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EXAMINING INSURANCE FOR 

NONPROFIT ORGANIZATIONS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND INSURANCE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 28, 2017 

Printed for the use of the Committee on Financial Services 

Serial No. 115–43 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

KIRSTEN SUTTON MORK, Staff Director 

(III) 

SUBCOMMITTEE ON HOUSING AND INSURANCE

SEAN P. DUFFY, Wisconsin, Chairman 

DENNIS A. ROSS, Florida, Vice Chairman 

EDWARD R. ROYCE, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

KEITH J. ROTHFUS, Pennsylvania 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

THOMAS MacARTHUR, New Jersey 

TED BUDD, North Carolina 

EMANUEL CLEAVER, Missouri, Ranking 

Member 

NYDIA M. VELA ́ ZQUEZ, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

JOYCE BEATTY, Ohio 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

RUBEN KIHUEN, Nevada 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 28, 2017 .......................................................................................... 1 

Appendix: 

September 28, 2017 .......................................................................................... 23 

WITNESSES 

THURSDAY, SEPTEMBER 28, 2017 

Cothron, M. Kevin, President and Chief Executive Officer, Southeast Nonprofit Insurance Programs .................................................................................. 8 

Davis, Pamela E., Founder, President, and Chief Executive Officer, Alliance 

of Nonprofits for Insurance ................................................................................. 5 

Santos, Tom, Vice President, Federal Affairs, American Insurance Association ........................................................................................................................ 7 

Webel, Baird, Specialist in Financial Economics, Congressional Research 

Service ................................................................................................................... 3 

APPENDIX 

Prepared statements: 

Cothron, M. Kevin ............................................................................................ 24 

Davis, Pamela E. .............................................................................................. 29 

Santos, Tom ...................................................................................................... 39 

Webel, Baird ..................................................................................................... 47 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Duffy, Hon. Sean: 

Letter from The Council of Insurance Agents & Brokers, dated September 

26, 2017 .......................................................................................................... 56 

Written statement of the Cincinnati Insurance Companies ......................... 58 

Written statement of the Independent Insurance Agents and Brokers 

of America ...................................................................................................... 59 

Written statement of the National Association of Insurance Commissioners ............................................................................................................ 65 

Hultgren, Hon. Randy: 

Written responses to questions for the record submitted to Tom Santos .... 67 

Luetkemeyer, Hon. Blaine: 

Written statement of the National Association of Mutual Insurance Companies ............................................................................................................. 70 

(1) 

EXAMINING INSURANCE FOR 

NONPROFIT ORGANIZATIONS 

Thursday, September 28, 2017 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HOUSING

AND INSURANCE, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:38 a.m., in room 

2128, Rayburn House Office Building, Hon. Sean P. Duffy [chairman of the subcommittee] presiding. 

Members present: Representatives Duffy, Ross, Royce, Posey, 

Luetkemeyer, Rothfus, Zeldin, MacArthur, Budd; Cleaver, Beatty, 

Kildee, Kihuen, and Gonzalez. 

Chairman DUFFY. The Subcommittee on Housing and Insurance 

will come to order. 

Without objection, the Chair is authorized to declare a recess of 

the subcommittee at any time. 

Also, without objection, members of the full Financial Services 

Committee who are not members of this subcommittee may participate in today’s hearing for the purposes of making an opening 

statement and asking our witnesses questions. 

Today’s hearing is entitled, ‘‘Examining Insurance for Nonprofit 

Organizations.’’ 

The Chair now recognizes himself for 3 minutes for an opening 

statement. 

I want to welcome our witnesses. Thank you for being here 

today. And I would just note that Mr. Cleaver is on his way. He 

is going to participate, and I am sure he is going to want to ask 

questions and make an opening statement as well, but welcome. 

Risk retention groups, or RRGs, are liability insurance companies owned by their members that allow businesses with similar 

needs to pool their risk together. They were originally created to 

address a distortion in the marketplace when product liability insurance was largely unavailable. 

In the 1980s, Congress expanded the types of liability insurance 

RRGs could offer to commercial liability as companies faced similar 

issues obtaining commercial liability insurance. 

From a regulatory standpoint, RRGs operate under a different 

regime than a traditional property and casualty insurance company. Whereas an insurance company is regulated in each State 

they offer an insurance product, RRGs’ regulation is largely handled at the State in which the company is domiciled, a pretty significant difference. 

2 

In the RRG regime, that company can ultimately sell products in 

other States without being under the same solvency regulation requirements as an admitted carrier. 

Now, we have had several nonprofit organizations claim that 

there is, once again, an availability issue in regard to property coverage. And so I think we are going to have a vigorous and lively 

conversation today about, should we now change the rules, expanding from liability to property coverage for nonprofits? 

And I know we have a lot of different opinions. The industry is 

probably somewhat split. I am sure that this body is split as well, 

but this is truly an opportunity for us to hear from you on your 

thoughts and opinions and provide advice and counsel to the Congress on what action, if any, you think we should take. 

So I am looking forward to your testimony and insight. And 

again, I want to welcome you to our hearing. 

With that, I want to recognize the Vice Chair of the subcommittee, the gentleman from Florida, Mr. Ross, for 2 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

And I thank the witnesses for being here today as well, and for 

their testimony. 

This subcommittee will discuss an issue that has been of deep 

importance to me for some time, and that is the insurance needs 

and options available for nonprofit organizations. 

I first started working on this subject after hearing stories from 

my local Boys and Girls Clubs back in central Florida who were 

worried about the lack of commercial insurance policies that offered 

the coverage they needed at an affordable price. 

As I dug deeper into the issue, I discovered that it was not uncommon for many of our community nonprofit organizations to be 

underinsured, specifically with regard to property coverage. 

These groups are the lifeblood of their communities. Many of 

them dedicate themselves to serving others in the time of need, organizing volunteers to support a good cause or helping the most 

vulnerable members of our society work for a better future. 

Unfortunately, their commitment to charity in their community 

comes with a cost. Nonprofits, by the nature of their very mission, 

have a unique set of risks, different than almost any other commercial enterprise. And that unique risk makes them difficult to insure. 

In addition, many nonprofits operate on extremely thin margins, 

giving back all they take in and looking to maximize returns to the 

people they serve. That, too, contributes to the nonprofit sector’s 

relative undesirability in the insurance market. 

Today, a significant number of nonprofit organizations have insurance in the form of liability coverage from a risk retention 

group, also known as an RRG. In the mid-1980s, Congress passed 

the 1986 amendments to the Liability Risk Retention Act, which 

expanded the lines of liability insurance that RRGs could offer to 

their member owners. 

And today, we will have a chance to discuss my draft proposal 

to further expand the lines of insurance an RRG may offer to include standalone property coverage. I believe that my proposal is 

appropriately tailored to address the issue at hand. 

3 

Importantly, it includes strong consumer protections that mitigate some traditional concerns surrounding RRG expansion. I think 

it is a good compromise that will help fix this very real problem. 

I am glad to have each witness here today to share with us their 

experience and expertise and to help this subcommittee get a better 

understanding on the issue of the merits and demerits of the proposal like the Nonprofit Property Protection Act. We have a great 

group of witnesses, and I thank them for being here. 

I yield back. 

Chairman DUFFY. The gentleman yields back. 

I now want to take this opportunity to welcome our witnesses. 

We have Mr. Baird Webel, a specialist in financial economics from 

the Congressional Research Service; Ms. Pamela Davis, the founder, president, and chief executive officer of Alliance for Nonprofits 

for Insurance; and Mr. Santos, the vice president of Federal Affairs 

for the American Insurance Association (AIA). 

And for the introduction for Mr. Cothron, I want to recognize Mr. 

Ross, who knows Mr. Cothron well. 

Mr. ROSS. Thank you, Mr. Chairman. It is my distinct honor to 

introduce Mr. Kevin Cothron, who has been a longtime friend of 

mine. He is the president of Southeast Nonprofit Insurance Programs. He has over 25 years in the insurance industry. 

He created and manages an insurance placement program that 

specializes in niche insurance markets of 501(c)(3) nonprofits 

throughout the United States. The company performs no direct 

sales and works entirely through independent brokers and agents. 

He has been a leader in the nonprofit insurance sector for many 

years, and we are very fortunate to have him here today. Thank 

you for being here. 

Chairman DUFFY. Wonderful. 

And welcome, Mr. Cothron. 

In a moment, the witnesses are all going to be recognized individually for 5 minutes to give an oral presentation of their testimony. And without objection, the witnesses’ written statements 

will be made a part of the record. 

Once the witnesses have finished presenting their testimony, 

each member of the subcommittee will have 5 minutes within 

which to ask each of you questions. 

And with that, Mr. Webel, I recognize you now for 5 minutes. 

