Risk Purchasing Groups

Executive Summary

The 1986 Risk Retention Act provided for the establishment of Risk Purchasing Groups (RPGs). Through early in 2007 approximately 700 RPGs have been formed. Is that an indication that there are only 700 homogenous liability groups in the US or an indication of lack of knowledge of the advantages of forming a RPG? The purpose of this article is to address the lack of knowledge issue.

The stated intent of the Risk Retention Act was to preempt state regulation. Although it is commonly believed that rate, rule and form filing requirements are inapplicable for risk purchasing groups, only a few states do not require filings for approval of the rates, rules and policy forms and endorsements used to insure the RPG. A RPG may be formed only to purchase commercial liability insurance. The purchasing group must register in every state in which it intends to do business and must have, as members, a homogeneous group for the purchase of insurance.

There are distinct advantages for the establishment of a RPG from the standpoint of insurance buyers, insurers, and agents and brokers. There are, however, costs and administrative requirements involved with the establishment of a RPG and its registration in the various states.

In summary, the advantages for the establishment of a RPG are:

  • Elimination of rate, rule, policy form and endorsement filings in several states.
  • Elimination of countersignature requirements.
  • The ability to develop and implement a specific set of rates, rules and policy coverages for an objectively defined classification of business.


Introduction


In 1986 the United States Congress enacted the Liability Risk Retention Act, in part, to respond to the “liability crisis” of the late 1970’s and early 1980’s. During that period property and casualty insurers raised rates, because of a decrease in interest rates and an increase in losses. Losses dramatically increased in part because of coverage expansion and increases in tort awards through the U.S. judicial system. For some classes of business insurers either cancelled their in-force policies or no longer made insurance available. The rationale for the Risk Retention Act of 1986 was to provide an alternative market for buyers of commercial liability insurance by enabling two entities -- risk retention groups and risk purchasing groups -- to be established. This Act preempted state regulations in several areas but its intent has been eroded by efforts by many state insurance regulators to preserve their jurisdiction. While the Act has more application to risk retention groups, that is not the subject of this article and this article will deal only with the impact on RPGs.

It should be noted that the definition of “liability” in the Risk Retention Act excludes workers’ compensation and property insurance. In addition it is not applicable to personal lines insureds. The Act does apply to “any group which has, as one of its purposes, the purchase of liability insurance on a group basis.”


The Risk Retention Act of 1986


The Liability Risk Retention Act provides that RPGs may be formed by groups of commercial insurance buyers engaged in similar or related businesses or activities. There is no requirement that RPGs have a particular number of members. The type of insurance coverage permitted in the Act’s definition of “liability” would include all types of third party liability coverage. This would include common commercial general liability insurance, errors and omissions, directors and officers, medical malpractice, professional liability, product liability, employers liability, employee benefits liability, and pollution liability as well as other liability coverages.

The Liability Risk Retention Act permits states to require the use of licensed agents or brokers for placement of coverage in a RPG. Almost all states require that RPGs use licensed agents or brokers to place coverage for the RPG members residing in their state. Prior to the passage of the Liability Risk Retention Act, state countersignature laws required a resident agent to countersign policies placed by a nonresident agent. The Act preempts those laws and no countersignature is required for RPG policy. The RPG policy can be a master policy with certificates issued to RPG members or it may be individual policies issued to each member. Most states do require some form of nonresident agent or broker’s license enabling nonresident agents to place coverage in the RPG.


State Regulations


Under current law and state requirements every state, individually, addresses the application of state laws to the property and casualty insurance industry. This includes the filing of rates, rules, policy forms and endorsements for review and/or approval prior to their use as well as countersignature requirements, agency licensing and appointments, unfair trade and claims practices, and the registration and licensing of risk retention and risk purchasing groups.

When the 1986 Liability Risk Retention Act was first enacted, it was stated that the Act would circumvent all state filing requirements. Almost immediately several states sent notices to companies that, in their opinion, their state statutes on filing requirements still applied. Soon after the enactment of the Act questions were raised as to whether states could require the admitted insurers of purchasing groups to file their rates, rules, and forms and endorsements for prior approval before providing coverage to the members of the RPG. The issue was tested in the case of Insurance Company of the State of Pennsylvania vs. Corcoran in 1988. The court held, in that case, that the Liability Risk Retention Act was ambiguous so that the New York Superintendent of Insurance could require an admitted insurer to file its rates, rules, and policy forms and endorsements, for prior approval, prior to their use. The court did find that a RPG and its members cannot be denied rate and form advantages provided by the Act.

This case was not appealed to a Federal Court nor has the issue been brought to Court in other states. Thus, most states rely on this decision for requiring admitted insurers of purchasing groups to comply with state laws for the filing and review of rates, rules, and policy forms and endorsements.

