H.R. 5792: Scrap That ASAP
By NANCY GROVER, vice president of communications for the National Association of Mutual Insurance Companies
The National Association of Mutual Insurance Companies supports competitive markets and is a leader in the effort to seek free market reforms of insurance regulation. Our top legislative priority is to reform state-based insurance regulation by doing away with stifling price controls and burdensome regulatory requirements.
The best way for policymakers to expand options for insurance consumers, including commercial insureds, is to adopt comprehensive competition-based reform measures for all insurance markets. However, what they should not do is adopt a narrow set of rules that favor one segment of the insurance industry over others.
That, unfortunately, is precisely what some in Congress are proposing by introducing legislation, H.R. 5792, that would allow Risk Retention Groups, which are exempt from the most onerous forms of regulation, to enter new markets and compete directly with admitted carriers that still suffer under these regulatory constraints. This is unfair and could potentially lead to serious market disruptions.
There is no question that risk retention groups serve an important, limited need in the marketplace. However, expanding the scope of these entities is unnecessary, would not benefit companies or their customers and would most likely hurt admitted carriers.
The new bill, also known as the Increasing Insurance Coverage Options for Consumers Act of 2008, would expand the existing legislation to allow RRGs to provide additional lines of insurance, including property.
It would permit them to offer coverage that "indemnifies a business, nonprofit organization, or governmental entity for damage to, theft of, or destruction of real property or business property, including insurance that indemnifies a business, nonprofit organization, or governmental entity for damage to, theft of, or destruction of furniture, fixtures, and inventory, from any and all perils or causes of loss and against consequential loss or damage, including business interruption, other than noncontractual legal liability for such loss or damage.'' NAMIC has several concerns with the proposed expansion of RRG authority.
H.R. 5792 would give RRGs a competitive advantage since they would not be subject to the plethora of regulatory burdens placed on insurers, yet they would be allowed to write virtually the same lines of coverage. The original trade-off allowed RRGs exemption from multiple state regulation because they would only be writing very specific types of coverage. Expansion alters that dynamic.
Unlike when the legislation was originally adopted, there is not a market availability crisis in this line of coverage. Additionally, RRGs do not participate in the system of state guaranty funds nor do their policyholders receive the financial backstop ensured by participation in guaranty funds. Expanding RRGs without guaranty fund protection means that policyholders are left bare in the event of insolvency.
The lack of these fundamental insurance protections could be particularly problematic for small and medium sized businesses. The Government Accountability Office studied risk retention groups in 2005. It concluded that RRGs have had a small but important effect in the availability and affordability of commercial liability insurance for certain groups, a conclusion with which NAMIC agrees. However, the GAO also deduced that RRG regulation lacked solvency and accountability standards and proposed greater controls.
Finally, the definition of 'commercial insurance' included in the legislation, while attempting to limit the expansion to only commercial coverages is vague and opens the door to liabilities owed to individual consumers. The proposed expansion could open the LRRA to misinterpretation.
RRGs serve an important role in the insurance marketplace. However, we believe the proposed expansion is problematic and should not be approved at this time. The industry would be better served by focusing on competitive market reforms for all types of carriers across all lines.
September 15, 2008
Copyright 2008© LRP Publications