H.R. 5792: Pass it Now
By JANICE OCHENKOWSKI, the president of the Risk and Insurance Management Society and a managing director with Jones LaSalle Inc.
The Liability Risk Retention Act is an example of legislation that has served consumers well by making insurance more available and affordable. The U.S. Congress first passed legislation in 1981 that permits entities with similar risk exposures to form Risk Retention Groups to self-insure similar risks on a group basis.
That legislation also created Risk Purchasing Groups that allow insurers to market product liability insurance on a group basis. Despite resistance from some state regulatory bodies, the legislation provided a successful model for the sale of specialized insurance across state lines and successfully addressed capacity shortages in the marketplace.
In 1986, Congress expanded the LRRA to include all types of liability coverage, except workers' compensation. The results have been just as successful, providing consumers with another competitive option to manage the cyclicality of liability insurance.
Most recently, Rep. Paul Kanjorski, D-Pa., chairman of the U.S. House of Representatives Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, advanced H.R. 5792 (Increasing Insurance Coverage Options for Consumers Act of 2008). This time, the legislation expands the LRRA's benefits to include commercial property insurance.
Based on the success of the RRGs and RPGs formed to date, we expect that this legislation will expand the market success of the liability program to the commercial property market, with the effect of making insurance more affordable--especially when natural disasters make it difficult to purchase commercial property insurance--and enabling businesses to obtain coverage that may not otherwise be available.
The legislation draws the support of consumers, a vast array of real estate organizations, housing authorities, as well as RRGs, and organizations representing insurance agents and brokers. Advocates view the legislation as an effective means to open another venue for providing affordable insurance to the insurance buyer.
While H.R. 5792 enjoys broad-based support, it also draws some critics. The legislation permits RRGs or RPGs to be domiciled and regulated in one state, but to operate in all states. Some state insurance departments, which are not domiciliary states, have concerns that the legislation will permit RRGs to be financially irresponsible and take advantage of commercial insurance buyers.
H.R. 5792 addresses this potential issue by incorporating established financial responsibility and corporate governance standards for RRGs recommended in a 2005 study from the Government Accountability Office. Additionally, those standards were adopted verbatim by the National Association of Insurance Commissioners (NAIC).
In addition to those standards, there are other consumer safeguards in the legislation. For example, in order to conduct business, RRGs must be licensed or authorized by a state that has adopted corporate governance standards as set forth in the bill. These standards cover independent directors, conflicts of interest, service contracts, and prior approval of material service provider contracts.
The standards reflected in the bill also require a written charter imposing numerous responsibilities on the board of directors. States must adopt requirements for examination authority, and be subject to audits by certified public accountants, follow accounting practices and procedures and file with the NAIC. Proponents of the bill believe that these safeguards adequately address the concern that consumers may not be adequately protected against financially irresponsible entities.
Disasters of all types continue to cause catastrophic losses to property owners. Providing options to ease the market impact of those losses is responsible and appropriate. I believe that it would be in the interests of the commercial insurance consumer for H.R. 5792 to be advanced by the House Financial Services Committee and passed by the House of Representatives--a good start for the 111th Congress when it begins next year.
September 15, 2008
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