The RRG (E) Committee, explained Robert H. "Skip" Myers Jr., counsel for the National Risk Retention Association, deals with the accreditation process for the states and is working to develop standards to be imposed on captive domiciles. Their recommendations will go to the full (E) Committee, then to the Executive Committee, and finally on to the full body of the NAIC.

He said Congress would only get involved if necessary, to approve any changes to "the letter of the law" of the federal Liability Risk Retention Act.

Mr. Myers said NRRA wants to make sure more captive states are represented. "There are 22 states now with captive laws," he noted. "Probably 10 are active captive jurisdictions and only Vermont is on either of these two NAIC committees. That's not an accurate or fair representation of what's going on in the states."

He said Nevada and other domiciles requested to be on a committee and were turned down, and that Washington, D.C. also has made a request.

Dana Sheppard, acting director of the District of Columbia's Risk Finance Bureau with the Department of Insurance, Securities and Banking, said D.C. is trying to get on the NAIC groups. He said the (C) Committee has been dealing with issues such as governance and service contracts, and whether or not it should be included in the definition of liability insurance.

That group, he said, "seems to be open to participation from the captive and non-captive jurisdictions." The (E) group, however, "is more troublesome," he added. "There are more issues and it's fast-track, and they don't seem to want to let anybody else on the committee."

He said he made a request that D.C. and several other domiciles be considered for that group, citing indications from Larry Cluff, assistant director of financial markets and community investment for the GAO and co-author of the agency's RRG report.

"I mentioned that when Larry Cluff came to our conference, he said the GAO wanted to see a balanced representation on all the committees and working groups of both captives and non-captives," noted Mr. Sheppard. "He went on to say that if the group was not balanced, Congress would take note of that when they take up the issue some time next year."

Mr. Sheppard continued that he called Mr. Cluff last week. "He said that he had gotten around to talking to both Tim Wagner and Betty Patterson, and he expressed some concerns about there not being a balanced participation."

Mr. Cluff, he noted, "seems to think that when the NAIC rearranges the committees in late December, they'll open it up when they start the new year…So we'll see what happens." If this doesn't happen, he added, "Vermont would be the only captive jurisdiction that could vote. So we need to get a balanced group,"

Getting balance on the committees is "the first step," he said. "Then there is still a lot to do…All the important issues are still on the table," Mr. Sheppard concluded.

Larry Smith, vice president of corporate risk management services for MedStar Health in Columbia, Md., which has an RRG for medical malpractice, said he hopes the NAIC will listen to the concerns of the RRGs themselves–many of which write hard to find and/or afford medical malpractice liability coverage.

Mr. Smith explained that RRGs are formed out of necessity. "The alternative market is out there because the commercial market is not available in some areas, and med mal is a great example of that," he said. The NAIC, he added, needs to be cognizant of what the alternative market has done to "stabilize the industry."

MedStar, he said, serves as parent company to a seven-hospital system with more than 4,000 physicians. He added that the price for medical malpractice coverage has become so prohibitive that he fears some doctors might leave their practice.

He explained that a physician bringing in $200,000 in income with a $120,000 malpractice insurance premium "can't get that to work." In Maryland, he said, premiums for an ob-gyn are $90,000 to $120,000 annually.

"So [the RRG] can't give it to them for a lot cheaper, but if I can even undercut those prices with a good, sound program by a few thousand dollars, maybe it's enough to keep them in business," Mr. Smith said.

He noted that although he found the GAO report to be fair and factual, his concern is that "discussions at the NAIC, coupled with the [GAO] report could cause a reaction." For example, he said, "if we change the [RRG] capitalization, it would not be affordable. If we can't use letters of credit, we will find ourselves unable to have these programs initiated."

Mr. Smith said he doesn't understand the level of concern. He noted he has worked with three domiciles–Hawaii, Vermont and D.C. "All were very cautious and monitored very carefully," he added.

Jon Harkavy, a board member with the Vermont Captive Insurance Association, said the state would like to see more captive domicile representation–especially from Washington, D.C.

"We want Nevada, Hawaii and Arizona on that committee," he said. "What will happen? You never know what will happen internally or how the NAIC will react."

Flag: Report Highlights

What Did GAO Say?

A study of risk retention groups by the Government Accountability Office concluded that:

o Although RRGs accounted for about $1.8 billion, or 1.17 percent of all commercial liability insurance in 2003, more regulation is needed.

o Shortage of affordable liability insurance has led to an increased number of RRG formations–more in 2002-to-2004 than in the previous 15 years, three-quarters of which write medical malpractice.

o Failures of several large RRGs raised questions about whether RRG regulation is adequate.

o A partial exemption of state insurance laws allowed by the federal Liability Risk Retention Act has led to a regulatory environment characterized by widely varying state standards.

Larry Cluff, assistant director of financial markets and community investment for the GAO, and Sonja J. Benson, a senior analyst, who co-authored the report, recently discussed their findings at a Vermont Captive Insurance Companies Association seminar and at the Captive Insurance Council of the District of Columbia annual meeting.

Mr. Cluff said at the VCIA seminar that the study was not designed to end RRGs but rather provide recommendations "in keeping with the intent and philosophy of the act as it stands." He added that "we wanted to structure recommendations without hurting the way RRGs function and provide services to members."

The GAO Report was addressed to Rep. Michael Oxley, R-Ohio, who chairs the Committee on Financial Services for the House of Representatives, which commissioned the study. The report's recommendations to Congress included:

o Strengthening the single-state regulatory framework for RRGs.

o Requiring that insureds of RRGs make financial contributions to the capital and surplus of the RRG.

o Requiring that only insureds have the right to elect members of the RRG governing body.

o Establishing mechanisms to manage conflicts of interest between RRGs and managers.

o Expanding RRG disclosure requirements to consumers.

o Devising a set of minimum baseline regulatory standards that includes laws and regulations, policies and procedures, and standards for staffing expertise, keeping the unique nature of RRGs in mind.