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Friday, July 1, 2011

The Liability Risk Retention Act: Background, Issues, and Current Legislation

Baird Webel
Specialist in Financial Economics

Risk retention groups (RRGs) and risk purchasing groups (RPGs) are alternative insurance entities authorized by Congress to expand insurance supply through a simplification of insurance regulation. The McCarran-Ferguson Act of 1945 generally leaves the regulation and taxation of the business of insurance to the individual states. In 1981 and 1986, however, Congress crafted a narrow exception to the usual state insurance regulations for these groups, generally exempting them from multiple state oversight. Membership in risk retention and purchasing groups is limited to commercial enterprises and governmental bodies, and the risks insured by these groups are limited to liability risks.

Over the past two decades, interest—both in Congress and in the market—in RRGs and RPGs has varied largely with the vagaries of the regular insurance market. From 2001 to 2004, the insurance market was in one of its periodic “hard” markets, and regular insurance became increasingly expensive and sometimes unavailable. Since 2001, the numbers of risk retention groups rose dramatically and calls have been heard to expand the scope of insurance that they are allowed to offer. At the same time, some problems occurred in individual risk retention groups, and cautionary voices have also been raised. Although the liability insurance market has softened somewhat in the past few years, with policies becoming more available and relatively less expensive, risk retention groups have continued to form in significant numbers.

The fundamental question surrounding expansion of the Liability Risk Retention Act (LRRA) can be posed as an issue of availability vs. reliability. Those who would support expansion often emphasize a failure of the current insurance market and the current 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 they pose is essentially: “What happens to a community when a business, a school, or a doctor can not afford or find liability insurance?” Those who would oppose expansion often emphasize the dangers in allowing insurance to be sold that is not subject to same regulatory standards as “normal” insurance. The question this group poses is essentially: “What happens to a community if the insurer from which this business, school, or doctor purchases insurance ends up insolvent or if the policy does not cover what needs to be covered?”

In the 112
th Congress, H.R. 2126, the Risk Retention Modernization Act of 2011, would extend the LRRA to commercial property insurance, authorize the Federal Insurance Office to determine the states’ compliance with the act and impose corporate governance standards on RRGs and RPGs. Representative John Campbell introduced the bill on June 3, 2011. A similar bill was introduced in the 111th Congress by Representative Dennis Moore, with Representative Campbell as a cosponsor.

This report outlines the current regulatory structures affecting risk retention and risk purchasing groups as well as the legislative and market history of these groups. It also discusses the debate regarding possible expansion of these groups into areas beyond commercial liability insurance.

Date of Report: June 24, 2011
Number of Pages: 15
Order Number: RL32176
Price: $29.95

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