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A ONE STOP RISK MANAGEMENT RESOURCE

by John Salisbury, Chief Executive Officer
Housing Authority Risk Retention Group, Inc. (HARRG)

(Editor's Note: This article was written in the mid-90's. While some of the anecdotal information is no longer correct, the basis on which the article was written is still valuable. We have chosen to keep it in our archives for this reason. -- captive.com)

WHY HAVE PUBLIC HOUSING AUTHORITIES ESTABLISHED BOTH A RISK RETENTION GROUP AND AN ASSOCIATION CAPTIVE?

Interested public housing authorities initially joined together in 1986 to find a solution to the problem of availability and affordability of liability insurance created by the hard insurance market in the mid-1980's. During the course of the study they learned that selected public housing authorities were also experiencing some problems with respect to the scope and cost of property coverage. As a result of the feasibility work they found it necessary to incorporate two captive insurance companies.

The risk retention group was created in 1987 to write liability coverages i.e. general liability, public officials liability, law enforcement liability, employee benefit liability, and lead-based paint liability. However, the Liability Risk Retention Act did not permit risk retention groups to write property insurance, workers compensation and other lines of coverage. The name of the company they created was Housing Authority Property Insurance (HAPI). HAPI was not licensed to start operation until late 1988.

WHY DID YOU SET UP AN RRG WHEN A SINGLE CAPTIVE COULD DO THE JOB?

The most important reason is the expense. Fronting costs for a captive can be substantial. An RRG can be a direct writer and avoid the fronting expense of 8% - 10% of premium. In HARRG's case, the additional cost of fronting expense would probably exceed $1.6 million annually.

A second reason is that you avoid any adverse business decisions that fronting carriers may need to make about writing or not writing coverage in selected states. If you have members/policyholders in certain states and the fronting carrier decides that the insurance regulatory environment or business conditions in that state are such that it will no longer issue policies in that state, a fronted captive can have problems, i.e. currently writing workers compensation and property coverages in selected states.

A third reason is that fronting carriers are subject to rate and form filings. A front may not be willing to do special rate filings that meet the particular needs of a captive.

A forth reason is that with an approved business plan in the state of domicile a risk retention group only needs to register in the states where it intends to operate. If the various states followed the intent of the Federal statute, the time and expense of meeting the requirements in a state should be minimal. For starting a liability program, a risk retention group is the most efficient way to proceed. In the case of PHA's, the first priority was securing liability coverage. The next was meeting other insurance needs.

Finally, I would point out that risk retention groups are not subject to the additional expense of insurance company guarantee fund assessments that states levy. A fronting carrier has this expense. Recent insurance company insolvencies have necessitated a number of stated levying such assessments. However, it would only be fair to point out RRG members are also not the beneficiaries of those funds if the RRG they own becomes insolvent.

WHAT IS A PUBLIC HOUSING AUTHORITY (PHA) ?

A federal public housing program was created in 1937 to provide housing to low income people. The housing is financed by rents paid by low income persons and the federal government, and built, owned and managed by local public housing authorities created under state statutes.

There are 1.4 million public housing units -- apartments, town homes, duplexes, high-rises, and single family homes. The units house 3.7 million people of all ages and are operated by about 3,200 PHA's.

HOW MANY PUBLIC HOUSING AUTHORITIES ARE MEMBERS OF HARRG, HAPI, AND HAI ?

HARRG has 296 members that manage more than 40% of the public housing units in the U.S. HAPI has 144 member PHAs that represent about 10% of the housing units and have property values of more than $6 billion. The HAI membership includes HARRG and HAPI who belong on behalf of their policyholders and 23 other PHA's that do not purchase any insurance coverages from either company.

IS IT NECESSARY TO MARKET HARRG THROUGH AN INSURANCE AGENCY?

No. HARRG is marketed directly by the staff of the risk retention group. Where a risk retention group is managed by in-house staff, the federal law preempts states from requiring officers and employees to be licensed as agents. In limited instances HARRG uses licensed insurance agents.

Housing Authority Insurance, Inc. (HAI is an association of housing authorities and insurers owned by housing authorities) publishes a coverage manual that outlines all of the coverages of the HARRG and HAPI programs.

WHY DID YOU CREATE AN INSURANCE AGENCY?

An insurance agency Housing Authority Insurance Services, Inc. (HIS) created to provide insurance agency services under an agency agreement with the fronting carrier. The agency markets programs sponsored by HAI and is an alternative to using an insurance agency staffed by a captive management firm. HIS has reduced insurance commission expenses and permitted a more effective marketing effort.

HAS IT BEEN NECESSARY TO ESTABLISH ANY OTHER CORPORATE ENTITIES TO DELIVER SERVICES?

Yes. The Boards of Directors of HARRG and HAPI support the concept that ìgood risk management is good management.î They have asked HAI (Housing Authority Insurance, Inc.) to among other things serve as the vehicle for developing new programs that: (1) assist in improving the management capacity of housing authorities and (2) improve the quality of life of residents of public housing. For example, HAI developed, under a contract with HARRG, a lead-based paint liability program. One by-product of that project was the creation of Housing Environmental Services, Inc. (HES) to provide risk assessments, training, consulting, laboratory quality control and other serviced for housing authorities, other interested organizations and HARRG. HES has already developed a national reputation as a leader in this environmental hazard.