STATEMENT OF BAIRD WEBEL, SPECIALIST IN FINANCIAL 

ECONOMICS, CONGRESSIONAL RESEARCH SERVICE 

Mr. WEBEL. Thank you. Mr. Chairman, Ranking Member 

Cleaver, and members of the subcommittee, I would like to thank 

you for the opportunity to testify today. As the chairman said, my 

name is Baird Webel. I am a specialist in financial economics at 

the Congressional Research Service. 

And just for anybody who is watching and doesn’t know this, 

CRS’ role is to provide objective nonpartisan research and analysis 

to Congress. We take no position on the desirability of any specific 

policy. Any arguments presented in my written and oral testimony 

are for the purposes of informing Congress, not to advocate for a 

particular policy outcome. 

4 

As the chairman mentioned, risk retention groups were created 

by Congress in the 1980s in response to problems in the liability 

market. And there are obviously a lot of different policy options one 

could have when you have insurance market problems. 

Congress sought to address the supply problems by essentially 

simplifying the regulatory structure of the liability insurance. And 

in doing so, they put particular limitations on the risk retention 

groups that resulted from this legislation. 

Particularly, they can only supply commercial liability insurance, 

and I think the ‘‘commercial’’ is important because what the presumption is to some degree is that businesses purchasing commercial insurance are going to have some measure of sophistication in 

the purchase of the insurance. 

The risk retention groups have to be owned by the policyholders. 

And this, I think, was an attempt to basically give the owners and 

the policyholders some skin in the game and some control over how 

the risk retention groups were going to operate, and the policyholders facing similar risks essentially should at least make the 

management and the judgment about the risks of these groups a 

little easier to manage and to face. 

Importantly, the Federal law prevents risk retention groups from 

participating in the State guaranty funds, which do provide some 

protection in the case of an insolvency, which means that the RRG 

policyholders, again by the statute, do not have this protection. 

A number of State laws do still apply to risk retention groups, 

notably relating to unfair claims practices, nondiscrimination, and 

State premium taxes still apply to these companies. 

In the 30 years since, I think that the experience in general in 

the risk retention market has largely followed to some degree the 

ups and downs of the rest of the commercial liability market. 

Property casualty insurance tends to move in cycles of hard markets where insurance gets expensive and difficult to obtain, frequently followed by softer markets where the insurance gets a little 

cheaper and a little easier. 

And as you might expect for a sort of niche product like risk retention groups, they tend to improve during hard markets when 

people are looking for these types of insurance. 

They grew a lot after they were first created and then sort of 

plateaued in the 1990s and grew a little more in the early 2000s, 

as we saw another hard market. Then for the last 10 years overall, 

you have seen pretty soft market conditions and, again, a sort of 

plateauing of the numbers of risk retention groups. 

They are a reasonably niche product. The overall premium of 

risk retention groups compared to property casualty insurance in 

general is pretty small, about $3 billion versus compared to somewhere in the realm of $600 billion for property casualty overall. 

But I think it is important to know that within the niches where 

a company can serve, they can still be important, even if the overall market may be soft. The worldwide capital markets have seen 

a lot of liquidity in the last 10 years. 

But that doesn’t mean that the individual niches where property 

casualty insurance is sold necessarily experience the same market 

conditions. It is a local product that is sold under local conditions. 

5 

And in order to really judge what is going on you have to look at 

those particular local conditions. 

The people who have looked into the market in general, the Commerce Department in the 1980s and GAO more recently, have generally found that risk retention groups have served a positive role 

in these sorts of niche markets. 

And so that basically concludes what I wanted to say, and I look 

forward to answering any questions you may have. 

[The prepared statement of Mr. Webel can be found on page 47 

of the appendix.] 

Chairman DUFFY. Thank you, Mr. Webel. 

Ms. Davis, you are now recognized for 5 minutes. 

STATEMENT OF PAMELA E. DAVIS, FOUNDER, PRESIDENT, 

AND CHIEF EXECUTIVE OFFICER, ALLIANCE OF NONPROFITS FOR INSURANCE 

Ms. DAVIS. Thank you. Mr. Chairman, Ranking Member Cleaver, 

and members of the subcommittee, thank you for the opportunity 

to testify in favor of the Nonprofit Property Protection Act, which 

will permit a very small subsection of established risk retention 

groups to provide property and auto physical damage insurance to 

their members. We have submitted a written statement for the 

record. 

I am the president, CEO, and founder of Alliance of Nonprofits 

for Insurance (ANI), a nonprofit risk retention group on whose behalf I am testifying today. ANI insures small and mid-sized community-based nonprofit organizations across the country, those in 

our neighborhoods who work with the most vulnerable among us. 

They are homeless shelters and programs for those with Alzheimer’s, victims of abuse, and the developmentally disabled. They 

are animal rescue organizations, elder care services, drug and alcohol rehabilitation centers, school arts programs. They are foundations raising money for diabetes, heart disease, and cancer research, among many others. 80 percent of our member insureds have annual budgets of $1 

million or less. These little nonprofits got into the business of insurance because commercial insurance carriers walked away from 

them. They never wanted to be in the insurance business but were 

forced into it to be able to serve our communities. 

We are successfully insuring these organizations for difficult 

risks, such as auto liability and sexual abuse and employment 

practices liability. We offer a vast array of free consulting and educational services, such as employment risk management and driver 

training to our members whose small budgets do not allow them 

to purchase or provide these services. 

But our future ability to continue to offer assistance to these organizations is now in danger. Commercial insurers, when they are 

willing to offer coverage for these unusual risks represented by 

nonprofits, will provide it only as a bundled package. That is, these 

small nonprofits must purchase the liability insurance and the 

property insurance together as a package, somewhat like a cable 

triple play package. 

However, by Federal law, as an RRG, ANI is only allowed to 

offer liability insurance to our member insureds. Since ANI’s incepVerDate Nov 24 2008 17:31 May 15, 2018 Jkt 029710 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\29710.TXT TERI
6 

tion, only one insurance company has offered the standalone property and auto physical damage policies that small and mid-sized 

members of ANI need. 

Several years ago, that company told us that the program is too 

small to be viable in the long term because of the requirements of 

filing and reporting in 50 States. And they advised us to look for 

other options. 

We asked our insurance brokers and agents who work with nonprofits to find other commercial insurance companies to provide the 

standalone property and auto physical damage that their clients 

need. They told us in no uncertain terms that there were no markets available. 

Every insurance carrier required that to purchase the property, 

the nonprofit would also have to purchase liability from them at 

the same time. Hearing that, we engaged Guy Carpenter to conduct an independent study to see whether there were insurance department filings that we had overlooked, because surely there was 

some other carrier that would provide this coverage. 

Guy Carpenter’s research demonstrated that only one other company has filed the property form that our members need. But that 

filing requires that the commercial insurance company sell the 

property and liability together as a bundled package. The property 

cannot be sold on a standalone basis. 

We had exhausted all of our options for market-based solutions 

and our future viability without the Nonprofit Property Protection 

Act is now in danger. 

To address consumer protections, there are provisions included in 

the bill that require any RRG authorized to offer property insurance to: one, have a minimum of $10 million in threshold capital, 

although the domicile regulator may require more; and two, to 

have a minimum of 10 years’ experience offering liability insurance. 

And to make sure the bill will correct only this market failure 

and not interfere with an otherwise well-functioning commercial 

property market, the bill allows RRGs to offer these coverages only 

to their members that are 501(c)(3) nonprofits. 

And any single nonprofit may be insured for only up to $50 million in total insured value because it is presumed that larger nonprofits will have the market clout to be able to purchase this in the 

standard marketplace. 

In closing, ANI offers important specialized coverages and risk 

management services for community-based organizations serving 

some of the most vulnerable in our communities. We help those organizations provide their services safely and efficiently as possible 

to make sure that scarce resources are directed back into our communities. 

Standalone property and auto physical damage insurance is essential for these RRG members, but it is not available from the 

commercial marketplace. This bill would allow nonprofits to solve 

that problem for themselves without requiring any government resources so they may continue to do their important work in our 

communities. Thank you. 

[The prepared statement of Ms. Davis can be found on page 29 

of the appendix.] 

7 

Chairman DUFFY. Thank you, Ms. Davis. 

Mr. Santos, you are now recognized for 5 minutes. 

STATEMENT OF TOM SANTOS, VICE PRESIDENT, FEDERAL 

AFFAIRS, AMERICAN INSURANCE ASSOCIATION 

Mr. SANTOS. Thank you, Mr. Chairman. Chairman Duffy, Ranking Member Cleaver, members of the subcommittee, thank you for 

inviting me to testify at today’s hearing. 

I am Tom Santos, vice president of Federal Affairs at the American Insurance Association (AIA), and I am pleased to provide 

AIA’s perspective on what we believe is the critical aspect of today’s hearing: whether to expand Federal preemption contained in 

the Liability Risk Retention Act. 

