RRGs' global hegemony

Risk & Insurance, May, 2004 by Roger Crombie

In the captive world, one do-it-yourself branch of insurance currently making headway is the risk retention group. The technique allows birds of a feather to flock together to take control of and share their liability exposure, but nothing else. Growth in RRGs is fueling the rapid development of both the captive business within the United States and the advent of what insurance historians will one day refer to as "the hegemony of alternative risk."

More than 20 U.S. states plus Washington DC allow some kind of captive activity within state lines. Vermont is the most active, reporting almost 500 captives, which together write annual premiums in excess of $7 billion, and hold more than $70 billion in assets.

It is possible to set up captive insurance activity almost anywhere in the United States from coast to coast. Nevada is the westernmost point attained thus far, although north of the border, British Columbia has more than a dozen Canadian captives.

The U.S. captive market is budding, but cannot as yet hold a candle to the giants in the field, or more precisely in the Atlantic Ocean. Bermuda and the Cayman Islands are home, between them, to about half the global captive total. Bermuda has some 1,700 and Cayman about 650.

Worldwide, the prospects for the captive sector look resilient. Bahrain and Dubai are both open for captive business these days, as, half a world away, are Labuan and Vanuatu, countries few of us could pinpoint on a map. More than 70 jurisdictions worldwide now offer captive facilities.

An RRG may sound like John Wayne with a stutter, but technically, a risk retention group is a captive owned by its policyholders, authorized only to write liability insurance for its members. Under the Federal Liability Risk Retention Act of 1986, similar businesses facing similar risks may insure their liability exposure themselves. The federal law pre-empts state law, meaning that no fronting carrier is required, which reduces cost and increases flexibility. With fronting as hard to find as kipper ties these days, the use of RRGs has nowhere to go but up.

According to The Risk Retention Reporter, RRG premiums in the United States reached $1.7 billion in 2003. That may not be much in the grand scheme of things, but RRG premiums were $1.2 billion a year earlier, and just $0.9 billion in 2001.

In the United States, hard markets and shortages in the medical malpractice and construction guarantee lines are driving practitioners in both disciplines to discover the joys of captivity through the use of RRGs. The construction industry, particularly on the West Coast, has been a powerful adopter of the RRG. The hard market has exacerbated the difficulties faced by small to medium-sized builders in obtaining liability cover. Multiple residential units have become a focus for class action lawsuits. Liability coverage shrinks, often to zero, when class action legal beagles start sniffing around.

Time was that any development in alternative risk would have the brokers crying foul and muttering "disintermediation." No longer. The major brokers are all able to direct groups of the similarly interested into suitable vehicles.

Good ideas have a way of spreading faster than melting butter, and it doesn't take a great leap of faith to see that one day soon, the great majority of insurance will be self-insurance.

ROGER CROMBIE writes monthly for Risk & Insurance. He can be reached at riskletters@lrp.com.