Risk Retention Groups

Time for Property

Potential legislation in Congress would allow risk retention groups to write property. Here are the arguments for and against.
By: | August 3, 2015 • 7 min read

Is it an insurance issue or a nonprofit issue? Is there an insurance market for these risks or is government intervention needed? Is Congress looking to tell the insurance industry what’s what or are lawmakers looking to facilitate a market-based solution?

The bigger question is: Whom do you trust?

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At the heart of these questions is an insurance law: the Liability Risk Retention Act (LRRA). Having passed it in 1981 in response to a collapse of the product liability insurance market, Congress last amended the law in 1986 to include most commercial liability.

Since then, a vibrant subculture within the self-insurance world has grown up. In 2014, the average annual premium written by risk retention groups (RRGs) was $12.6 million. With 234 RRGs now in existence, according to the Risk Retention Reporter, that amounts to nearly $3 billion in total premium.

Despite such a success story, surprisingly, RRGs haven’t expanded further — say, to property coverages. It’s not for want of trying.

Janice Abraham, CEO of one of the biggest RRGs, United Educators, has been in her position for 18 years.

“I don’t believe the government should be in the business of insurance at all.” — U.S. Rep. Dennis A Ross, a Florida Republican

“I have been working on this for almost the whole time,” she said, referring to the fight for RRGs to retain property risk.

Right there with her has been Pamela Davis, CEO of another massive RRG provider, the Alliance of Nonprofits for Insurance (ANI). They spearhead a renewed effort to expand the LRRA to allow RRGs to underwrite property coverage.
The fight is being led in Congress by Florida Republican Rep. Dennis A. Ross, who assures constituents and insurance professionals that he’s a “strong free market person.”

“I don’t believe the government should be in the business of insurance at all,” he said. Efforts to expand the LRRA is not “the camel’s nose under the tent trying to get into the industry.”

Instead, Ross, whose brother Bill served as CFO of the Hillsboro County Boys & Girls Club, said that he appreciates the challenges nonprofits face, and hopes to create an opportunity for such groups to pool resources and focus on their primary missions, not premiums.

The pro-LRRA expansion argument is best illustrated by a plausible example: A nonprofit senior center can purchase $1 million in liability through an RRG to cover the liability to transport its seniors in a van, but that RRG cannot underwrite damage to the $20,000 van itself.

Janice Abraham CEO United Educators

Janice Abraham
CEO
United Educators

Or take the example of a college that buses its sports teams to various competitions and shuttles its students around campus. An RRG could offer the school millions in third-party liability, but not the thousands to fix the bus after a fender-bender.

That just doesn’t make sense, advocates said. Of course, their opponents tell a different story.

One Side

A primary argument for the new LRRA is that it won’t be a big change at all. The draft bill now in Congress would only allow certain groups to write coverages like property, fleet auto physical damage and business interruption: RRGs active for 10 consecutive years, with at least $10 million in capital and surplus.

Perhaps most limiting, the bill only applies to RRGs protecting 501(c)(3) organizations.

The argument: The commercial insurance market has failed these nonprofits. These community and educational nonprofits tend to be small in size and faced with unique risk.

“These are hard to cover property, auto physical damage issues that really warrant a lot of attention and a lot of risk management,” said Abraham.

Sometimes, commercial insurers are interested in these risks, Abraham said. Sometimes, they are not.

What often happens: A 501(c)(3) purchases liability insurance through an RRG, then finds it challenging to buy unbundled property from a commercial carrier. What’s more, seeking out unbundled property coverage adds operational costs to small organizations on constrained budgets.

According to Davis, 85 percent of 501(c)(3)s that would benefit from the law change have annual budgets of less than $1 million.

In United Educators’ case, schools come to the RRG year after year looking for help with this issue, Abraham said.

She went on the record — the Congressional Record — about that unmet demand when she testified to the Subcommittee of Housing and Insurance of the Financial Services Committee of the U.S. House of Representatives on May 20, 2014.

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Davis said she hears from insurance brokers about these problems and the unmet demand. They tell her that only 6 percent of commercial markets would consider standalone property risks from nonprofits.

