How to Grow RRGs in the Future by Tal P. Piccione

How to Grow RRGs in the Future

Tal P. Piccione

Chairman & Chief Executive Officer

U.S. RE Companies, Inc.

 2009 National Conference

National Risk Retention Association

September 24, 2009

Washington, DC

After 37 years in reinsurance – twenty two of them building a global reinsurance broker and expanding into an international financial services group spanning brokerage, underwriting, claims, risk, captive management and investment banking – it’s a special pleasure to share thoughts on the insurance industry with a group of fellow entrepreneurs.

The Risk Retention Act of 1986 unleashed a wave of entrepreneurship as mainline carriers backed away from liability lines beset by the liability crisis in the mid 80’s. In my opinion, RRGs and their sponsors represent a formidable entrepreneurial sector of the insurance industry. Like the pioneers of the late nineteenth century who banded together to form mutual companies that today are among the shakers of the business, you and your colleagues launched a new industry.

I well remember that when the Act was first passed, a number of large retail and reinsurance brokers were reluctant to support RRGs because of concern about disturbing their relationships with main line insurers. They would not have guessed that from a modest beginning, the number of RRGs would have grown by now to 254. Nor that in less than 22 years, the premium volume of the top 100 RRGs exceeded $2.5 billion dollars with a correlating industry surplus or net worth, reaching $2 billion – which by the way, is up from $1.4 billion just three years earlier. Nor that financially solid RRGs now qualify for A.M. Best and Demotech ratings.

Entrepreneurs – many of you in this audience – took control of your liability insurance needs that were neglected or abandoned by the traditional carriers. You inspired others in your business to help raise capital, to become shareholders, to organize and manage a new form of insurance company. The largest RRG in 2008 wrote $385 million of premium. Four RRGs topped $100 million each. That’s a tremendous achievement; but when I look at the industry I see many fledgling companies poised for growth.

What can you as individual RRG owners and managers do to realize this growth potential? What can your professional organization, the National Risk Retention Association, do to promote industry development and remove obstacles to growth? How can we in the reinsurance industry help?

First, let’s reflect on what you as owners can do to move your companies to the next level. In 2008, 47 of the top 100 RRGs generated premium of less than $10 million. Eleven of the top 100 generated less than $6 million of premium. The other 100 generated less than $5 million. So, you can see there’s great growth potential. Clearly, many of the smaller RRGs are startups or just beginning to gain momentum.

So, what to do? I well remember addressing the East Asian Insurance Conference in Tokyo 27 years ago when I   played a senior role in the world’s then largest reinsurance broker’s international activities. The Conference was devoted to developing professionalism and growth of the insurance industry in Asia and how to establish greater credibility with global reinsurers and implicitly investors. I and other speakers focused on the need for companies to create and sustain a reputation for professionalism in management and positive results in underwriting. It seems to me that  these same lessons apply to the RRG industry today.

Your success in fulfilling the promise of sustainable, affordable, comprehensive, and competitive liability insurance to your shareholders will not only build credibility with members, it will give investors and reinsurers the confidence to back your efforts. That’s what I mean by professionalism. At the same time, build a track record of low loss ratios, active risk management, fair claims handling, and cost-effective administration. This will keep your shareholders committed even in soft markets when traditional carriers start cutting prices.  It will also increase the respect of and augment greater support from state insurance regulators.

Now, what can the National Risk Retention Association do to help your industry and remove obstacles to growth? When you think about NRRA, remember the Association is you. In order to make the Association an increasingly influential force in public policy, you need to get active – not just with your dollars but with personal commitment of time and energy.

Let’s begin with some of the critical issues facing your industry. The freedom of RRGs to function in all states when domiciled in a single state is threatened. We hear an increasing number of alarming reports. In some states, startup RRGs are facing delays, requests for unnecessary information, improper assessment of fees, and burdensome regulatory review in the process of registering to operate. This could be the beginning of a gradual encroachment on the authority granted to RRGs by the Federal Liability Risk Retention Act of 1986. 

The NAIC is set to make RRGs subject to examination and reporting requirements in 2011 under a so-called “risk focused surveillance framework.” Is this an intrusion or simply another tool for the domiciliary state to assure that RRGs licensed in that state meet standards to protect policyholders? Unfortunately, there is no enforcement mechanism in place to protect the RRG industry from infringement of the federal law. I know you’ll be hearing more about this and other government and regulatory issues in the expert panels on the docket for today.

These developments could threaten the stability and growth potential of the industry. I encourage you to support NRRA in defending the special regulatory framework that enables RRGs to function. Your industry must speak with a single voice through the Association on issues that could jeopardize the interests and even the very life of RRGs as we know them today. Your particular RRG may not have experienced some of these infringements in the states where you do business. However, the actions of a few states can lead others to follow resulting in a gradual erosion of operating authority for all RRGs.

Now, let’s take a moment to focus on broader insurance industry issues and why they’re important to you as owners and operators of Risk Retention Groups. The NAIC continues to defend state regulation fiercely, but Congress and the Administration are taking greater interest in the regulation of the insurance industry.