AIA represents approximately 330 of the Nation’s leading insurance companies that provide all lines of property and casualty insurance to consumers and businesses in the United States and 

around the world. AIA members write more than $117 billion annually in U.S. property and casualty premiums and approximately 

$225 billion annually in worldwide premiums. 

Our members have a strong interest in ensuring a competitive 

marketplace where the regulatory approach focuses on policyholder 

protection through appropriate financial standards applied equitably. 

We recognize that risk retention groups have played a role in the 

commercial liability insurance market for more than 25 years, and 

we applaud the important work that many nonprofits do in communities all across the United States. 

However, there is no demonstrable national availability problem 

in commercial property insurance markets. And considering that 

RRGs operate under a substantially different and less rigorous regulatory regime, AIA opposes further expansion of the Risk Retention Act to include commercial property insurance. 

Over the years, there have been several proposals to expand the 

Risk Retention Act to allow RRGs to offer commercial property. 

Most recently, these proposals have focused on not-for-profit 

501(c)(3) organizations. 

Proponents that argue for expanding the LRA suggest an insurance availability problem exists. They also argue that nonprofit organizations are unable to easily acquire property coverage from the 

traditional insurance markets. That is not the case. 

Proponents themselves acknowledge that nonprofits can secure 

property coverage in the marketplace. The fact that nonprofit organizations are able to secure property coverage, even if combined, is 

evidence that there is no availability or market crisis in the commercial market for property insurance. 

Today’s property insurance marketplace is extremely competitive, 

with insurers offering commercial property and liability products at 

affordable and appropriate rates. In fact, property insurers are 

looking to expand offerings and enter into new markets, as evidenced by shrinking markets of last resort for property insurance 

in some of the toughest markets in the country. 

With regard to insurance for nonprofits, many AIA member companies have dedicated business operations specifically designed to 

meet the needs and address those of nonprofit entities, giving nonVerDate Nov 24 2008 17:31 May 15, 2018 Jkt 029710 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\29710.TXT TERI
8 

profits the ability to purchase commercial property insurance in the 

private market from a wide selection of insurers. 

Again, simply put, there is no market failure that warrants the 

extreme step of expanding the Risk Retention Act’s Federal preemption into commercial property insurance. 

AIA has long argued that the most important consumer protection when it comes to insurance is the ability of the insurer to pay 

claims when an insured has a loss. 

This is particularly true when faced with a significant loss from 

a major event such as a terrorist attack or a large natural catastrophe. A risk retention group insolvency would leave policyholders 

and its impacted community without the financial support at the 

very time they need it most. This impact would be particularly 

acute for nonprofit organizations serving the most vulnerable in 

our communities. 

We are not alone in our concerns about RRG insolvency. A 2011 

report by the Government Accountability Office noted that some 

RRG representatives and State regulators, ‘‘expressed concerns 

about whether RRGs would be adequately capitalized to write commercial property coverage.’’ 

Further, in looking at property and casualty impairments, a 2015 

A.M. Best special report revealed a rise in risk retention group impairments during the period from 2000 to 2015. 

In addition, the National Association of Insurance Commissioners have noted that RRGs have gone into receivership at a 

much higher rate than admitted property and casualty insurers. 

Thus, concerns about capital adequacy and solvency regulation 

must be addressed before any expansion of commercial writing by 

risk retention groups is even considered. 

Again, we see no demonstrable national availability crisis that 

would warrant such a significant expansion of the Risk Retention 

Act and there are options for risk retention groups if they wanted 

to get into the commercial property space. They could become licensed admitted carriers. There are other corporate structures of 

which they could avail themselves. 

Thank you for the opportunity to present our views this morning. 

We look forward to your questions. 

[The prepared statement of Mr. Santos can be found on page 39 

of the appendix.] 

Chairman DUFFY. Thank you, Mr. Santos. 

Mr. Cothron, you are now recognized for 5 minutes. 

STATEMENT OF M. KEVIN COTHRON, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, SOUTHEAST NONPROFIT INSURANCE 

PROGRAMS 

Mr. COTHRON. Mr. Chairman, Ranking Member Cleaver, Congressman Ross, and members of the subcommittee, I would like to 

thank you for the opportunity to testify today in support of the 

Nonprofit Property Protection Act. 

The majority of nonprofits that I work with are small to midsized social service organizations. These nonprofits have limited 

funding, but provide invaluable services within their communities. 

I have been in the insurance industry for 25 years and have 

worked with 501(c)(3) nonprofits throughout the southeast. The 

9 

type of nonprofits that we work with are senior care centers, foster 

care and adoption agencies, mental health services, homeless shelters, and animal rescue groups, among many others. 

In my experience we have had an ongoing crisis in trying to secure property coverage for small to mid-sized 501(c)(3) nonprofits. 

The challenge these small to mid-sized nonprofits have in securing 

property insurance is they have to rely on commercial insurance 

companies, and there are few of these companies that will insure 

this type of risk. 

And insurance companies that will insure nonprofits typically 

only provide the property insurance if they are also getting the liability insurance, thereby creating what is called a package program. 

The package programs are offered on an all-or-nothing basis, 

meaning the nonprofit cannot purchase the property insurance 

from the insurance company unless the liability insurance is also 

purchased from the same company. 

When the insurance carrier offers a package program to a nonprofit they typically charge more for liability insurance than what 

the nonprofit would pay if they were getting the liability insurance 

from a risk retention group. 

I work extensively with a risk retention group for nonprofits, but 

unfortunately, the risk retention group is prohibited from being 

able to provide property insurance. In most States, an insurance 

company, an insurance mutual captive or even an insurance trust 

can provide all lines of commercial insurance coverage, including 

property. 

Only a risk retention group is restricted to providing only liability coverage to nonprofits. This is unfair to nonprofits who prefer 

to have their coverage and services with a risk retention group. It 

also creates an unfair market advantage for the insurance companies. 

It has been my practice in my business to work with insurance 

companies, including risk retention groups. I believe in offering the 

best possible coverage to clients at a reasonable cost. I think insurance is more than just a piece of paper with coverage terms, and 

that the industry should provide risk management services to the 

nonprofits. 

It has been my experience with risk retention groups that they 

provide insurance with broader, specialized coverages and services 

that are tailored to a nonprofit’s actual needs. 

For example, I know that my clients really appreciate the risk 

retention group’s loss control services, that will help them train 

their employees and volunteer drivers, as well as providing them 

with advice on how to navigate complex employment law and help 

them avoid claims and litigation. 

While I never worked with an RRG or a commercial insurance 

company that claims to always offer the lowest price, I have done 

many comparisons that demonstrate when a nonprofit is forced to 

purchase a package policy on an all-or-nothing basis from a commercial insurance company, the nonprofit is typically paying a 

higher price in annual liability premium in order to get the property coverage. 

10 

Most nonprofits I work with have limited operating funds and 

are receiving all or some of their funding from State, Federal, or 

local governments. The nonprofit has been entrusted with the taxpayers’ money and should not have to spend an unnecessary high 

amount on insurance. 

This added undue expense in turn negatively impacts the 

amount of services that they can provide to their communities. By 

allowing a risk retention group the ability to provide property insurance, the nonprofit will receive more competitive pricing from 

all the insurance options that are available and still be able to benefit from the specialized coverages and services they value. 

I work with over 100 brokers, and I can state without hesitation 

that we need risk retention groups for nonprofits to be able to provide property to serve the small to mid-sized nonprofits that choose 

to be a member of a risk retention group and benefit from their 

strong niche focus and loss control resources. 

These RRGs are already providing coverage for the difficult liability exposures and are presently able to provide multi-million 

limits for a van full of children, but they are prohibited from insuring a dent on the van. 

There is no reason risk retention groups should not be able to 

provide property and auto physical damage, particularly with the 

strong consumer protections that are included in the bill. 

I strongly support the Nonprofit Property Protection Act, and ask 

that you please pass this bill as soon as possible. Thank you. 

[The prepared statement of Mr. Cothron can be found on page 24 

of the appendix.] 

Chairman DUFFY. I want to thank the witnesses for their opening statements. 

The Chair now recognizes himself for 5 minutes for questions. 

Let us drill into the problem, if there is a problem. So maybe if 

I can have everyone answer this question, is there an agreement 

that nonprofits cannot exclusively buy property insurance? 

Ms. Davis, what do you think? 

Ms. DAVIS. The qualifier really needs to be the standalone property and auto physical damage coverage. If a nonprofit wants to 

purchase the property, they have to buy it from a commercial market. And they have to buy it as a bundled package with the liability 

together with the property. 

But we sell only liability and so the nonprofits can’t get the 

standalone property. 

Chairman DUFFY. Mr. Santos, do you agree with that? 

Mr. SANTOS. I don’t. I think there are products available in the 

marketplace. In fact, previously the proponents have done a comparison where they have suggested they could purchase a monoline 

property coverage and when paired up with the monoline liability 

product combined or standalone products, they were more expensive. 