“I would love to see the market come up to [nonprofits] and say, ‘There is no need for this,’ ” Ross said, but unfortunately “games” are being played in the commercial market.

But the main takeaway from proponents is: A vote for the LRRA change is a vote that benefits communities and their nonprofits. It’s not about commercial insurance. So how can people dare oppose it?

The Other Side

Opposition is aligned against the LRRA expansion, just as it has been for the past 18 years that Abraham fought for it.

On one side of the opposition is the National Association of Insurance Commissioners (NAIC).

“These are hard to cover property, auto physical damage issues that really warrant a lot of attention and a lot of risk management.” — Janice Abraham, CEO, United Educators

The insurance regulators have never been fond of risk retention groups, as one insider in the captive insurance industry put it, perhaps in large part because the 1981 law and its 1986 addendum are two of only a few instances when the feds have intervened in state-based regulation.

In the last serious effort to reform the LRRA, a two-year attempt that ran aground in 2013, opposition from the NAIC was cited as one major reason the bill didn’t pass.

News reports at the time focused on the NAIC’s belief that RRGs are more prone to insolvency than commercial carriers.

For their part, commercial carriers might argue that RRGs aren’t on an even playing field. Once formed, RRGs are regulated only by the insurance department in the state in which they are domiciled (not in every state they write business).

Another argument might be that they aren’t as safe for consumers. RRGs are not subject to state guarantee funds in the event they go belly up.

Beyond these two distinctions and the fact that they can only write liability, RRGs are also a unique form of captive because only owners can contribute capital, only policyholders can be owners.

Independent insurance agents, represented by the Independent Insurance Agents & Brokers of America (Big I), also oppose expanding LRRA.

Jen McPhillips, its senior director of federal government affairs, said concerns include consumer protection and the fact that RRGs have no experience writing property, but the primary objection is the failure to demonstrate a market using empirical data.

“The traditional marketplace is there and is willing to take on the risk,” she said.

Whereas the original LRRA was passed in response to a clear crisis in coverage, no such crisis exists today.

Independent insurance agents, represented by the Independent Insurance Agents & Brokers of America (Big I), oppose expanding LRRA.

However, data does support the contention that RRGs serve their policyholders well.

In A.M. Best’s “2015 Captive Review,” the rating agency found that risk retention groups outperformed commercial counterparts in loss adjustment expense, underwriting expense and combined ratio, among others. They did not outperform them in policyholder dividends.

The review’s authors were also quick to mention the other benefit of the RRG structure — dividends and surplus buildup are returned to policyholders. Between 2009 and 2013, that amounted to $638 million for rated RRGs.

Also, RRGs are known to provide members with tailored risk management and loss-control services.

“Because RRGs serve a single industry, they are able to develop and share best practices including risk management initiatives, which isn’t common among commercial carriers,” wrote Christina Kindstedt, senior vice president of Willis’ Global Captive Practice for the Americas, in a blog calling for the LRRA expansion passage.

To insurers that voice concerns about RRGs not “playing on a level playing field,” David Provost, deputy commissioner for Vermont’s Captive Insurance Division, said: “Most RRGs are playing on a field that you abandoned.”

Vermont, it should be noted, is the No. 1 home for RRGs in the world; one-third of all groups are domiciled in Vermont, and they bring in two-thirds of all RRG-related premiums.

The Chances of Passage

Beyond the insurance industry lobbying against the bill in Washington, D.C., another hindrance is the overall inertia in the Capitol.

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“Ask Congress,” said Abraham when asked why an LRRA expansion hasn’t passed. It “would be foolish to be overly optimistic” about the bill’s passage this year, she said.

As of early July, Ross had not yet presented the bill to the Subcommittee on Housing and Insurance, waiting on industry groups to provide market information.

Davis is optimistic and determined. Even if it doesn’t pass this year, she is “absolutely determined to get this through.”

“It certainly would help our schools and it would certainly help our small nonprofits in our communities,” she said.

Matthew Brodsky is editor of Wharton Magazine. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]