As the National Association of Insurance Commissioners moves to implement GAO recommendations to develop uniform, baseline standards for RRG regulation, it will be important to understand why captive regulation has been more successful than traditional approaches and to incorporate this knowledge into accreditation standards now under NAIC review.

The Liability Risk Retention Act–a federal law enacted 19 years ago that enables formation of RRGs–requires that RRGs become licensed in a state. Under the LRRA's "lead state" provisions, once licensed in its domiciliary state, an RRG can operate in all states upon registering and filing the requisite documentation with non-domiciliary states.

RRGs can choose to be licensed as an RRG under a state's captive law–where the state has enacted a captive law and allows RRGs to form under it–or under the state's traditional property-casualty law. If a state has no captive law, the RRG must become licensed under the state's p-c provisions or other sections of its insurance law.

The Risk Retention Reporter has since 1987 maintained a database of RRGs formed under the 1981 and 1986 Risk Retention Acts. Of the 296 RRGs formed under these acts through September 2005, 19 were determined to be insolvent and placed in liquidation.

(Note: In the same period that the Risk Retention Reporter identified 19 insolvent RRGs, the GAO has identified 21 failed RRGs, defining a failed insurer as one placed in rehabilitation, conservation or liquidation. The difference in the number–19 versus 21–has no impact on the conclusion that states regulating RRGs as captives have demonstrated a better track record.)

Of the 296 RRGs, 258–or 87 percent–have been regulated as captives. Of these 258, only seven, or 2.7 percent, have become insolvent.

In contrast, of the 38 RRGs that were regulated as traditional insurers, a total of 12–or 31.5 percent–have become insolvent.

What's more, even when excluding the large number of RRG formations since 2000, the track record of states regulating RRGs as captives versus those regulating them as traditional insurers is still significantly better. These data suggest that RRGs regulated in captive domiciles, where regulators typically have greater experience and expertise, are less likely to become insolvent.

GAO points out in its report that Vermont and Hawaii have extensive experience in regulating RRGs, since 1987 and 1988, while the other leading domiciles–South Carolina, District of Columbia, Nevada and Arizona–have limited experience, having enacted captive laws beginning in 1999.

Of the 133 RRGs formed from 1987 through year-end 1999, 87 were regulated as captives. Of these, 60 (69 percent) were regulated in Vermont. The superior solvency record achieved by states regulating RRGs as captives must be attributed in significant part to Vermont regulators and their implementation of Vermont's captive law in the regulation of RRGS domiciled in that state.

The NAIC RRG Task Force is in the process of determining which of the Part A accreditation standards that apply to traditional insurers should apply to RRGs. At this time, only one captive domicile–Vermont–sits on this task force. While several other captive domiciles have requested participation, they have not been selected.

Both the National Risk Retention Association and the Captive Insurance Companies Association have requested that the NAIC hold public hearings on these critical issues and permit voting participation by captive and other domiciles.

CICA, in a letter to the chairs of the RRG Task Force and the RRG Working Group, observed that "the NAIC has had limited input from the interested public and, in the opinion of some, has deliberately isolated many of those who could and should be part of this discussion and process."

In addition, the District of Columbia, one of six leading domiciles regulating RRGs, has requested that it, along with other captive domiciles, be given full voting rights on the RRG Task Force. If the request is denied, it has asked that the NAIC provide an explanation and a way to appeal the decision.

The GAO also has made it clear that the NAIC process will not be "credible" unless it is open to all interested parties who are given an opportunity to meaningfully participate. Stay tuned!

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.

Big number chart

Flag: Key Facts

Head: Numbers Don't Lie

296–RRGs formed since 1981.

19–RRGs declared insolvent and placed in liquidation.

258–RRGs regulated as captives.

7–"Captive" RRGs declared insolvent.

38–RRGs regulated as traditional insurers

12–"Insurer" RRGs declared insolvent.