But a combined package produced a product that was both more 

economical for the insurer to produce and cheaper for the insured 

to purchase. 

Chairman DUFFY. And quickly, Mr. Cothron and Mr. Webel, do 

you want to weigh in on this? Because I think we have to identify 

whether there really is a problem. 

11 

Mr. COTHRON. Yes, there is a problem. The commercial insurance 

carriers will only offer it as a package. I have worked with independent brokers. I don’t do direct sales. 

I work with independent brokers throughout the southeast, and 

there is not a week that goes by that I am not contacted by a 

broker searching for a property market that will write a nonprofit 

on a monoline basis, and that product is just not there. 

Chairman DUFFY. Mr. Webel? 

Mr. WEBEL. I would say from what I have seen that there is 

probably not a problem at a national level, but that it is entirely 

possible that you might see some individual niche problems. 

Chairman DUFFY. Did you also want an expansion to auto, too, 

Ms. Davis? 

Ms. DAVIS. The answer is yes. This is auto physical damage. We 

actually— 

Chairman DUFFY. So is it fair to say that you can actually buy 

auto insurance that is unbundled? 

Ms. DAVIS. We write auto liability insurance and other carriers 

write the liability. It is the auto physical damage that we are not 

allowed to write as a risk retention group. So just to clarify, we 

presently now insure plenty of vans that carry kids and insure that 

up to $10 million. But if that van is in an accident, we are not allowed to fix a dent in the bumper. 

Chairman DUFFY. Okay. 

Mr. Santos, do you agree with that? 

Mr. SANTOS. Again, there may be individual instances in particular communities, but it is not a national problem. I think one 

of the questions is, if they are covering the liability, is that vehicle 

not insured for property damage or are they purchasing it from 

someplace else? 

Chairman DUFFY. Okay. So we are not going to get an agreement 

on whether or not we have a problem. I expected that. 

But if we want to have an expansion, why don’t we just have the 

risk retention groups become insurance companies and become licensed in each of our States that they want to do business? What 

is the problem with walking down that path instead of expanding 

this exclusion? 

Mr. Santos, do you see a problem with that? 

Mr. SANTOS. In fact, that is what we think companies should do. 

I would highlight also they may not need to go as far as to become 

an admitted licensed carrier in every State in which they operate, 

although that would certainly provide the most rigorous consumer 

protection and the most rigorous solvency oversight. 

There are other avenues that they could do without this sort of 

broad Federal preemption that the Risk Retention Act provides. 

Chairman DUFFY. Mr. Cothron? 

Mr. COTHRON. There is no practical purpose to becoming an insurance company. The purpose behind that would be if they want 

to insure numerous types of businesses. But a risk retention group 

specializes in a unique niche market. 

So if you only want to do 501(c)(3)s, which is all a risk—this bill 

pertains to nonprofits, and an insurance company won’t do just 

nonprofits. 

12 

Chairman DUFFY. But this is is just—it is pretty fair to say that 

when in the business of insurance, all kinds of insurers can come 

in and say, I have a really specific niche market, therefore, I 

shouldn’t be subject to State laws, and I shouldn’t be licensed in 

a certain State because I am a certain niche market. Everyone 

could make that argument, right? 

Mr. COTHRON. The risk retention groups are subject to laws. 

They are regulated. 

Chairman DUFFY. In each State? 

Mr. COTHRON. Ms. Davis would be better able to answer that 

question, but there are State laws that apply in each and every 

State. 

Chairman DUFFY. I know that, but not all the laws in regard to 

insurance. Some of the laws I believe do. Let me just—my time is 

almost up. If I can quickly just ask, a risk retention group doesn’t 

have access to the State guaranty fund, is that correct, if that risk 

retention group becomes insolvent? 

Mr. Webel? 

Mr. WEBEL. Yes, that is correct, by Federal statute. 

Chairman DUFFY. Ms. Davis? 

Ms. DAVIS. I would just— 

Chairman DUFFY. Do you agree? 

Ms. DAVIS. I would just like to add that there are lots of different 

forms of insurance providers, and we really need that innovation. 

There are many types of insurance that are not subject to guaranty 

funds. It is certainly not just risk retention groups. 

So this is really an innovative solution that Congress has put forward because we have member nonprofits in 50 States, so we have 

to cover the whole country with very, very small premiums. 

And there is very little difference now in the regulation of risk 

retention groups and traditional insurance companies because the 

NAIC has done wonderful work to make sure there is uniformity 

in that. 

Chairman DUFFY. Thank you, Ms. Davis. My time has expired. 

I now recognize the gentleman from Missouri, Mr. Cleaver, the 

ranking member of the subcommittee, for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

In my real life I am a United Methodist Pastor, and we have to 

deal with this issue all over the country with the United Methodist 

Church. In fact, I live in the United Methodist building across the 

street. And this is something that is not some issue that there is 

not a lot of interest in. We are interested. 

I have been on this committee for 13 years. A few months before 

the economic collapse in 2008, the insurance rating companies sat 

at that same table and told us that the economy was essentially 

healthy, that the corporate community, based on their investigations and surveys, showed that everything was solid just a few 

months before the collapse. 

And I am always skeptical of them now, but as it relates to the 

RRGs, there is no rating. There is no examination of solvency, no 

financial ratings from the rating agencies. Does that disturb you? 

Anybody? 

Ms. DAVIS. I would like to address that. Actually, there are many 

regulations that apply to risk retention groups, and they are very, 

13 

very significant regulations that are very much like the traditional 

insurance companies. 

And the NAIC has done a tremendous amount of work over 30 

years to make sure that the regulation of risk retention groups is 

very, very similar now to traditional. 

Mr. CLEAVER. Financial rating agencies? 

Ms. DAVIS. Let me speak to that. We actually are rated as an 

A.M. Best A-rated insurance company. So yes, the premier rating 

service for insurance companies rates us as A-rated excellent. So 

that is very important to us and we are very proud of that. 

Mr. CLEAVER. Who does the rating? 

Ms. DAVIS. It is A.M. Best. It is the most prominent rating agency for insurance companies, and our financial rating with them is 

an ‘‘A.’’ 

Mr. CLEAVER. Yours, then? 

Ms. DAVIS. Yes. 

Mr. CLEAVER. Anyone else? Everybody embraces the— 

Mr. COTHRON. In the bill itself there is a lot of structure in there 

regarding capital, financial security of an RRG itself. And again, 

this is pertaining just to 501(c)(3)s. It is not making it available to 

all risk retention groups within the marketplace, but those that 

specifically deal with 501(c)(3) nonprofits. 

Mr. SANTOS. Mr. Cleaver, just an additional comment? I think 

the A.M. Best ratings are important, but I think it is important to 

remember that we are trying to determine what the right public 

policy solution here is. 

So any number of companies may have a good rating from A.M. 

Best, either a risk retention group or a traditional property company. The fundamental question is, should we be expanding the 

Risk Retention Act? 

One point I would want to clarify is while the NAIC does have 

some solvency regulation in the State of domicile for the risk retention group, they are not subject to those capital solvency requirements in every State in which they operate. 

Mr. CLEAVER. Do you agree that the RRGs are subject to less 

stringent State regulatory schemes? 

Ms. DAVIS. May I comment on that? 

Mr. CLEAVER. Would you? Go ahead. 

Ms. DAVIS. I would like to say that statement was true 30 years 

ago, but the NAIC has done a tremendous amount, as I say, of 

work. And now, for example, we must submit our financials to all 

States in which we operate every year, the annual statement. 

We are subject to the same examinations, the risk focus examinations that every other insurance company is. We are required to 

comply with the same investment regulations, the same annual annual audit requirements, the same actuarial opinion. 

And I do want to point out that we have quite a bit of control 

by the other States that we are not domiciled in. For example, if 

a State in which we are not domiciled does not think that we are 

doing a good job, they have the ability to ask our State regulator 

to do an examination. 

And if our State regulator does not do that, then the other State 

has the opportunity to do the financial examination themselves. 

14 

And if they don’t like what they find in that examination, they can 

actually go to court and have us shut down. 

So there are a lot of protections that are offered to the non-domicile States through the Risk Retention Act. And it has been very 

well-thought out and I think it is quite strong regulation for the 

type of entity we are where we can insure only one type of organization, and we can only do one sort of coverage. 

It is a very, very limited ability to write this just for 501(c)(3) 

nonprofits. So we are very, very different than a traditional insurance company. 

And I think the way we are regulated reflects that different sort 

of company. It allows innovation to have a different sort of regulation. Not less strict, just different. 

Mr. CLEAVER. I am out of time, so thank you very much. 

Mr. ROSS [presiding]. Thank you. 

I will now recognize myself for 5 minutes. 

