Risk Retention Act of 1981

The Product Liability Risk Retention Act of 1981 sought to improve the availability and cost of product liability insurance to businessmen and municipalities across the United States by allowing similar businesses to form risk retention groups (RRGs) who could self-insure to cover product liability exposures. The Risk Retention Act reflects social organization and a decision that continues to evolve as to who bears the risks in society.

In 1986, the Product Liability Risk Retention Act was revised, expanded, and renamed the Risk Retention Act. The revised act established a new entity by which insurance buyers could purchase liability insurance: purchasing groups (PGs). A PG can be any group of persons with similar or related liability risks who form an organization to purchase liability insurance on a group basis. Unlike a RRG, a PG is not an insurance company. PGs are much easier to form and are not required to raise capital to file feasibility studies or to reinsure, as are RRGs.

For the RRGs and PGs to operate cost-effectively and efficiently across state lines, Congress inserted two types of federal preemption provisions. The first prohibits discrimination against RRGs and PGs by the states. On a practical level, once a RRG has obtained a license from its chartering state and has raised its capital, it can begin operations in other states almost immediately. The second prohibits a state from requiring any insurance policy issued to a RRG or any member of the group to be countersigned by an insurance agent or broker who resides in that state. This addresses the issue of states requiring every insurance policy issued in the state to be countersigned by an agent who is a resident of that state and who would be paid a percentage of the commission. RRGs, by definition, provide insurance to persons in the same type of business or industry, not to the general public. Therefore, the state requirement for a resident agent to sell insurance seems to add nothing but cost. Although the Liability Risk Retention Act is a federal law, it has no enforcement mechanism of its own. RRGs are regulated by the state in which they are registered. Regulation of PGs entails not only the domiciliary state of the PG but also the regulation of the PG's insurer.

RRGs benefit from the act because it allows members to control their own program, obtain rate stability over the long term, and implement effective loss control programs. They may obtain dividends for good loss [Page 1843]experience and have access to reinsurance markets, all of which improves their ability to maintain a stable source of liability coverage at affordable rates. The major benefit for PGs is the ability to negotiate tailormade coverage at favorable rates with insurers.

The natural catastrophes of the 1990s drove up the price of commercial property insurance and increased discussion about the need to broaden the act to allow RRGs to cover property risks. Although such legislation would be welcomed by RRGs, the National Association of Insurance Commissioners (NAIC) opposes expansion of the 1986 act on the grounds that a lack of any guaranty fund protection could lead to a disproportionate number of bankruptcies of RRGs. The NAIC also argues that although premiums may be high, there is no actual shortage of property insurance that is not addressed by state-based solutions that are mindful of insurer bankruptcy. At the time of this writing, legislation to expand the 1986 act is being reviewed by a congressional committee.

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