The Risk Retention Acts: Background and Issues

Publication Date: December 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Business

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Abstract:

Risk retention groups and risk purchasing groups are alternative insurance entities authorized by Congress to expand insurance supply through a simplification of insurance regulation. The McCarran-Ferguson Act of 1945 generally leaves the regulation of the business of insurance to the individual states. In 1981 and 1986, however, Congress crafted a narrow exception to the usual state insurance regulations for these groups, largely exempting them from multiple state oversight. Membership in risk retention and purchasing groups is limited to commercial enterprises and governmental bodies, and the risks insured by these groups are limited to liability risks.

Over the past two decades, interest -- both in Congress and in the market -- in these groups has varied largely with the vagaries of the regular insurance market. Since 2001, the insurance market has been in one of its periodic "hard" markets and regular insurance has become increasingly expensive and sometimes unavailable. During this time, the numbers of risk retention groups have risen dramatically and calls are being heard to expand the scope of insurance that they are allowed to offer. At the same time, some problems have occurred in individual risk retention groups and cautionary voices are also being heard.

The fundamental questions surrounding Risk Retention Act expansion are essentially the same as those addressed by Congress in prior consideration of the issue. Stripping away jargon, this question can be posed as an issue of availability vs. reliability. Those who would support expansion often focus on a failure of the current insurance market, and the current regulatory system, to make a sufficient supply of insurance available so that consumers who need insurance can find it at a reasonable price. The question they pose is essentially: "What happens to a community when a business, a school, or a doctor can not afford or find insurance?" Those who would oppose expansion often focus on the dangers in allowing insurance to be sold that is not subject to same regulatory standards as "normal" insurance. The question this group poses is essentially: "What happens to a community if the insurer from which this business, school, or doctor purchases insurance ends up bankrupt or if the policy does not cover what needs to be covered?"

This report outlines the current regulatory structures affecting risk retention and risk purchasing groups as well as the legislative and market history of these groups. It also discusses the current debate regarding possible expansion of these groups into areas beyond commercial liability insurance. This report will be updated as significant legislative events occur.