Softening Market Drives PG Formations
The soft market appears once again to be driving purchasing group growth, which is no surprise. Market cycles have shaped the expansion and development of such facilities since passage of the Liability Risk Retention Act in 1986, with formations increasing in soft markets and declining in hard markets.
This is how it works: The Liability Risk Retention Act created two entities to address the liability needs of commercial insureds–purchasing groups and risk retention groups. Purchasing groups are comprised of homogeneous insureds who buy liability coverage from admitted insurers, surplus lines carriers or risk retention groups.
By contrast, RRGs–also comprised of homogeneous insureds–are liability insurance companies owned by their members, who obtain liability coverage directly from the RRG.
While RRGs need to be capitalized, PGs require no capitalization and hence are much easier to form. Most RRGs have “lock-in” provisions which impede members from removing their capital for a period of time, while members of PGs are free to leave and obtain coverage elsewhere. In addition, PGs can be brought to market in a matter of months, whereas getting an RRG up and running could take a year or more.
As the traditional insurance market softens, more carriers are willing to take on program business because of the freer flow of capital and their improving reserve positions.
Eleven PGs formed and 14 were retired in the first three months of this year, compared with seven formations and 25 retirements during the same period last year.
The last hard market cycle, which began roughly in 2000, had a unique impact on PG formations, revealed by the abrupt drop-off starting in 2001 and the corresponding increase in retirements. The accompanying graph shows PG formations and retirements during first quarters from 2000 to 2005.
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.
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