RRG for smaller contractors

Rough Notes, Aug 2003 by Pillsbury, Dennis H

National Builders reaches 15 states in less than two years

A hard market that's getting harder. Insurance availability problems have reached crisis proportions. The federal government needs to provide some solutions. That's what was being said in the mid '80s when the socalled "liability crisis" hit.

Television ads showed deserted playgrounds, closed because municipalities couldn't find coverage. Even the Great American Game-baseball-was in danger as Little League teams found themselves coachless and without a field on which to play. Enough was enough. Congress acted and passed the Liability Risk Retention Act in 1986 to help business, professionals and municipalities obtain liability insurance.

Under the legislation, companies in similar businesses could band together to form and capitalize an insurance company to provide liability coverage. The insurer is owned by the members. The act also allowed homogeneous groups to band together as a purchasing group to buy liability coverage from traditional insurers under the theory that the larger size would give them greater market clout.

Fast forward to today and we find a similar marketplace, especially for certain types of risks-contractors being one of those that face a very difficult market.

In August 2001, Peter Foley began planning for a risk retention group for contractors in Nevada. He set up National Builders Insurance Services, Inc., to serve as the managing company for the RRG and bought the list from a predecessor program that had been terminated in 2000. "That gave us a database that went back to the early '80s," Peter notes. "We filed our plan November 1 in the state of Nevada and received our certificate of authority on February 5, 2002." Today, the company is licensed to write business in 15 states-Arizona, California, Colorado, Idaho, Mississippi, Montana, New Mexico, Nevada, Oklahoma, Oregon, South Carolina, Texas, Utah, Washington, and Wyoming. It also has filed to write in Virginia where a decision is pending.

A unique arrangement

As required by law, the risk retention group-Builders & Contractors Insurance Co. RRG (BCIC)-is owned by its members, the contractors and subcontractors who are insured by the company. Builders & Contractors is a common stock RRG. The members pay their premium plus 10%, which pays to purchase stock in the insurer. The initial capitalization came from National Builders in the form of a loan.

National Builders Insurance Services is owned by 21 investor/producers, including nine retail agencies and 12 wholesalers. Only those owner/producers can place business with BCIC. Other retail agents can access the market through the wholesalers who are owners. The owners have the advantage both of access and higher commissions. In addition to managing BCIC, National Builders also has two subsidiaries, Claims Adjusting Services and Southwestern Casualty Insurance Co., which reinsures the BCIC business through a quota share arrangement. NBIS receives a management fee and has a profit-sharing arrangement with the risk retention group. The reinsurer also offers opportunity for profit.

The company focuses on small and mid-sized contractors and subcontractors with a current minimum premium of $6,500 for all but roofers, for whom the minimum is $10,000. It will write all types of residential and commercial contractors including residential tract homebuilders. However, it will not write contractors who build or work on condos or townhouses.

Because it is a risk retention group, the company offers only comprehensive general liability coverage, including products and completed operations. Limits are $1 million per occurence/$1 million general aggregate. The deductible is $3,500.

"We individually underwrite each account and require a minimum of at least three years' loss experience-ideally, five," Peter notes. "We also look for any changes in operation and any class action lawsuits drawn. We have our own application that must be completed and is available online at www.natbuilders.com."

Initially, the rate of submissions was relatively slow. "In April and May, it began to ramp up and we've been busy ever since. So far, we've received more than 3,400 submissions and have bound less than 20% of them.

"We have to be extremely careful in our underwriting and track our results continuously. Our actuary comes in twice a year and is very conservative. We will make changes mid-year if necessary and don't intend to release profits until they're earned.

"We are in this for the long haul," Peter concludes.