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Proposed amendments to risk retention act debated.

Proposed Amendments to Risk Retention Act Debated

This past June the Commerce, Consumer Protection and Competitiveness Subcommittee of the House Energy and Commerce Committee conducted a hearing on House bill 4351, which would amend the Liability Risk Retention Act of 1986.

During the hearing Susan Howard, associate undersecretary for economic affairs for the Department of Commerce, recommended amendments to the act that would ensure membership control of risk retention and purchasing groups; preserve single state regulation; tighten state regulation of purchasing groups; and improve disclosure requirements regarding purchasing groups and their insurers.

Ms. Howard, who was accompanied by department representatives Jane Malloy and Ted Barrett, said that although the department does not specifically endorse the bill, it supports many of its provisions.

The department panel opposed the suggestion from Rep. Jim Slattery, D-KS, who proposed the bill, that the department should investigate the solvency of particular risk retention groups when state regulators are suspected of failing to do so. In addition, the panel recommended that the NAIC increase its monitoring of risk retention and purchasing groups. It also suggested that the association develop standardized forms for risk retention group and purchasing group filings in non-chartering states.

Several members of the subcommittee expressed concern about the regulation of risk retention and purchasing groups to ensure solvency and subsequent payments. This may have occurred as a result of the investigation conducted by another subcommittee of the House Energy and Commerce Committee into insolvencies of U.S. insurance companies. The panel, however, agreed that some states needed to improve their regulatory requirements but indicated that it could be done under a single state regulatory system. It recommended that the chartering state conduct the regulation.

A representative of the Independent Insurance Agents of America opposed the bill and criticized provisions that permitted officers and directors of risk retention groups to act as unlicensed agents. Rep. Slattery commented that it seemed unnecessary for risk retention groups directly marketing their programs to have agents interposed between them and their insureds.

An NAIC representative indicated that the organization generally opposed the provisions of the proposed amendments because regulation would be limited to a single state. He did, however, say the NAIC favored provisions that required minimum financial requirements regarding purchasing group insurers and possibly risk retention groups.

A representative of the National Risk Retention Association (NRRA) testified that although the organization generally agreed with the bill, amendments should address several issues. They include the refusal of certain states to recognize risk retention group coverage as evidence of financial responsibility with regard to certain liability coverages; the policy of some states to impose a surplus lines tax on risk retention groups rather than taxing them as admitted insurers (the current requirement results generally in a higher tax rate); the practice of some non-chartering states to charge high filing fees; and the need to clarify countersignature laws.

In addition, the NRRA believes that the amendments should address the refusal of some states to permit risk retention groups to reinsure liability coverage written by a fronting company for their members. It should be noted that California has indicated it will not recognize a company as a risk retention group if its activities are limited to reinsuring the risks of an insurer that insures only the risks of its members.

Howard Greene, RIMS director of governmental affairs, spoke in favor of the bill (see last month's RM Spectrum) but recommended several amendments, including permitting associated and parent organizations to assist in capitalizing a risk retention group without becoming an insured or group member; permitting an association or sponsoring entity to own a risk retention group even if some of its members are not members of the group; adding surety bonds to the definition of insurance; clarifying securities laws exemption provisions to include groups set up under a holding company structure; and clarifying purchasing group provisions to ensure that insurers of purchasing groups meet capital and surplus requirements in a single state only.

P. Bruce Wright, a member of the New York Bar, is with the law firm LeBoeuf, Lamb, Leiby and MacRae.
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Title Annotation:Liability Risk Retention Act of 1986
Author:Wright, P. Bruce
Publication:Risk Management
Date:Sep 1, 1990
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