Those were heady years for risk retention groups in '03 and '04. There were 112 new formations between the two years, which more than doubled the total number of RRGs that had previously existed in 2002. But then came 2005, and total new formations dropped to only 33 for the whole year. The first half of 2006 seems to be following the same pace, with 24 new formations through August, according to statistics from the trade newsletter, the Risk Retention Reporter.
What gives? Are these specialty vehicles, whereby a group of members owns a liability insurance company, a fad that's slowly fizzling? Or perhaps the demand for them has been met, and now the supply is leveling off. RRGs got their start in 1986 after the passage of the Liability Risk Retention Act to strictly cover liability, only one side of the property/casualty equation, after all.
"I assume that the limited purpose for which risk retention groups were created was to fill a gap in the commercial insurance system, primarily for medical malpractice, and I expect that much of that has been done," says Larry Mirel, counsel for the American Risk Retention Coalition, a relatively new trade group for RRGs formed in February 2006.
"It's just a matter of at this point probably market saturation for the original area where risk retention groups have been allowed to operate," Mirel adds.
It should be noted that the ARRC is actively campaigning Capitol Hill for revision of the LRRA, to allow risk retention groups to take on that second half of the P/C equation, property.
For Brian Donovan, chairman of the other RRG trade group, the National Risk Retention Association, which has been around as long as risk retention groups themselves, the drop in formations from 2003-2004 to 2005-2006 is merely a logical result of trends in the broader insurance market.
"I see it strictly as a matter of a softening of the insurance marketplace," Donovan says, "and therefore there's one less reason to encourage someone to put together a group."
Donovan, who's also president of an RRG--STICO Mutual, which writes general liability and pollution liability coverage for manufacturers and installers of storage tanks--explains that companies might not go through the trouble of forming an RRG if the traditional market is competitively priced.
"You put together a group captive or a risk retention group, that's not something you do on a weekend," he says. "It's a process that could take six months to a year, so if the market had stayed firm, and all of a sudden today it's a real hard market, it could be that a year from now, by the time you're ready to launch, that the market has softened and the insureds that you thought would follow you find out they're going to have to pay more to come into your program than they would in the commercial market."
Karen Cutts, managing editor at the Risk Retention Reporter, also sees the soft market behind the 2005-2006 formation numbers. "Risk retention groups are linked," she says, "to soft market, hard market."
As for Mirel's explanation, Cutts doesn't even consider that demand for RRGs could have a ceiling.
"I don't think that there's going to be a saturation point. (To) the contrary," she says.
Unless, we're talking about groups for hospital systems, she adds, where the biggest systems for the most part have already formed their RRGs.
It should be noted that hospitals, physicians and other health-care organizations also drove the rapid-fire formations a couple years back. In 2003, 47 out of the 58 formations were health-care related, according to stats from the Risk Retention Reporter. In 2004, it was 36 out of 54. Even in 2005, with 33 total formations, more than half--18--were for health care.
Larry Smith, vice president for risk management at health system MedStar Health, which formed MedStar Liability Ltd. Risk Retention Group to provide coverage to individual practitioners, says this "tremendous utilization" of RRGs resulted from physicians and hospitals searching for coverage in the midst of a hard market and the "full bloom" of the medical-malpractice crisis.
Now, says Smith, all of the big players in the health-care sector already have RRGs, leaving smaller players to organize themselves into groups. This, Smith explains, isn't as easy as forming groups for the large players, perhaps one reason for a drop in formations.
"Those decisions are like herding cats," he says. "You get 17 cats in the box and one jumps out, you got to start all over again."
Smith is quick to see the positive in the drop in formations, saying it's "more of a steady state," compared to the "spike" of 2003-2004.
"I think it is a very good set of data," he says about the formation numbers. "I think it shows that when there was a crisis, there was relief available. As the crisis abates, I think we're now seeing sort of RRGs being more mainstream solutions to physician groups and hospital out there as they move along."
So they're not a fad, after all? Not according to Cutts either: "The concept of a risk retention group has really caught on, much more. People are much more aware of it."
She, too, stresses that the slowdown is instead "steady growth." After all, the premium of the 216 risk retention groups in existence in 2005 went up 11.5 percent compared to 2004's premium, according to stats from the Reporter, to a total of more than $2.4 billion.
A main reason to explain how RRGs move steadily ahead despite the soft market is that they offer more than just potentially cheaper prices.
"Really what's happening now, the rates that risk retention groups charge their members are basically what they'd have to pay in the traditional market, or maybe even a little bit more. So it's not rate driven," Cutts says. "It's driven for the desire to control the program and achieve stability over the long term."
And this benefit holds currency for not only health-care organizations and other traditional RRG industries. The concept is expanding into new areas and appearing in new forms, says Cutts, and is spreading by a "copycat" effect.
One new risk retention group that could catch on was formed primarily for defense against so-called weld-fume litigation suits. Welding equipment manufacturers and distributors are finding themselves being sued for purported neurological damage caused by welding fumes, and in many cases, their traditional insurers are denying coverage via the pollution exclusion.
Another new big RRG trend, according to Cutts, could be for contractors, who are staring down a hard market.
Of course, another potential up tick in growth--perhaps even the next Himalaya-like spike in formations--could come about if ARRC and its supporters have their way in Washington and property becomes part of the RRG equation. But both Mirel and Donovan don't see Congress acting on the Liability Risk Retention Act, however, until next year at the earliest.
is associate editor of Risk & Insurance®.
September 15, 2006
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