Another example is HAI's current efforts to develop a satellite television network to serve public housing authorities. Housing Telecommunications, Inc. (HTI) is being developed to deliver training, education and information services to housing authorities and their residents.

All of these corporations have evolved from the work of the original visionaries of the liability and property insurance programs. They all work closely together in achieving the common mission described above.

It is challenging for me to wear a variety of different hats in the six corporations that have evolved since the formation of HARRG in 1987. My responsibilities vary from chief executive officer, president, director, and/or chairman of the board of directors in one or more of the corporations.

WITH MORE THAN FIVE YEARS OF OPERATING HISTORY UNDER YOUR BELT, DO YOU THINK IT WAS A GOOD DECISION TO CREATE BOTH A RISK RETENTION GROUP AND A SEPARATE CAPTIVE INSURANCE COMPANY TO REINSURE OTHER FRONTED INSURANCE PROGRAMS FOR PUBLIC HOUSING AUTHORITIES? WHY?

Yes. HARRG and HAPI were created by their public housing owner/policyholders to meet specific needs. The public housing officials that serve on the Boards of their captive insurance companies take pride in the fact that they are evolving a ìone stop risk management resource.î Public housing authorities have multiple insurance/risk management needs. The membership in both Companies have increased by being able to offer multiple lines of coverage. A public housing authority may initially join one of the Companies to purchase a specific type of coverage and realize the benefits that can be realized by becoming a member of the other Company and purchasing other lines of coverage.

Shared services is another benefit of having both Companies managed by the same staff. HARRG manages HAPI under a contract. There are economies in the overhead costs associated with the finance, management information systems, underwriting, claims and risk control, administrative functions. In addition to benefiting from these efficiencies, participating PHAs receive integrated HARRG/HAPI risk control services i.e. site visits, training, technical assistance and risk management information.

It is difficult to estimate the savings achieved by having shared services. However, I am confident the number has six figures.

The major disadvantages of not being able to offer all lines of coverage through a risk retention group are: (1) separate licensing and reporting requirements for each company, (2) the complexities associated with having separate boards, and (3) the confusion separate corporations cause prospective public housing authority members who want insurance coverage from a quality program but do not understand the insurance legislative and regulatory barriers that make it necessary to have two separate captive insurance companies.

HOW DOES YOUR REINSURANCE WORK FOR BOTH COMPANIES?

HARRG purchases reinsurance from several quality reinsurers. On the general liability coverage side it writes up to five million dollar limits, retains the first one million dollars and a portion of the layer excess of three million dollars.

HAPI is a property insurance retrocessionaire. The fronting carrier for the HAI sponsored property program retains property losses excess of one million dollars. The fronting carrier then reinsures the HAI sponsored program through a quality reinsurer that currently retains the layer excess of HAPI's retention. The reinsurer then ceded to HAPI premiums for the first one hundred thousand dollars of each loss. A retrocessionaire is an insurance company that insures a reinsurer.

WILL ANY ADDITIONAL LINES OF COVERAGE BE PROVIDED BY EITHER OF THE COMPANIES IN THE FUTURE?

Yes. Currently HAI is working on the development of a workers' compensation program that will be provided through the use of a fronting carrier reinsured by HAPI. Public housing authorities are very interested in working to reduce their workers' compensation costs.

We will be submitting a revised HAPI business plan to Vermont for approval and a license to write this line of coverage.

A captive insurance company can use more than one fronting carrier. The fronting carrier for the workers compensation program may not be the same as the fronting carrier for the property program that is currently being sponsored by HAI.

WOULD YOU ADVISE OTHERS TO FORM SIMILAR PROGRAMS? WHY?

If the member owner/policyholders of a risk retention group are interested in expanded insurance coverages I would definitely suggest the risk retention group conduct a feasibility study to develop other program coverages provided through a second captive company. If your RRG has delivered a quality program you are in an excellent position to generate the commitment needed to start a new program. Either your internal staff or the management company you use should be able to assist you in your program development efforts.

SHOULD ACTION BE TAKEN TO EXPAND THE LIABILITY RISK RETENTION ACT TO PERMIT RISK RETENTION GROUPS TO WRITE OTHER LINES OF COVERAGE?

Yes, this action would be very helpful to member owner/policyholders. Single state licensing and regulation for financial solvency and multiple state registration is appropriate for any line of insurance where a captive insurance company is governed by its member/policyholder/owners. Under these conditions every one involved has a vested interest in the coverages provided, the success and solvency of their captive.

DO THE MEMBERS OF THE HARRG BOARD OF DIRECTORS ALSO SERVE ON THE HAPI BOARD OF DIRECTORS?

No. The members of each of the boards of directors are elected by their respective members. The composition of the boards of both Companies is not required to be the same. In practice many of the directors have been elected to serve on both boards. However, there are individuals that presently serve on one Board and not the other.

You would probably find the meetings of the HARRG and HAPI Boards of Directors interesting. Simultaneous meetings are held with the Presidents (the responsibilities of this title are the same as Chairman of the Board in other captive and traditional insurance company settings) of each Company presiding using a joint agenda. Only the directors of each Company vote on the agenda items for the Board on which they serve. Two sets of minutes are recorded.