Ms. Davis, it has been well over 30 years since the Risk Retention Act was amended to allow for liability. Obviously, this is not 

a new concept. Obviously, there was a need 30 years ago. 

Today, we are here because we are seeing a market need that is 

stressing the resources of our nonprofits. Could you further explain 

under the proposed Nonprofit Property Protection Act, the additional consumer protections? 

Because I think what we are trying to do—look, we are not trying to take over a market. We believe in them. There is probably 

nobody more in favor of free market insurance than I am in this 

Congress. 

And yet, I also do have a compassionate side of me that realizes 

that nonprofits use their resources, that are so limited, to serve 

their clients. 

For example, let us take Goodwill. Their risk is a very homogeneous risk. It is a greater risk because of the clientele they serve. 

We have seen this in workers’ compensation in the State of Florida where we had to go after and being able to allow legislatively 

for the creation of groups to sell workers’ compensation because the 

commercial market didn’t want to take that risk. 

And now we are saying, okay, but we are going to let you take 

the liability risk in the open market if you take the property risk. 

Where do your resources go? 

So my question to you is, to make sure that we are not looking 

at trying to expand the markets or that we put RRGs into the insurance business, which they are not, what protections are we offering that would make sure not only for consumers but also for 

the market so that we could alleviate—as you pointed out, Guy 

Carpenter has shown you can’t find a monoline product out there? 

That is evidence. That is pretty strong. Guy Carpenter is a pretty 

well-known organization that brokers insurance. So how can you 

alleviate some of the concerns of my colleagues that this is just not 

an expansion into an insurance market for the sake of profit? 

Ms. DAVIS. Thank you very much. Those are really good comments. I will remind you that, again, we are a nonprofit-owned 

company so there is no one gaining from this bill except for the 

thousands of nonprofits that are our members. So there is no individual to gain any profit from this. 

15 

Also, we can only insure this very narrow niche, and I would remind you also— 

Mr. ROSS. And you have to have solvency. 

Ms. DAVIS. Yes. 

Mr. ROSS. You have to have— 

Ms. DAVIS. Yes. And that is in the protections in the bill—$10 

million of minimum capital that is required before you can write 

property—10 years of writing the more difficult liability insurance, 

which before you can write property, and then it is still limited to 

only 501(c)(3) nonprofits that have demonstrated that there is a 

market need. 

And we don’t want to disrupt the otherwise functioning market 

where there is coverage. And so again, you have rightly limited this 

to $50 million total insured value so that only nonprofits that are 

small and mid-sized can benefit from this bill. 

So there are a lot of really well-thought-out restrictions in this 

bill that you have put in, I think, because you have listened. 

Mr. ROSS. Mr. Cothron, we, being Floridians, have just seen another devastating storm season that is not yet over in our State. 

We saw in 2004 what happened to the property market. 

We saw that there was an expansion of a State-run property insurer that private markets ran. They did rate filings for increases 

in rates, and it had an adverse effect, not only on commercial insurance but also on nonprofits. 

What do you anticipate is going to be the state of the property 

market in the State of Florida following this storm season? And 

would it not be in the best interest of these nonprofits, again, who 

have very stressed resources, to be able to have an opportunity to 

find property insurance through an RRG? 

Mr. COTHRON. First of all, the market had been pretty soft for 

years because we hadn’t had that many— 

Mr. ROSS. That is why I asked that, yes. 

Mr. COTHRON. —natural catastrophes. Correct. On the heels of 

two hurricanes this year, the market is going to get very what we 

call a hard market. The insurance companies are going to draw a 

much stricter line on who they won’t insure and what type of business they won’t insure. 

Mr. ROSS. Why don’t they want to insure nonprofits? 

Mr. COTHRON. Because they will insure a nonprofit if they have 

large enough insured values. I have met with a lot of property carriers. I cannot find one on a monoline basis who will insure a nonprofit unless their total insured value is $100 million or more. Now, 

these small nonprofits in a community that is working out of a donated house, provide a— 

Mr. ROSS. So my Alliance for Independence nonprofit back home 

that has 70-some clientele that they serve doesn’t have that type. 

So what do they do? 

Mr. COTHRON. They either end up underinsured in the marketplace or they are forced into these package policies where they are 

paying a lot more for insurance than they would have to if the 

availability was there with a risk retention group. 

Mr. ROSS. Thank you. I see my time has expired. 

I recognize the gentlelady from Ohio, Mrs. Beatty. 

16 

Mrs. BEATTY. Thank you very much, Mr. Chairman and to our 

ranking member. 

First, let me thank the panel for being here today. My question 

centers around one of the biggest concerns with expanding the Liability Risk Retention Act is that the risk retention groups do not 

have access to State guaranty funds. 

And we have been hearing a lot this morning about floods and 

hurricanes and so with the rising frequency of the wildfires in the 

northwest, the earthquakes, the flash floods and the hurricanes, 

coupled with the fact that any one of these storms has the ability 

to force insurance companies into solvency, what happens to the 

consumers if their risk retention group goes insolvent and they do 

not have access to the State guaranty funds? 

Mr. WEBEL. Basically in that kind of situation the assets that are 

left in the risk retention group would be used to pay off policies to 

the extent that there are assets in the risk retention group. And 

if there are insufficient assets to pay off the policies, then some of 

the policies would end up being unpaid. 

Mrs. BEATTY. Is this a valid concern and would limiting the ability of the risk retention groups with at least $10 million in capital 

or surplus to be allowed to offer property insurance be enough to 

mitigate these concerns? 

Mr. WEBEL. Again, I think it certainly is a concern. It is real that 

they do not participate in the guaranty funds. The thing is, in one 

sense commercial policies—the guaranty funds limits are compared 

to some commercial policies relatively low. 

So it is entirely possible that in the higher level commercial insurance the guaranty fund protection isn’t going to do that much 

in the end. If you have a $1 million or a $2 million claim and the 

limit is $300,000, you are looking at possible losses on that anyway. 

Any solvency regulation that is going to stop a company from 

going insolvent is certainly going to help. But no solvency regulation is going to completely stop the possibility of a company going 

insolvent. 

Ms. DAVIS. Could I comment on that? 

Mrs. BEATTY. Yes, please. 

Ms. DAVIS. Thank you. I would like to point out that we already 

are authorized to insure and we insure organizations for their own 

liability up to $10 million. 

So we don’t have a guaranty fund at this point, but we certainly 

have much higher limits already on the liability side that we have 

done it very responsibly and we will continue to do so through reinsurance and other risk spreading. 

But also I would like to point out that many types of insurance 

companies are not part of the guaranty fund, that we are not unusual in that way. 

In fact, we have offered to be part of the guaranty fund with this 

bill, and we would be happy to do so, but it has been the insurance 

companies that have opposed our being part of the guaranty fund. 

But we would like to have that privilege if we could. 

And I will also point out that adding property to the liability that 

we now insure will actually lower our risk because it allows us to 

hold different types of risk and actually brings us a lower cost of 

17 

risk and will make us less risky rather than more risky by being 

able to add the property to the liability. 

Mrs. BEATTY. Does anyone else want to comment before my time 

runs out? 

Mr. COTHRON. One quick comment? Also, when we look at risk 

that, whether it is an insurance company or a risk retention group 

retains, none of them that I am aware of bear 100 percent of the 

risk. They all insure risk to a certain level and then they purchase 

reinsurance behind that. 

So once a claim expense gets to a certain level, the cost is then 

borne by the reinsurance carrier that is behind it. So all of the 

companies out there and all of the RRGs that I am aware of lay 

off their risk to reinsurance carriers for that sole purpose. 

Mrs. BEATTY. Okay. We are not going to leave you out, so— 

Mr. SANTOS. Yes, thank you. I think there is an important distinction here. One is admitted carriers are subject to the solvency 

and capital requirements of every State in which they operate. So 

in the example you gave of a large catastrophe or an event, you 

may have concentration of risk there. 

And State regulatory agencies, they weigh the capital requirements of that insurer in the State in which those properties are insured. And then the capital requirements are set based on their 

risk profile. 

So putting a number in the Federal statute and then allowing 

that entity to write risks all across the country, we think presents 

a considerable problem and puts policyholders at risk in the type 

of events that you just outlined. 

Mrs. BEATTY. Okay. 

Thank you, Mr. Chairman, and I yield back. 

Mr. ROSS. Thank you. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman, and I also ask for 

unanimous consent that the statement from the National Association of Mutual Insurance Companies be entered into the record. 

Mr. ROSS. Without objection, it is so ordered. 

Mr. LUETKEMEYER. Thank you. 

This is kind of an interesting hearing this morning. I am always 

willing to listen to situations where we can improve the situation 

and allow more private sector competition, more choices for consumers, but along the way we need to find and make sure we have 

a problem. 

The NAMIC letter that I have here this morning indicates that 

they don’t feel that there is a problem. So, if we have insurance 

companies that want to expand, that is fine, but I guess it goes 

back to the structure of the RRGs. 

