Later, a key state regulator told National Underwriter that among his confreres the legislative change faces strong opposition and many questions.

Mr. Meyers, a partner with Morris, Manning & Martin, LLP, told NRRA members that regulators, though "willing to discuss" the matter, said they have concerns about the regulation of RRGs and the ceding of personal risk of insureds to the RRG.

This is a "very big" issue for RRGs, he warned. "I think every group in NRRA and every RRG should be concerned," he said, referring to the language in a National Association of Insurance Commissioners' resolution that is under discussion, which is highly critical in some respects of RRGs or the regulatory structure surrounding them."

Mr. Myers began with an update on the two-year bipartisan effort to expand the LRRA to include property coverage.

With other pressing business on Congress' agenda and an upcoming election, he said a general oversight hearing about risk retention may not happen until the next session early in 2004. This would be followed by a hearing in front of the full financial services subcommittee, he said.

One of the selling points of an expansion, he said, has been that a risk retention group offers competition in a hard market, which can pierce "the excessive prices of the conventional market." Even though the proposed expansion is "pretty benign," he said, and the group has "tried to avoid enemies," Mr. Myers reported the emergence of two potential threats.

One is opposition by the Service Contract Industry Council, a group representing insurers that deal with service contracts, particularly in the warranty area.

While this group does not directly oppose expansion of the Risk Retention Act, it wants to see that the issue of "undercapitalized risk retention groups dealing with service contractors" is addressed in the legislative process, he said.

The other, more serious obstacle, he noted, is the NAIC. The NAIC's Property & Casualty Committee discussed the proposed resolution at a Sept. 16 meeting in Chicago.

NRRA, he said, has "taken issue with several of the premises that underlie" NAIC's position. These points were outlined in a letter sent to NAIC on Oct. 15.

"They take a run at the fact that risk retention groups are owned by their insureds and therefore there is not the diversity of risk," he noted. However, "The Mutual of Omaha has that problem?they're owned by their risks," he said.

Mr. Myers explained that the most important misunderstanding is NAIC's assumption that risk retention groups are more prone to insolvencies than property-casualty companies. "When you examine the facts, you realize that licensed companies and RRGs have a statistically comparable failure rate--about 1 percent," he said.

Mr. Myers continued that NAIC expressed concerns about the insolvency of a major RRG, which he identified as The National Warranty RRG, domiciled in Cayman with headquarters in Lincoln, Neb.

"My concern is because we had this one problem with National Warranty, we can extrapolate from that to think that we have a problem with 129 other groups that are domiciled in a state."

Mr. Myers stressed that there is "a fair amount of confusion in the insurance community about what RRGs can and cannot do." He said he would like to see NAIC appoint a study group to review the issue.

Jose Montemayor, Texas insurance commissioner and chairman of the Property & Casualty Insurance Committee, told National Underwriter there is "a lot of polarization" on the issue. "There are people who very much would like to see an expansion of the Risk Retention Act?they're clearly in the minority within the NAIC."

He continued: "I would say, overwhelmingly, the fact that you have had some pretty spectacular failures, particularly in the area of auto warranty, is troubling in terms of this approach to RRGs and how appropriate they are to do different things."

Mr. Montemayor added that the current p-c market is "active and strong. I think we're far from an environment that resembles the mid-80s liability crises? I think we're far from that scenario at this time; there is plenty of capacity in the regulated market."

Mr. Montemayor said he is concerned because of the lack of guaranty fund coverage. "It's a strong mark against them. I can tell you personally that I have got, in my state alone, probably a quarter-million warranty holders holding auto warranties that were backed by RRGs in something called an excess of liability contract that basically failed. I have people holding worthless paper with no backup and no recourse."

The issue, he said, is likely to get "an awful lot of attention and discussion within the NAIC, adding that he might call a hearing at the NAIC's next scheduled meeting in December in Anaheim, Calif.