purchasing groups to also cover property risks. Such efforts would have been welcomed by RRGs, who would then be permitted to write additional commercial lines. At the same time, however, many companies would have opposed such LRRA expansion efforts, as such changes could have led to what some would perceive to have been as additional unfair competition.

In August 2005, the General Accountability Office (GAO) issued a report (GAO-05-536) titled "Risk Retention Groups: Common Regulatory Standards and Greater Member Protections are Needed." In order to strengthen the overall regulation of RRGs, it was GAO's recommendation that state insurance regulators adopt consistent regulatory standards for RRGs. According to the report, the GAO suggested that the Congress should consider 1) granting LRRA's regulatory preemption only to states that adopt the standards and 2) establishing minimum corporate governance standards for RRGs.

NAMIC POSITION. NAMIC opposes legislation that would expand the Risk Retention Act by allowing RRGs and purchasing groups to cover property risks. Permitting these groups to write additional lines of commercial insurance would likely lead to an unfair competitive environment. NAMIC is supportive of efforts in Congress that would better provide for an open and fair competitive marketplace in the insurance industry. NAMIC will continue to examine all proposed legislation that serves to expand the scope of the Risk Retention Act.