They can become insurance companies, can you not, Ms. Davis? 

Can’t you become an insurance company and then fall underneath 

all of the other things so that you can expand services? 

Ms. DAVIS. We would not be able to do that. It is not financially 

possible because recall we are very different in our structure because we— 

Mr. LUETKEMEYER. Yes, I understand that, but that is like it is 

the same situation we have with a lot of other entities, whether 

18 

banks and credit unions and you wind up with the farm credit 

services versus banks. 

You have a lot of entities that started out with a very narrow 

purview, a narrow band of where they are supposed to be operating 

and suddenly they want to get beyond that, which is fine. 

But once they get beyond that, they need to become the entity 

that they are competing against. And so my concern is that if you 

want to become an insurance company, become an insurance company and fall under the rules and regulations to be capitalized in 

the same way. Do you have reinsurance? 

Ms. DAVIS. Yes, of course we have reinsurance. And in fact, if we 

were able to insure the property, we would reinsure it as well. We 

insure property in California. We are authorized in a risk pool in 

California, and we have been doing the property risk there. And we 

actually— 

Mr. LUETKEMEYER. So in California, you sell liability and property already? 

Ms. DAVIS. Yes, we do. And through a different entity, not 

through the risk retention group. But my point there was that we 

actually reinsure this risk in excess of $100,000. We are just trying 

to make this efficient for nonprofits. We are not trying to take on 

all this risk ourselves. 

We only take on risk on the property up to $100,000, and all the 

rest of the risk is back in the commercial insurance market. So we 

are really just trying to make an efficient solution, something that 

our nonprofit members need. 

We are not trying to do more than we can. We are very well-capitalized. We are very aware our work is that we need to protect 

these nonprofits. 

Mr. LUETKEMEYER. I am not against you, but I am also concerned that when you start getting into a different area, you have 

to behave differently. Your company has to be structured differently. That is just the way it works. 

Life insurance companies are completely different than property 

and casualty companies. They are structured differently. They are 

capitalized differently. They are reinsured differently. 

What you are asking us to do today is to allow you to retain your 

RRG status and expand to become something completely different 

and still be that same entity. Nobody else does that. 

It is very difficult to get past this and I am trying to get my head 

wrapped around this, but when you have the ability to change your 

structure so that you can do this, which you don’t want to do apparently, but yet you can do it, I am a little on the reluctant side 

to go along with this. So— 

Ms. DAVIS. Sir, I think— 

Mr. LUETKEMEYER. —educate me. 

Ms. DAVIS. Excuse me. I think we are just trying to get the right 

regulation, keeping in mind that we are— 

Mr. LUETKEMEYER. And the regulation is a whole other part of 

this, but structure is what I am concerned about. You have to be 

structured differently. 

Now, Mr. Santos, you have stated a number of times that there 

are plenty of companies out there that will allow or that will do 

what the RRGs are wanting to expand and get into. 

19 

Can you name two or three? I am not trying to promote their 

names, but they act like there is nobody out there. Can you give 

me two or three names of folks who can do this? 

Mr. SANTOS. I am reluctant to identify any particular company, 

but, as you well know, Mr. Luetkemeyer, there are approximately 

2,500 companies, property insurance companies across the country. 

I do know that there are some who offer a wide range of products 

for not-for-profit entities, providing all forms of nonprofit services, 

whether it be teen shelters or diabetes or cancer associations and 

the like, so they go from large to small. 

Mr. LUETKEMEYER. Okay. 

Mr. SANTOS. They do that. We can get you a list— 

Mr. LUETKEMEYER. I guess I would go back to my original point. 

I am not against what you are trying to do, but there is a difference in the coverages you are trying to offer compared to what 

you are offering now. 

And that means the structure of your entity has to change to be 

able to accommodate that. You can’t be the same thing you are 

today if you are going to change what you do tomorrow. 

With that, Mr. Chairman, I yield back. 

Mr. ROSS. The gentleman yields back. We are having votes. What 

we are going to do is we are going to take one more round of questions from the gentleman from Pennsylvania, and then we are 

going to recess. 

We probably will not be back after votes, so I will ask that those 

Members who do have questions, if you would submit them for the 

record and we will see to it that our panel gets them. 

And with that, I will recognize the gentleman from Pennsylvania, 

Mr. Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Mr. Webel, you wrote in your testimony that the total premium 

volume for the 236 RRGs currently operating is about $3 billion. 

How does this compare to the overall market for liability insurance? 

Mr. WEBEL. I don’t know that I have the figure for liability in 

front of me. As I said, it is relatively small compared to the overall 

property casualty, but I— 

Mr. ROTHFUS. We will follow up with you and see if you can get 

that data for us. 

Mr. WEBEL. Absolutely. 

Mr. ROTHFUS. Do you know whether there is a significant difference in the premiums that nonprofits are paying for liability insurance from RRGs versus the admitted property casualty insurers? 

Mr. WEBEL. I haven’t seen the figures, but just from regulation, 

the costs of regulation for an RRG are going to be less because it 

is a single State regulation. And that essentially is the whole point 

of the RRG structure. 

If you didn’t have lower costs because of this regulation, essentially the entire RRG construct from the Congress there wouldn’t 

be any point. 

Mr. ROTHFUS. Is the RRG market share growing or shrinking 

right now? 

20 

Mr. WEBEL. I think that it has been—the numbers have been 

shrinking of individual RRGs. The premium has been relatively 

flat, growing a little bit for the past 5 to 10 years. 

Mr. ROTHFUS. You framed this issue in your testimony as a question of availability versus reliability. You also referenced the same 

A.M. Best report as Mr. Santos, which highlights a significant 

trend of RRG impairments over the years. 

Clearly, expanding the scope of business that RRGs can engage 

in would broaden availability. Do you have any research on whether it would harm the reliability of these firms? 

Mr. WEBEL. I think that the reliability to some degree can go either way because I think it is true that as you broaden a risk pool, 

you can make an insurance company more stable because they are 

covering differential risks that are unlikely to both sort of come 

due at the same time. So in that way, expanding it might improve 

your liability because you are no longer a monoline structure. 

But a lot of it does come down to the regulation of the individual 

States that are overseeing the RRGs and each of those individual 

States making sure that as an RRG entered the property market, 

they are adequately capitalized to do so. 

Mr. ROTHFUS. This conversation we have been having this morning—by the way, all of you did really well with the testimony, so 

thank you for giving us some good background on this issue. 

But Ms. Davis, do many RRGs convert to admitted insurance 

companies? 

Ms. DAVIS. I am not aware that this happens very often. They 

have to be very, very large to make that even a financial possibility 

as the other individual, Mr. Webel, said. This is why the Risk Retention Act was created, because if you have members, a very small 

number of members in all 50 States, you need to have the structure 

that risk retention groups make available. 

I would like to point out that I believe the receiverships increasing with risk retention groups, a lot of those are voluntary where 

they just don’t see the need for the particular risk retention group 

anymore. 

I didn’t want that to be implied to be because they are in financial trouble. I believe in many cases they have just put themselves 

into liquidation. 

Mr. ROTHFUS. Thank you. 

Mr. Chairman, I yield the balance of my time to the gentleman 

from New Jersey. 

Mr. MACARTHUR. I thank the gentleman. 

Mr. Webel, if a State wanted to do what the nonprofits are asking, and that is retain the risk on auto physical damage and property, could States allow that or does Federal law currently preempt? 

Mr. WEBEL. Federal law preempts in the sense of a risk retention 

group may only under the Federal law write liability insurance. If 

a State—there is nothing stopping a State from recognizing another insurance company coming into their State without requiring 

a license. 

So if a State sort of wanted to create what would be a similar 

structure as an RRG in terms of a recognition of another State’s 

regulation without requiring a license, a State could do that. 

21 

Mr. MACARTHUR. Yes. I would just like to point out from my perspective that when risk retention groups were created, there was 

a public policy interest in the Federal Government being involved. 

Liability claims involve other people who are damaged if there are 

not adequate resources, adequate capital to pay those claims. 

This is fundamentally different. These are organizations who are 

talking about their own losses. They are the only ones who lose if 

they are not adequately insured. That is true. There is no real public policy interest. 

I get why Congress is sort of forced to consider this, but it is really odd to me that the United States Congress is trying to figure out 

how nonprofits retain or transfer risk. And it seems to me we 

would do well to find a way to put this back to the States. 

If States want to allow it, I am fine with it. If States want to 

impose capital requirements, I am fine with that, too. But this to 

me is fundamentally different than liability claims, and I just think 

that we need to find a way to put this back where it belongs. 

States adequately govern insurance matters, and I just think this 

is—I get why we are here. But this is an odd place for us to have 

to be to tell nonprofits whether to retain risk or transfer it or how 

to transfer it. If you lose your property, you have lost your own 

property, nobody else’s. 