In a generally accepted state by state regulation survey the majority of states have indicated that their filing requirements do apply even though a RPG is involved in the purchase of liability insurance for its members. Several states have indicated that either no filing is required or a filing, is required, but only for information.

Advantages for Risk Purchasing Groups

There are advantages to using a RPG - to the RPG member who purchases the insurance, the insurer who underwrites the coverage, and the agent or broker who provides the services. These include:

• Advantages to Agents and Brokers

- Specialized program market.
- Elimination of state countersignature laws.
- Tailor-made coverage and favorable rates may be negotiated.
- Being viewed as a market specialist.

• Advantages to Insurance Buyers

- Tailor-made coverage.
- More favorable rates.
- Better policy terms.
- Risk management and loss prevention programs.

• Advantages to Insurers

- Specialized coverage and favorable rates to an objectively defined group.
- Preemption of state countersignature laws.
- No prior approval or formal filing requirements of rates, rules, policy forms and endorsements in several states.
- Regulatory perception of a sophisticated market may lead to less specific review of rates, rules, policy forms and endorsements.
- Marketing advantage if the “group” or “association” affiliated with the “group” endorses the product.

Disadvantages for Risk Purchasing Groups

There are very few disadvantages to the establishment of a RPG. The only one worth noting is the cost and administration of incorporation and registration.


Development and Formation of a Risk Purchasing Group


Although the Liability Risk Retention Act does not require that a RPG have a particular legal structure, most risk purchasing groups choose to be either an unincorporated association, a for-profit corporation, or a not-for-profit corporation. The not-for-profit corporation is the most popular structure. The formation of a not-for-profit corporation RPG involves the preparation of the appropriate incorporation documents and the filing of those documents with the Secretary of State. Approvals, when required, are normally very prompt. The formation of the corporation is typically prepared by a local law firm familiar with the state’s corporation law. In most cases the initial incorporation, including any name review that might be required by a state, can be accomplished within two or three weeks.

One of the most common sources for members of a RPG are trade or professional associations. Associations are interested in pursuing the formation of a risk purchasing group because of the income and membership benefits in sponsored insurance programs. Also, there may be an opportunity for fee income to the Association. The delivery of insurance products, through an association, can be much more cost effective and efficient than delivery through a one-on-one marketing procedure with each and every possible insured.


Regulation of Purchasing Groups


Under the provisions of the Liability Risk Retention Act the RPG must file a notice of intent with each state insurance commissioner for the states in which the RPG intends to do business. The notice normally includes:

• Identification of the state in which the risk purchasing group is domiciled.
• The lines and classifications of liability insurance for which the RPG intends to purchase insurance.
• The insurance company and agent or broker through whom the RPG intends to purchase insurance.
• The identity of the principal place of business of the risk purchasing group.
• The agent of service for process for the RPG.

The National Association of Insurance Commissioners (NAIC) has developed a set of standard procedural forms for the registration of a RPG. Individual states have also developed their own forms. Several states do require flat fees for the registration and other states require annual renewal fees for the continuation of the RPG.

Many states have enacted similar, if not identical, liability risk retention acts when compared to the Federal Act. Most of these laws, as well as the Federal Law, require that if changes are made in the RPGs formation -- for example, a change in officers, a change of insurer, or a change in agent -- then the state must be notified of the change. The Acts also require that, if a surplus lines insurer is used, that appropriate payments of the surplus lines taxes be made by the licensed broker.


Expense and Administration


As noted previously there is a cost for initial incorporation of the RPG. Besides those costs there are fees for the initial registration and annual renewal of the risk purchasing group. Several states require annual filings, normally made by the insurer, which include summaries of the amount of premium written in a state for confirmation that the admitted insurer or licensed surplus lines broker has paid the necessary state premium taxes.

Summary

There are advantages for the establishment of a RPG for the liability insurance exposures for a homogenous set of insureds. They include:

• Elimination of rate, rule, policy form and endorsements filings in several states.
• Elimination of countersignature requirements in all states.
• The ability to establish a set of tailored rates, rules, and policy coverages for an objectively defined class of business.

There are no specific disadvantages for establishing a risk purchasing group for a set of homogenous insureds, but there is a cost for its establishment. If the RPG were to incorporate there would be a charge in the state of domicile. The countrywide initial fees and flat charges for registrations are approximately $5,100. The countrywide annual fees to continue the registration are approximately $3,000. Not a great amount!



The Author: Michael L. Averill, CPCU

About the Author: Mike Averill is the owner of Michael L. Averill Consulting, LLC. Mike started this insurance consulting firm in 2002. It was formed to effectively save companies money. The firm specializes in company licensing, product development, regulatory compliance, state filings, education, and provides other services. Mike is also an expert witness on rating, use of underwriting rules and guidelines and interpretation of policy forms and endorsements.


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