RRG Growth Lags Past Hard Markets, but Opportunities Remain

Past and Future signs with arrows pointing opposite directions

August 11, 2021 |

Past and Future signs with arrows pointing opposite directions

While risk retention group (RRG) formations have fallen short of their pace during previous hard insurance markets, RRGs continue to fill an important role addressing challenging insurance markets.

Speaking during a session titled "Are RRGs a Mature Industry?" Tuesday on the first day of this year's virtual Vermont Captive Insurance Association Annual Conference, Christopher Diemel, managing editor of the Risk Retention Reporter, noted that while the current hard market has led to numerous new captive insurance company formations, there have been few new RRG formations.

Mr. Diemel noted that while Vermont licensed 38 new captives in 2020, only 2 of those were RRGs. By contrast, during the liability insurance crisis of the 1980s and following the passage of the US Liability Risk Retention Act in 1986, 17 RRGs formed in Vermont in 1987 and another 10 in 1988.

"Coming into the hard market of the early 2000s, once again we saw a huge surge in formations," Mr. Diemel said.

"In Vermont, it has been relatively slow, which is kind of interesting because [RRGs have] been kind of a speed-to-market solution," said Christine Brown, assistant director of captive insurance in the Vermont Department of Financial Regulation, who moderated the session.

Over the history of risk retention groups, RRGs serving the government and institutions sector have historically seen long-term success, Mr. Diemel said. Meanwhile, health care is the largest RRG sector today, writing up to 20 percent of all medical professional liability coverage in the United States, he said.

"The healthcare sector is really what drove risk retention growth in the 2000s," Mr. Diemel said.

Looking forward, Mr. Diemel said, "I do think an area where we will see a lot of growth is in the transportation sector." Though he added, "It's worth noting that transportation has been a difficult sector for RRGs historically."

The transportation sector has seen more RRG insolvencies than other sectors, he said, so it's important to learn from the experience of those failed RRGs to increase the likelihood of success with future transportation sector RRGs.

"I do think the number of operational RRGs will grow in the current hard market but probably not at the same rate of expansion that we've seen in the past," Mr. Diemel said. In the current market, markers of RRG success might include established RRGs gaining larger market share, he said, and those that already have a large market share remaining a stable option for members over the long term.

Another panelist, Chris Heckman, chief risk officer at MCIC Vermont, Inc., RRG, outlined several keys to established RRGs remaining stable organizations through various insurance market cycles.

First is for the RRG to have a distinct mission and vision that are reinforced with all its stakeholders, Mr. Heckman said. "That doesn't mean your mission and vision won't change over time," he said, but it is important that a broad audience understands what the RRG is doing as the mission and vision change.

It's also important to integrate the RRG's owners into its board, Mr. Heckman said. He added, "It's important to communicate with your home regulator on a consistent basis so they know what you're trying to achieve and your performance toward meeting your goals."

It's also important that the RRG's staff operates efficiently, Mr. Heckman said.

"Capital is a critical component to long-term success, and capital will definitely change," he said. It's important to work with the board to set capital targets that support the RRG's mission and fit its strategy.

"One of the areas in which MCIC has learned many lessons is being able to adjust capital during market cycles," Mr. Heckman said.

It's also important that the RRG remain relevant, according to Mr. Heckman. "Your RRG has to be able to adapt to the changing landscape," he said. It's essential that the RRG's policies remain state-of-the-art. "We review our cyber language every year to ensure it's covering what we want it to cover," Mr. Heckman said.

The final key for RRG stability through changing market cycles is reinsurance, Mr. Heckman said. The RRG's reinsurance needs will change over time, and it's important to be prepared to change the approach to reinsurance as needs change.

There are opportunities for new RRGs in emerging industries as well. Timothy Herr, general counsel and risk management officer at Recreation Risk Retention Group, Inc., said his RRG was created to solve a very specific problem.

"In niche recreation, we have difficulty finding and keeping insurance in the traditional market," Mr. Herr said. In Recreation Risk Retention Group's case, that was covering hang gliding, paragliding, and power paragliding businesses.

In 2015, the insurer that had covered hang gliding's governing body and some of the largest flight schools in the United States announced it would no longer cover hang gliding, Mr. Herr said.

"The traditional market just has an aversion to writing these kinds of risks," Mr. Herr said, believing such businesses must be dangerous and will produce high volumes of claims.

"There's a lack of carriers out there in the traditional market that are willing to offer the coverage or the limits that are needed for these recreational opportunities," Mr. Herr said.

In addition, because these are niche industries, there's little experience or loss data in the traditional market that allows them to understand what sort of claims they might actually face. "There's also a lack of understanding in the traditional market about how to actually manage that risk," Mr. Herr said. "The traditional market hasn't gotten the experience and won't get the experience in this type of risk because [the business] just isn't big enough."

Ultimately, turning to an RRG produced several benefits for its members, according to Mr. Herr. Among them are tailored coverage and policy language designed for the needs of the industry. "You're no longer putting a square peg into a round hole with commercial insurance policies," he said.

The RRG also offers its members pricing stability, he said. And the opportunity to own and understand loss data has led to improved risk management. "That's something we couldn't accomplish well in the traditional insurance market," Mr. Herr said.

"That's not to say there aren't challenges with going the RRG route with a niche market. The biggest challenge we faced was reinsurance," Mr. Herr said. "This is not unlike the challenge we have with the traditional market in general."

But the RRG solution has worked well for Recreation Risk Retention Group's members, Mr. Herr said, and could be an effective solution for other niche recreation industries.

August 11, 2021