And with that, I yield back. Thank you. 

Mr. ROSS. Thank you. The gentleman yields back. 

Before we adjourn, I have been asked to ask Ms. Davis to clarify 

a statement in her opening that, ‘‘the best rating of A excellent and 

see that we have thrived, even though we have been handed the 

most difficult of these risks, such as sexual abuse and professional 

liability with no ability to balance these long-tail lines with shorttail property.’’ Could you clarify that just a little bit? 

Ms. DAVIS. Yes, absolutely. Risk retention groups have been put 

in the position of holding a whole portfolio of stocks and not being 

allowed to hold bonds. We have been forced to do the most difficult 

of these risks. 

Sexual abuse and auto risks are extremely difficult to do. We 

took it on because the insurance industry wouldn’t do it. And I can 

tell you that actually being able to offer the property would actually lower our risk because then we would have a balanced portfolio, and nonprofits would be able to benefit from having the property and the liability together. 

Mr. ROSS. Balanced against the long tail, I guess, is the— 

Ms. DAVIS. Absolutely, very much. It’s unlikely that both things 

are going to have difficulty at the same time, and this would greatly help us to balance that risk. 

22 

Mr. ROSS. Thank you. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And with that, this hearing stands adjourned. Thank you all for 

being here. 

[Whereupon, at 10:38 a.m., the hearing was adjourned.] 

(23) 

A P P E N D I X 

September 28, 2017 

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Testimony of M. Kevin Cothron 

President and CEO 

Southeast Nonprofit Insurance Programs 

Lake Mary, Florida 

The Subcommittee on Housing and Insurance 

The Committee on Financial Services 

United States House of Representatives 

Hearing: 

"Examining Insurance for Nonprofit Organizations" 

September 28, 2017 

Mr. Chairman, Ranking Member Cleaver, and Members of the Subcommittee: 

Thank you for the opportunity to testify as part of the Subcommittee's Hearing on "Examining 

Insurance for Nonprofit Organizations" in favor of the Nonprofit Property Protection Act which 

would permit a certain subsection of established Risk Retention Groups to offer property and 

auto physical damage insurance to their members. I am the President/CEO of The Cothron 

Group, Inc. (TCG) dba Southeast Nonprofit Insurance Programs. 

Southeast Nonprofit Insurance Programs is an Insurance Placement service that specializes in 

coverages for 501 ( c)(3) Nonprofits in North Carolina, Georgia and Florida. We perform no direct 

sales, but work through independent insurance brokers. We currently have over 200 nonprofits 

insured but have had difficulty in finding property insurance. I appreciated this hearing on the 

Nonprofit Property Protection Act as passing this would provide more insurance options for 

non profits who are members of Risk Retention Groups. 

I have been in the insurance industry for over twenty years and have worked with 501(c)(3) 

nonprofits throughout the Southeast for over ten years. We have had a crisis in trying to secure 

property coverage for 501(c)(3) nonprofits and with the recent Hurricanes of Harvey and Irma, 

this will only become more difficult. I work extensively with a Risk Retention Group (RRG) for 

liability insurance for nonprofits but unfortunately the RRG is prohibited from being able to 

provide property insurance. 

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At this time in most states, a commercial insurance company, insurance mutual, a captive or 

even an insurance trust can provide all lines of commercial insurance coverage to customers. 

Only an RRG is prohibited from providing property coverage. 

The challenge 501(c)(3) nonprofits that are members of an RRG have in securing property 

insurance is that they have to rely on commercial insurance companies to provide that 

coverage. These insurance companies typically will only provide the property insurance along 

with the liability insurance creating a package policy. A package policy means that overages 

are bundled together on an all or nothing basis, meaning that the property cannot be purchased 

from the insurance company unless the liability is also purchased from the same insurance 

company. 

While, I never work with RRGs or commercial insurance companies that claim to always offer 

the lowest price, I have done many comparisons that demonstrate that when a nonprofit is 

forced to purchase a package policy on an all or nothing basis from a commercial insurance 

company, the nonprofit is typically paying a higher price in annual liability premium in order to 

get the property coverage. 

Over the years, I have collected various data regarding the difficulties 501 ( c)(3) nonprofits 

member of RRGs have had obtaining standalone property coverage and in turn, the need for 

this legislation. Listed below are several examples in which a nonprofit was put in a position of 

purchasing a more expensive liability insurance policy in order to be able to purchase the 

property insurance they needed. 

Ronald McDonald House: The RRG provided a very affordable liability insurance quote, but an 

insurance carrier provided a package quote including the property on an all or nothing basis. 

The nonprofit had to have property and had to take the more expensive liability coverage as part 

of the package. 

Boys & Girls Club: The RRG provided a less expensive liability insurance option, however, the 

carrier only offered to provide the property if the liability was also purchased at the same time. 

The nonprofit was not able to take advantage of the pricing and services offered by the RRG. 

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Heartland for Children: Once again the RRG liability quotes were actually lower than the 

insurance carrier's, but the carrier's quote was on an all or nothing basis. 

Alzheimer's Association and Related Disorders: Once again, a package quote from a 

commercial insurance carrier was offered only as a package policy. Although the liability quote 

from RRG was better. They went with an insurance carrier on a package program, which 

required combining the property and the liability. 

Center for Drug Free Living: This multi-location nonprofit was anxious to be able to utilize the 

services and competitive pricing that the RRG offered. However, they had to go with a 

commercial insurance carrier that offered Property with their package program. 

Seminole County Victims' Rights Coalition: The property values represented over 50% of the 

insurance premiums this nonprofit was paying. The RRG provided a very cost effective liability 

quote. However the insurance carrier refused to offer the property coverage on a stand-alone 

basis. Since the RRG could not provide property, the nonprofit had to go with the more 

expensive package quote from the commercial insurance carrier. 

Goodwill of the Gulf Coast: In this bid process the RRG delivered the best liability quotes of all 

submissions. However the best property quote was delivered by an Insurance Trust who 

refused to provide the property on a standalone basis. The RRG could not offer a property 

quote. The nonprofit had to select the higher premium liability quote from the Insurance Trust in 

order to obtain the property coverage. 

The combined increase in annual liability premium paid by these nonprofits listed above 

exceeds $150,000. Because they had to purchase a package policy that required purchasing 

the liability and property together rather than being able to select the best pricing on each of the 

coverages from different companies. Most of these nonprofits are small to midsized. The 

additional expense they incur with their insurance premiums will negatively impact the services 

they provide in their communities. These nonprofits were put in the position of paying the higher 

premiums on the liability because the insurance carrier gave them an all or nothing option with 

their policy program. 

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Most nonprofits I work with have limited operating funds and are receiving some or all of their 

funding from state, federal or local government A nonprofit entrusted with the tax-payer's 

money should not have to spend an unnecessary high amount on insurance. That undue 

expense in turn negatively impacts the amount of services they can provide to their 

communities. By allowing an RRG the ability to provide property insurance, the nonprofit will 

receive more competitive pricing from all of the insurance options that are available and still be 

able to benefit from the specialized coverages and services they value. 

I have worked with nonprofits for over a decade. I believe that insurance is more than just a 

piece of paper with coverage terms on it I believe that insurance is a service industry and 

working with RRGs it has been my experience that 

RRGs specialize and know their markets exceedingly welL The one I am most familiar 

with insures the 501(c)(3) nonprofit marketplace. 

RRGs provide liability insurance with broader and specific coverages tailored to the 

specialized needs of their limited market segment 

RRGs provide a host of safety, risk management and loss control services for their 

member-owners. 

RRGs tend to be specialized value driven service based companies sensitive to the 

needs of their members-owners, whereas the typical insurance company is more likely 

to offer a basic one size fits all policy with added services that are more generic and not 

a specifically tailored to that market segment 

RRGs in many cases offer better coverage, service and pricing, however they cannot 

provide a "package program" as they are prohibited from providing property coverage. In 

nonprofits' case, this is a significant disadvantage because of the requirement in the 

commercial market that nonprofits purchase package policies. Insurance companies are 

aware of this and utilize this unfair competitive advantage to make the nonprofits who 

would like to benefit from coverage from their own RRG, instead forgo the additional 

services offered by the RRG so they can get property coverage, even if it means paying 

more for liability coverage. 

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I work with dozens of brokers and I can state without hesitation that we need RRGs for 

nonprofits to be able to provide property to serve the small to mid-sized nonprofits that choose 

to be members of an RRG and benefit from their strong niche focus and loss control resources. 

These RRGs are already providing coverage for the difficult liability exposures. RRGs are 

presently able to provide multi-million dollar limits for a van full of children, but are prohibited by 

federal law from providing coverage for a dent in that van. There is no reason RRGs should not 

be able to provide property and auto physical damage coverage, particularly with the strong 

consumer protections that are included in the Nonprofit Property Protection Act. 

