States Regulating RRGs As Captives Continue Excellent Track Record (The Risk Retention Reporter)

Of the 360 RRGs that have formed under the 1981 and 1986 Risk Retention Acts, 321 have been regulated under state captive laws, while 39 have been regulated as traditional property/casualty carriers.

The 1986 Liability Risk Retention Act requires that RRGs become licensed in a state under the state's insurance laws.

Of the twenty-five states that have enacted captive laws, 18 authorize RRGs to form as captive insurance companies. Captive laws provide advantages to start-up companies, such as RRGs, including lower capital and surplus requirements, the use of letters of credit, and greater flexibility with regard to investments.

Even when the large number of RRG formations occurring since 2000 are excluded, the track record of states regulating RRGs as captives versus those regulating them as traditional insurers is still significantly better. Of the 360 RRGs formed under both Acts, 89% have been regulated as captives. Of these, only eight or 2.5% have been declared insolvent and placed in liquidation. In contrast, of the 39 RRGs that were regulated as traditional insurers, a total of 12 or 30.7% were declared insolvent and placed in liquidation. These data suggest that RRGs regulated in captive domiciles in which regulators typically have greater experience and expertise are less likely to become insolvent.

Moreover, captive regulators appear to have taken action more quickly in closing down troubled RRGs, with RRGs regulated as captives operating for an average of 4.7 years before regulators moved to shut them down, while RRGs regulated as traditional insurers were allowed to operate for an average of 7.9 years before action was taken against them.-