Last year, 58 RRGs were formed, while only 7 were retired, bringing the total number of operating RRGs at year-end to an all-time high of 141, according to Karen Cutts, managing editor and publisher of the Risk Retention Reporter, a monthly newsletter based in Pasadena, Calif. As of January, that total had risen to 145, “with dozens more in the pipeline,” she noted in an article in NU's Jan. 26 edition.

“RRGs are a hot topic this year,” agreed Leonard Crouse, deputy insurance commissioner of the Captive Insurance Division in Vermont.

Mr. Crouse said that of 77 captives licensed in Vermont last year, 20 were RRGs. Out of those 20, 17 were devoted to medical malpractice exposures. The majority of these med mal RRGs were formed by entities from Pennsylvania, while two were from the Midwest, two were from southern states, and one was from Texas. He guessed Vermont would license another 20 RRGs in 2004.

“The medical malpractice crisis has driven a lot of it,” he said. “And it has a lot of people concerned also.” But is their concern justified?

RRGs are “something that has to be watched,” he conceded. “So many RRGs are in new domiciles, and these states will learn as they go that these things are a different animal.”

Mr. Crouse said he believes that captive growth may have peaked in 2003, but that “what remains a question is how much RRG growth there will be in 2004.”

He noted that medical malpractice will continue this year “to be a tough, tough line because those [insurance] rates aren't coming down by any means. So I think we are going to see activity continue in the medical practice field, and there's no question that RRGs have been able to help the crisis in this country.”

Molly Lambert, president of the Vermont Captive Insurance Association, agreed that, “obviously, last year we did see many formations for RRGs–many in the health care arena.” The medical malpractice insurance crisis, she added, “continues and points to more and more physicians and/or hospital groups taking advantage of the RRG [option].”

As for adoption of an amendment to the Liability Risk Retention Act expanding the lines of eligible exposures, “there is a very short window of opportunity to get anything done this year because of the presidential election,” she said. “The feeling is that in order to get the RRG in front of anybody, it will have to be strategically approached.”

That could mean attaching it to another piece of legislation, the most likely being an extention of the Terrorism Risk Insurance Act, she said, which will be in effect until 2005 and may or may not be renewed. “I think it will be tough to get either of these items in front of Congress this year, but that can all change,” she said.

An NAIC working group is focusing on RRGs, “but this isnt necessarily positive,” Ms. Lambert said. “This could slow the potential expansion. The draft resolution that NAIC proposed that created a lot of furor in the industry opposed the expansion of the act. They have since established a working group to have further discussions.”

The other trend that could affect the number of captives in 2004, she said, is a softening in some standard insurance markets.

“Historically in Vermont, our premium growth continues because those engaged in the captive system like it and know how to use it,” she explained. “There are always niche businesses that they use the captive for, but the number of formations may not be at the incredible pace we've experienced in the last couple of years.”

In the individual captive domiciles, states of all sizes are reporting mixed results.

Washington, D.C.: Captive Capital?

Washington, D.C. is intent on creating a domicile that is friendly, but not too friendly, to captives. The effort includes a newly created department and reorganization of captive laws.

D.C. officials recently announced a newly-created agency combining its Department of Insurance and Securities Regulation with the Department of Banking and Financial Institutions.

The merged entity, called the Department of Insurance, Securities and Banking, will be headed by Lawrence H. Mirel, who is currently commissioner of insurance and securities.

William P. White, D.C. director of captive insurance, told National Underwriter that the move “goes back to wanting to create an environment where D.C. can become more of a financial services center.”

The District added 18 captives last year to bring its total to 20. Captive growth in D.C., according to Mr. White, is a “fallout in the traditional market from tough lines of business,” as well as a continuation of “anything that has to do with medical and health care.”

He also noted a greater interest in sponsored and segregated cell captives, as well as risk retention groups.

He said many organizations are turning to RRGs because they need “an organizational structure that will allow them to quickly and seamlessly go into new areas without the administrative hang-ups they might have with having to go through a complete licensing process everywhere.”

He said D.C. is being tough on requirements for RRGs, but “with a side glance toward what might happen in terms of changing the risk retention federal legislation.”

If Congress decides that property and possibly workers' compensation can be included in RRGs, “we don't think we will have any problem because we have fairly stringent requirements already.”

As a single captive category, he said that D.C. has more RRGs than anything else.

He noted that the domicile is doing a “quick and dirty” evaluation of its captives to allocate the proper resources to support them. “We need to learn from this portfolio of captives what the current needs are, but also project out to the emerging needs and emerging concerns for the organizations that will have the same motivations our current group has,” he said.

He added that D.C. is “not trying to compete with other domiciles based on how many captives we have,” but rather attempting to add value to the marketplace. The domicile is doing this, he said, by creating “the right kind of business environment,” so that companies and other organizations cannot only “do business on a fairly sophisticated basis, but have that tie-in to those government agencies that they need, whether it's Treasury, Commerce or Department of Labor.”

Mr. White said D.C is updating its captive law, implemented in 2001. The new law, he explained, is focused on “making it very clear what we will allow in this domicile, and also opening up a few things so that it is a little easier to do business using captives as a mechanism.”

