The RRG must (1) provide a copy of the plan or study to the  insurance regulator in the nondomiciliary states in which the RRG intends  to conduct business before it can write any insurance coverage in that  state; (2) provide a copy of the group’s annual financial statement  (certified by an independent public accountant) to the insurance  commissioner of each state in which it is doing business (the financial  statement should include a statement of opinion on loss and loss  adjustment expense reserves by a qualified loss reserve specialist or  actuary); and (3) submit to an examination by a nondomiciliary state  regulator to determine the RRG’s financial condition, if the domiciliary  state regulator has not begun or refuses to begin an examination. RRGs Generally Reported Increased Profitability and Continue to Write the Majority of Their Business in Nondomiciliary States

		Premiums Written by RRGs Generally Increased, Particularly in Health Care- Related Lines

Based on data reported by RRGs to NAIC since 2004, RRGs in  aggregate have shown an increase in premiums written and in their share  of the broader commercial liability market. In 2005, we reported that  RRGs wrote about $1.8 billion of commercial liability coverage, which  constituted about 1.17 percent of the overall market in 2003. According  to NAIC data, in 2010 RRGs wrote about $2.5 billion in premiums, which  was about 3 percent of the total $92 billion of commercial liability  insurance coverage written industrywide. Although Most RRGs Are Domiciled in One of a Few States, They Wrote the Majority of Business Outside Their State of Domicile

Although they conducted business nationwide, similar to what we  reported in 2005 more than 80 percent of active RRGs in 2010 were  domiciled in five states and the District of Columbia. Nondomiciliary state insurance regulators we interviewed expressed  concerns about the amount of RRG business in their states and their  limited authority to regulate RRGs providing coverage to their state’s  insureds. RRG representatives with whom we spoke generally  believed that RRGs have increased the availability of such insurance. Representatives  from the RRG industry maintain that state regulatory practices such as  registration requirements beyond what is specified in LRRA “encroached”  on LRRA’s partial preemption of state insurance laws. RRGs have challenged requirements established by nondomiciliary states  that RRGs believe are preempted, and therefore not permitted, by LRRA. States and federal courts also have differed in their interpretations. Two  nondomiciliary state insurance regulators with whom we spoke indicated  concerns about the capitalization and solvency of RRGs operating in their  states, and two regulators support increasing the minimum capital  requirement. The revised accreditation standards also require all RRGs to have risk- focused examinations in an effort to implement more uniform baseline  standards for RRG regulation, applicable to all financial examinations of  RRGs commencing on or after January 1, 2011. One proposed change would expand the  type of insurance RRGs may provide to include commercial property  coverage. RRG representatives with whom we spoke generally favored  amending LRRA to allow RRGs to provide commercial property insurance  coverage. For example, the office would resolve  disagreements about whether LRRA preempts any regulatory actions by  a state. Conclusions

In establishing the Liability Risk Retention Act, Congress allowed RRGs  to provide commercial liability insurance to RRG members and  established a lead-state regulatory framework. However, states have interpreted these provisions differently, due  in part to LRRA’s silence on certain issues such as registration  requirements, fees, and the types of insurance coverage RRGs can write,  sometimes resulting in litigation between state insurance regulators and  RRGs. In addition, some federal courts to which these disputes have  been brought also have interpreted LRRA differently. NAIC has made progress addressing these  concerns, including requiring accredited states to implement risk-focused  examinations and risk-based capital analyses, as well as developing  corporate governance standards for the RRG industry. Further, NAIC has  made efforts to more closely align the accreditation standards for RRGs  with those of traditional insurance companies. Matter for Congressional Consideration

To reduce the varying interpretations of LRRA, which have led to  uncertainty and disagreements among RRGs and state insurance  regulators, and at the same time continue to facilitate the formation and  efficient operation of RRGs, Congress should consider clarifying certain  LRRA provisions. Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) describe changes in the financial condition of  the risk retention group (RRG) industry from 2004–2010; (2) examine the  regulatory treatment of RRGs across domiciliary and nondomiciliary  states; and (3) examine changes to federal and state regulatory practices  regarding RRGs since 2004.
Why GAO Did This Study