The Federal Flood Insurance Program has been in place for many years. Recent efforts to include wind have been beaten down. The insurance industry supported creation of the Federal Terrorism Risk Insurance Program after 9/11. It has been extended twice.  A debate over proposed federal regulation heats up every year with the large national, commercial carriers advocating an optional federal charter that would exempt them from state regulation. Smaller, regional companies and their associations have blocked this legislation so far. Hurricane Katrina gave new life to proposals for national disaster legislation that would in effect make the federal government the insurer of last resort for certain catastrophes..

While these matters don’t relate directly to Risk Retention Groups, you need to follow them closely – as I’m sure NRRA does. Why?  It’s not beyond the realm of possibility that Risk Retention Groups could find themselves orphans in the move to federal regulatory reform and since RRGs were born from congressional versus state authority, you and your Association must be vigilant in capitalizing, if  not defending your authority, under the Risk Retention Act.

I understand that NRRA is considering formation of a coalition to advance your collective interests through a Political Action Committee. When this coalition is created, I encourage each and every one of you to contribute. PACs are a fact of life in Washington and state capitals. You need a strong voice to be heard in the face of powerful interests that oppose new competition in the insurance industry.

Now, let’s turn to reinsurance. How can reinsurance brokers and companies help you?  Lets take the example of U.S. RE which has been pleased to play a role in enabling RRGs to grow and prosper through  its sponsorship and delivery of capital. We have and continue to also arrange reinsurance for RRGs with good business plans and solid backing. Its Program Division works with RRGs in any profession or industry.  They’re available to discuss your reinsurance needs, 

When in 2002 Florida’s Governor Jebb Bush asked for U.S. RE’s help to overcome a growing crisis in his State, our subsidiary, Uni-Ter Underwriting Management Corporation created Florida’s Ponce de Leon RRG -- believed to be the first RRG in the United States to provide liability insurance to nursing homes, assisted living, and other long-term care facilities. In concert with the proposal we put forth to the Governor, legislation was passed that provided for a loan by the state to capitalize that RRG.  Uni-Ter now manages RRGs insuring long-term care facilities in 47 states and medical malpractice for physicians and surgeons in northeastern states. Professional managers at Uni-Ter are eager to work with interested parties in organizing and managing startup RRGs. They’re available also to review operations and consult on best practices.

Reinsurance protects your RRGs against losses. As small companies exposed to claims that could threaten your very existence, you need protection. Equally important, reinsurance can help you grow by risk sharing. Quota share coverage can make it possible for an RRG to grow by assuming a proportionate share of the risks and, thereby, allow you to write more insurance than your capital would otherwise; permit; however, this takes me back to an earlier point. In order to qualify for this kind of partnership, an RRG must demonstrate underwriting discipline and cost-effective administration, along with professional risk and claims management.

Looking to the future, I believe the reinsurance industry could take a more dynamic part in helping RRGs achieve their potential. In some cases, initial capital outside the base of potential stockholders is needed to get an RRG off the ground or enable a startup to gain momentum. The large number of RRGs, limited in their writings by available capital, may well create attractive opportunities for investment in the industry.

Reinsurers are entrepreneurs like you. I believe some could be interested in exploring the possibility of subscribing to a pool of capital available to RRGs that meet the standards of professionalism noted earlier. Such a pool would be consistent with historic practice in some quarters of the insurance industry to enable the procurement of financing to facilitate the availability of insurance capacity. If you think this idea has merit, I suggest you put it on the NRRA agenda for discussion. We would be pleased to work with you.

Even in today’s climate, there is money available for investment.  RRG sponsors, including MGA’s along with related principals interested in forming profitable RRGs, could approach private equity and hedge funds on behalf of RRG’s. Fronting companies also can be a source of growth for RRGs. I know of one that recently teamed up with a fronting company admitted in all states to share the risk fifty/fifty thus enabling the RRG to kick start growth. One of the RRGs organized by Uni-Ter was initially funded in part by a regional bank interested in access to the premium financing business. It turned out to be a win/win partnership for the RRG and the bank.

So, as you meet together, I encourage you to focus on the great potential your fledgling industry has to grow into a major force in the insurance business. As RRG owners and operators, your growth will be based on professionalism in management and positive results in underwriting. With a good business plan or track record, you will attract investors and qualify for reinsurance to help you grow. The National Risk Retention Association will play a vital role by building upon and protecting the franchise established in the Liability Risk Retention Act; however, NRRA cannot succeed without the financial support and active participation of each you. So, get behind the new coalition. Help fund the Political Action Committee to make your voice heard in Washington and all the state capitals. Finally, look to the reinsurance industry and other potential new sources of investment to build your capital base.

You have some of the smartest minds in the industry and regulatory community assembled at this conference including professional advisors, actuaries, auditors, and investment managers. You have a great opportunity to take full advantage of their expertise and experience over the next two days.  Now is the time to develop a road map for future growth.