He noted that D.C.'s captive law and some supporting legislation is working its way through the legislative process and will hopefully “end up on Congress' desk some time in April.”

Mr. Mirel said the structure of the financial services industry is changing rapidly and that a consolidated regulatory agency is needed in D.C., “just as they have been in leading financial countries such as Great Britain, Germany and Japan.”

By merging the two agencies, he said, “the District will demonstrate that it is ready and able to regulate modern financial services organizations.”

Hawaii: A Captive Paradise?

Craig Watanabe, Hawaii's captive insurance administrator, told National Underwriter that 2003 was a record year, with 23 new captives licensed.

“The growth is there, but compared to some East Coast domiciles, we're not as quick to grow,” he said. “I think the driving factor back east was the med mal captives.”

He noted that over the past six months, medical malpractice has become more of a problem in western states, which could spur captive growth in Hawaii.

“We are starting to see more inquiries,” he said. “California has a cap on medical damages, so it's slow there in terms of a crisis, but some carriers have pulled out of the market. The supply is diminishing, so some of the hospital and medical groups are scrambling for coverage now.”

Hawaii has 18 medical malpractice related captives, he said, of which five are RRGs.

The captive growth trend from Japan and the Pacific Rim is continuing slowly, he observed. In 2003, there were two captives licensed from Japan. “These are generally manufacturing operations such as equipment, pharmaceutical drugs. We should have a couple more this year,” he said.

Hawaii is not currently amending its captive statutes, Mr. Watanabe noted.

Kentucky: RRGs Keep Pace

Pat Talley, chief financial analyst in the Kentucky insurance department, said his state, overall, has licensed one pure captive, one association captive and two risk retention groups.

However, he said the last two captives he licensed in 2003 were RRGs, “in keeping with what we're seeing nationally. I suspect this is a trend we will continue to see, particularly with the discussion about expanding the scope of the Risk Retention Act.”

Kentucky's RRGs are professional liability and medical malpractice, he said. The pure captive is also professional liability, while the association captive is workers' compensation.

Mr. Talley said Kentucky is currently in its annual legislative process “and there is nothing [for captives] on the table. I suspect that next year there will be a need to do some fine tuning. There was a need this year, but Kentucky just went through a change in party.”

Arizona: Stays On Target

Arizona Captive Administrator Richard Marshall told National Underwriter that Arizona was on target in meeting its fiscal year objectives.

Arizona's captive legislation was adopted during the summer of 2002 and an amended law went into effect on Sept. 18, 2003. The new law permits agency captives, protected-cell captives and direct-writer captives for workers' compensation.

Group captive insurers include risk retention groups and industry groups. The expanded law also includes several reinsurance options, including personal lines, which were not part of the original act.

Nevada: Bucking The Trend

Tom Canfield, an insurance examiner for the Nevada insurance department, said the state picked up a few RRGs, “but we were not anticipating the number of pure captives which came in. We haven't been marketing like some states have.”

He added that the “word got out and people have been coming to us. So last year we had five new single-owner captives, which was something we hadn't anticipated and we're really happy with that.”

Mr. Canfield said companies are coming to Nevada to form captives because “we're a small state. People can come in and talk to us and deal with us and talk to the commissioner.”

He said his department does not have a captive division, but “there is anticipation that some time this year they will actually put in a full-time captive person and start a captive section.”

Such a position was not funded when the state's captive law was passed in 1999, he said, but as the number of captives grows, 10 percent of the premium tax for captives will eventually be allocated to the program. “So I think they are reaching a point where they might be able to support that, and from there on it could grow. And with a full-time person, they might be able to market better and the program would grow faster.”

Mr. Canfield said that because the Nevada legislature meets every other year, and already met in 2003, no changes in the captive law are in the works.

“However, we do anticipate proposing lowering taxes on fees and premiums for foreign RRGs for 2005,” he said. “There has been talk that someone has been looking at protected-cell legislation from the industry.”

South Dakota: Missing The Boat?

Wendell Malsam, chief examiner of the South Dakota insurance department, said the state had no captives licensed in 2003.

What's hold the state back? “It could be people think we're in the hinterland–certainly not a prime location for a board meeting, and our law is only a pure captive law,” he explained.

He said there have been no changes made to the state's original legislation and no requests for updates.

“To be truthful,” he added, “Id be somewhat concerned about ending up with the rejects out here.”

Montana: Keeping Busy

John Huth, captive insurance coordinator with the Montana Office of the State Auditor, said his state has been busy in the captive market.

“Our last four new captives are re-domiciles,” he noted, meaning they have moved from other locations. The facilities licensed are pure captives. “Three of them are rural phone co-ops out of Kansas covering liability and line interruption–coverage that the market won't provide, that they have been self-insuring. The one in-house is also another phone co-op.”

He added that two health care organizations are on line–one out of Topeka, Kan., and the other from Montana. “We're getting a lot of inquiries from Florida right now–also medical,” he said.

Montana is considering two legislative changes, he said. One is clarifying RRGs in the law, while the other would charge actual premium tax to Montana firms rather than the $5,000 minimum on premium written.

Mr. Huth said the domicile currently has one trucking RRG and three health-related captives–of which one is an RRG. He noted that the domicile started a captive association last year, which is planning its first conference.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 12, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.