What Do Reinsurers Look For In RRGs?
Although the Liability Risk Retention Act does not require risk retention groups to have reinsurance, it must be obtained at the onset if the domicile regulator deems reinsurance is required for the RRGs sound operation.
Under the LRRA, risk retention groups are formed as insurance companies “whose primary activity consists of assuming and spreading all, or any portion, of the liability exposure of its group members.”
The act further requires that RRG member/insureds be engaged in similar businesses or activities with respect to the “liability to which such members are exposed.” Put succinctly, RRGs must be comprised of homogeneous groups of insureds.
Regulators in the domiciles in which RRGs become licensed are charged with overseeing and approving the RRG's plan of operation or feasibility study. RRGs seek reinsurance to increase capacity, stabilize results and provide catastrophe protection.
Because many of the RRGs operating today do not have five years of operational historythe time typically, although not always, required by A.M. Best for a letter rating reinsurers will conduct a thorough financial evaluation of the RRG before agreeing to reinsure it.
Most reinsurers have a financial analysis group which will apply NAIC ratios to evaluate profitability, liquidity, leverage and loss reserves of the RRG. The group also will try to estimate the accuracy of the sales projection in terms of written premium and strongly consider the lines of business being underwritten, as well as the management and its reputation.
Of prime importance is the submission the RRG makes to the reinsurer. As a new insurer with which the reinsurer typically has no prior relationship, the reinsurer will decide, in large part, whether to implement a partnership based on information presented in the submission.
It is incumbent upon the RRG to present a well thought out, professional submission that articulates the business plan and all the component parts of the RRG.
The goal of the reinsurer, after all, is to issue capacity to make the RRG successful. If both parties do their part, the result will be an enduring partnership that provides long-term success for both the RRG and the reinsurer.
Karen Cutts is editor and publisher of the Risk Retention Reporter in Pasadena, Calif. Visit www.rrr.com for information on risk retention groups and purchasing groups.
Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 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.
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