Congress authorized the creation of risk retention groups (RRG)--a group of similar businesses that creates its own insurance company to insure its risk--to increase the affordability and availability of commercial liability insurance. Through the Liability Risk Retention Act (LRRA), Congress partially preempted state insurance laws to allow RRGs licensed in one state (the domiciliary state) to operate in all other states (nondomiciliary states) with minimal additional regulation. In a 2005 report (GAO-05-536), GAO noted concerns with the adequacy of RRG regulation. This report (1) describes changes in the financial condition of the RRG industry from 2004 to 2010; (2) examines the regulatory treatment of RRGs across domiciliary and nondomiciliary states; and (3) examines changes to federal and state regulatory practices regarding RRGs since 2004. GAO analyzed RRG financial data, surveyed state insurance regulators (96 percent response rate), and interviewed RRG industry representatives.

What GAO Found

Certain indicators suggest that the financial condition of the RRG industry in aggregate generally has remained profitable. In 2003, RRGs wrote about $1.8 billion, or 1.17 percent of commercial liability insurance. In 2010, RRGs continued to comprise a small percentage of the total market, writing about $2.5 billion--or about 3 percent of commercial liability coverage. Other financial indicators, such as ratios of RRG premiums earned compared to claims paid--also suggest profitability. In addition, the number of RRGs has increased since 2004, with the most growth occurring in health care-related lines. In 2010, more than 80 percent of RRGs were domiciled in Vermont, South Carolina, the District of Columbia, Nevada, Hawaii, and Arizona, but RRGs wrote about 95 percent of their premiums outside their state of domicile. Evidence suggests that RRGs may choose to domicile in a particular state, partly due to some financial and regulatory advantages such as lower minimum capitalization requirements. RRG representatives opined that RRGs have expanded the availability of commercial liability insurance--particularly in niche markets--but differed in their opinions of whether RRGs have improved its affordability. Different interpretations of LRRA have led to varying state regulatory practices and requirements in nondomiciliary states and disputes between state regulators and RRGs in areas such as registration requirements, fees, and types of coverage RRGs may write. For example, while some states have interpreted LRRA to permit RRGs to write contractual liability coverage, others have not, and therefore may not allow RRGs to write this coverage in their state. RRGs have challenged requirements established by nondomiciliary states that RRGs assert are not permitted by LRRA. However courts also have differed in their interpretations of LRRA. Some regulators with whom GAO spoke indicated that their actions toward nondomiciled RRGs reflect an effort to use their limited regulatory authority to protect insureds in their states as well as address concerns about RRG solvency. Some state regulatory practices for RRGs have changed since 2004, and federal legislation has been proposed. In 2005, GAO recommended implementation of more uniform, baseline state regulatory standards, including corporate governance standards to better protect RRG insureds. The National Association of Insurance Commissioners (NAIC) has since revised its accreditation standards to more closely align with those for traditional insurers which are subject to oversight in each state in which they operate. For example, all financial examinations of RRGs that have commenced during or after 2011 should use the risk-focused examination process. NAIC also has begun developing corporate governance standards that it plans to implement in the next few years. Proposed legislation would amend LRRA to allow RRGs to provide commercial property insurance and also include a federal arbitrator to resolve disputes between RRGs and state insurance regulators. While some RRG representatives and state regulators supported this legislation, others expressed concerns about whether RRGs would be adequately capitalized to write commercial property insurance and about federal involvement in state regulation.

What GAO Recommends

To further facilitate states' implementation and help reduce the varying interpretations of LRRA, Congress should consider the merits of clarifying certain LRRA provisions regarding registration requirements, fees, and coverage. NAIC concurred with this matter for congressional consideration.