Benchmarking Report Reflects Stability Among Risk Retention Groups

Stack of Rocks in a Pyramid Shape against a Muted Line and Dot Graph

October 30, 2023 |

Stack of Rocks in a Pyramid Shape against a Muted Line and Dot Graph

The number of risk retention groups (RRGs) has remained stable over the past 15 years, with RRGs, overall, tending to be better capitalized than the broader insurance industry, according to a new report from Pinnacle Actuarial Resources, Inc.

In its 2023 Risk Retention Group Benchmarking Study, Pinnacle notes that Vermont, South Carolina, and the District of Columbia have the most domiciled RRGs and are also at the top of RRG premium written. More than 60 percent of the total number of RRGs in the United States are currently domiciled in the three states.

Seven states and districts have ten or more domiciled RRGs, the Pinnacle report says. Meanwhile, New York, Pennsylvania, and California rank the highest in terms of the risk state—the state in which the insured risk is located—for written premium.

"While Vermont, DC, Arizona, and Nevada have all seen the number of RRGs decrease over the last 5 years, South Carolina, Hawaii, Alabama, Tennessee, and North Carolina have seen an increase in the number of RRGs," the Pinnacle report says. "Alabama, in particular, has seen the largest increase in number of RRGs for the past 5 years, growing from only 2 in 2018 to 19 in 2022."

The amount of written premium insured by RRGs decreased between 2009 and 2011 before growing steadily from 2012 to 2022, the Pinnacle report says. In 2022, RRG premium approached $5 billion.

RRGs' business mix is largely focused on medical professional liability (MPL), other liability (OL), and commercial auto liability (CAL), the October 2023 report says.

RRGs wrote $2.69 billion in MPL direct premium in 2022, up from $2.40 billion in 2021, Pinnacle found. Other liability accounted for more than $1.62 billion in RRGs' direct written premium last year up from $1.44 billion in 2021, while RRGs wrote $464 million in commercial auto liability direct premium in 2022, up from $445 million the year prior.

According to the Pinnacle report, the ratio of RRGs' net written premium to surplus has been flat over the past several years, and that ratio is substantially smaller for RRGs than for the broader insurance industry.

Both risk retention groups and the overall insurance industry continue to see premium growth across commercial auto liability, medical professional liability, and other liability lines of business, Pinnacle says, adding, "We continue to see new formations of CAL RRGs."

The number of RRGs with written premiums was relatively stable from 2010 to 2013, averaging 219 per year, according to Pinnacle. Between 2013 and 2019 the number of RRGs with positive written premium decreased from 221 RRGs in 2013 to 202 in 2019. £This decrease was related primarily to small and medium-sized MPL RRGs," the report says.

Over the past 3 years, RRG numbers have begun to increase, with 222 risk retention groups with positive written premium in 2022, Pinnacle says.

Of the 222 RRGs with positive written premium in 2022, 200 wrote more than 90 percent of their premium in 1 line of business, Pinnacle says.

"The number of MPL RRGs has decreased slightly from 99 RRGs in 2018 to 97 RRGs in 2022, while the number of RRGs specializing in CAL has increased from 28 to 46 over the same time period and those for OL has increased from 49 to 57," the Pinnacle report says.

RRGs underwriting net income decreased significantly in 2022, Pinnacle found. "Many RRGs use Generally Accepted Accounting Principles (GAAP) as their accounting basis," the Pinnacle report says. "The reductions in net income as bonds are marked to market caused a much bigger decrease compared to the industry which predominantly uses statutory accounting principles (SAP)."

The Pinnacle report goes on to note that the ratio of underwriting income to surplus has been cyclical in nature, with RRGs often running opposite of the broader insurance industry.

"RRGs' underwriting loss in 6 of the last 11 years is worth noting," the Pinnacle report says. "RRGs primarily writing CAL drive this result with significant negative underwriting income in several years since 2012. It is worth noting CAL has seen a significant improvement in underwriting loss beginning with 2020 compared to the prior 4 years."

RRGs writing other liability and medical professional liability saw fewer years with underwriting losses, Pinnacle says, and their investment income was always large enough to offset the losses.

RRGs' overall market share across all lines of business has been around 0.5 percent of direct written premium, Pinnacle says. RRGs' market share for the MPL line of business has steadily increased, however, from 13.9 percent in 2012 to 22.5 percent in 2022.

Pinnacle's study found that RRGs have had higher accident year loss and loss adjustment expense (LAE) ratios than the broader insurance industry over the past 11 years.

"A comparison of reported incurred (paid amounts plus case reserves) loss and defense and cost containment expenses (DCC) development patterns reveal that aggregated RRG-incurred losses tend to develop differently than aggregated incurred losses for the industry as a whole for the MPL, CAL, and OL lines of business," the Pinnacle report says.

The report also notes that RRGs' overall expenses vary by line of business written, with CAL having a higher and more variable expense ratio than RRGs writing OL or MPL.

Examining A.M. Best rankings among risk retention groups, Pinnacle found that of the 222 RRGs with positive written premium in 2022, 41 had A.M. Best ratings, 1 fewer than in the 2021 study. "A majority of the rated RRGs received an A- or better, with only two falling short of an A- level rating," the report says. "Those RRGs scored the next-highest rating of B++."

October 30, 2023