I strongly support the Nonprofit Property Protection Act and ask that you please pass this bill as 

soon as possible. 

Thank you. 

5 
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ALLIANCE OF 

NON PROFITS FOR 

INSURANCE A Head for Insurance" A Heart for fJonprojfts, 

Testimony of Pamela E. Davis 

Alliance 

Founder, Prt'sident and CEO 

Insurance, Risk Retention Group 

Cruz. CA 

The Subcommi11ee on Housing and Insurance 

The Committee on Financial Services 

United States House of Representatives 

Hearing: 

··Examining Insurance for Nonprofit Organizations"' 

September 28, 2017 

Mr. Chairman. Ranking Member Cleaver. and Members of the Subcommittee: 

Thank yon for the opportunity to testify as part of the Subcommittee's Hearing on "Examining Insurance 

for Nonprofit Organi1.ations" in favor of the Nonprofit Property Protection Act which would permit a 

certain subsection of established risk retention gronps to offer property and auto physical damage 

insurance to their members. I am the President/CEO and founder of the Nonprnfits Insurance Alliance 

Group. which includes Alliance ofNonprofits for Insurance. Risk Retention Group (ANI) on whose 

behalf I am testifying today. 

ANI is part of the Nonprotlts Insurance Alliance Group which currently insures more than I 7.000 

nonprofit organizations across the country. ANI is a 501(c)(3) tax-exempt nonprofit insurance company 

governed by its 50 I (c )(3) federally tax-exempt nonprofits. including animal rescues and shelters. 

volunteer centers, group homes for children~ teens and the disabled, art programs, library associations, 

foster family agencies, Meals on Wheels. United Way. Goodwill. Boys and Girls Clubs. charter schools 

and others. Member-insureds of ANI include community-based nonprofit organizations such as Southeast 

Missouri Food Bank. Garden State German Shepherd Rescue. Community-Based Care of Brevard 

County. Center for the Arts Evergreen. Companion Animal Advocates. AlDS Foundation of Chicago. 

Education Alternatives. Domestic Abuse Services. National Alliance for the Mentally Ill, Animal Care & 

Control of New York. Sunnyside I lome Care Project. and Riverton Community Housing. It has grown 

from initial capital grants of$10 million from the David and Lucile Packard Foundation and the Bill & 

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Melinda Gates Foundation to an insurance company rated A (Excellent) by A.M. Best. insuring more than 

7,500 nonprofits in 30 states and the District of Columbia. 

My written statement provides a brief description oft he problem the Nonprofit Properly Protection Act 

would solve for small and mid-sized nonprotits and explains "hY there is a particular insurance market 

failure alfecting this group. It describes the research that has been conducted to discover whether there arc 

other sources of standalone property. auto physical damage. and husincss intctTuption insurance available 

in a form applicable for small and mid-sized nonprotits who arc members of an RRG. Without any cost to 

government, the Nonprofit Property Protection Act will: 

Increase capacity. choice, and market options for property and casualty insurance tor small and 

mid-sized 50l(c)(3) nonprofit organizations: 

Create a lasting solution for RRG members who arc small and mid-sized nonprofits who are 

presently not able to find market-based solutions for their property and auto physical damage 

needs: 

Lower the cost of risk for RRGs owned and governed by nonprolits. by allowing them to have 

a broader spread of risk across different types of coverage: and 

Enable these RRGs to provide stable coverage and pricing for both liability and other lines of 

coverage. such as property. to insulate these small community-serving organizations from the 

cyclical nature of the larger commercial insurance market. 

A. Liability Risk Retention Act of 1986 

ANI owes its existence to the Liability Risk Retention Act (U~RA) of 1986. In the mid-!980s. the 

insurance industry found itself in linancial dif1iculty and dramatically reduced its capacity iilr providing 

insurance. Nonprofits were particularly hard hit by the capacity crisis as they faced huge rate increases. 

mass cancellations of coverage. and the unavailability at any price of entire lines of insurance. as 

commercial insurers abandoned these markets. To end this crisis. Congress passed the 1986 Amendments 

to the LRRA. which expanded the lines of liability insurance that RRGs could offer to their memberowners in order to protect these consumers that proved the most dit1icult to insure in hard markets. 

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B. History of ANI's Service to Non profits 

ANI is an unlikely success story whose future is now in jeopardy without the NonproJlt Properiy 

Protection Act. ANI's story is about how 17,000 small organizations. the vast majority of which have 

annual budgets of less than $1 million, have come together to jointly insure each other and develop 

specialized risk management tools through ANI and its Cali!()rnia affiliate, so that they may serve our 

communities more safely and eftlcicntly. All of the companies in the Nonprofits Insurance Alliance 

Group. including ANI. are themselves 50l(c)(3) nonprofits. 

When I speak of small and mid-sized nonprofits. l mean community-based organiz2tions in our 

neighborhoods that work with the most vulnerable among us. They arc homeless shelters and programs 

lor those with Alzheimer's. victims of sexual abuse and the developmentally disabled. They are animal 

shelters, adoption agencies. foster tllmily agencies. elder care services. alcohol abuse clinics and afterschool art programs. They are foundations raising money for diabetes. I1L~art disease and cancer research, 

and many others. These little non profits got into the business of insurance because the commercial 

carriers walked away from them. Nonprofits never wanted to be in the insurance business. but were 

forced into it to be able to continue to serve our communities. In fact when I was in the process of raising 

money from the l'ord Foundation to capitalize the first organization in our Group, the Ford Foundation 

told me that they really didn't want nonprofits to get into the "insurance business." They commissioned a 

third-party to conduct a study and told me that I was not going to get a dime unless the study showed that 

because of the specialized nature ol'the risk. and the limited appetite tor this sector for most insurance 

companies. the only way for nonproflts to gain long-term stability and protection was to get into the 

insurance business ourselves. T'he study was conclusive and we got the money. 

Why would thousands ofnonprotlts choose an RRG over a commercial insurance company? Why would 

95% of them stay with us year after year'' Why would hundreds of brokers recommend an RRG for their 

nonprofit clients? I can tell you, it is not for higher commission or contingent commission! And, if you 

arc familiar with our financials and our A rating from A.M. Best. you know it is not because of prices that 

are unsustainahly low. It is our laser focus on meeting the specialized insurance needs of these 

organiz.:ttions. providing stability. and supporting their risk management needs. Virtually none of these 

organizations have a line item f\x "risk management"' in !heir hudgets. Virtually no foundation or 

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government is going to fund that So. we have found a way to cHiciently be the collective "risk 

management" department for thousands of nonprollts by imbedding that cost in the price of insurance. 

The mission ofnonproJlts is to enhance their comm11nities. not hurt them. We help them to conduct their 

work more safely and etlleiently and in the process. fewer people get injured. We offer unlimited and free 

driver training. both in person and online, for our member-insureds. We have three sta!T employment 

attorneys, whose only role is to provide help and advice for these nonprotlts who have, on average. I 5 

employees. Organizations that small have no one on staff to advise them on complex employment laws. 

We do that for them on an unlimited basis and completely ii·ee of charge. It is simply not ellicicnt for 

commercial carriers. which insure many types of risks. to 1(Jcus like we do on this special group. 

We have heard concerns that an RRG cannot be sufficiently strong or well-regulated to provide pro petty 

insurance. Let me remind you of our history. ANI has an afJlliate charitable risk pool in California which 

I started in 1989 with a $1 million loan for capitaL and began offering $1 million liability policies. We 

had 300 small member-insureds and $1 million in premium at the end of our first year. We were the first 

to offer an afJlrmative sexual abuse policy. in contrast to the "silent" policies being offered hy 

commercial carriers that allowed them to decline many claims, leaving nonprofits completely exposed. 

The only in1l1sion of additional capital we have received in our history is$! 0 million in grants from the 

David & Lucile Packard Foundation and the Bill & Melinda Gates Foundation to allow us to create ANI 

in 2000. Insuring organizations deemed "uninsurable" hy the commercial industry, these two affiliates 

have generated as a Group $180 million in earnings from operations that is no\v our surplus and we have 

given an additional $35 million back to nonprofits in the fi.1m1 of dividends. If commercial insurers had 

been serving this market welL \VC vvould never have hccn ahlc to succeed as v.ic have. 

During the insurance crisis, most commercial insurers did not he!ieve that they could profitably insure the 

complex risks of things like vans full of kids driven by volunteers and the professional risk of caring 1(1r 

kids who had been sexually abused; hut, most commercial insurers didn't stop there. They banned all 

50 I ( c )(3) nonprotlts ti·01n their underwriting appetite completely. A large number of commercial carriers 

specifically exclude 50l(c)(3) nonprofits lrom their underwriting appetites even today; and. because of 

the specialized risks presented by these organizations, that position may actually be a prudent thing for 

many. if not most commercial insurers. However. the result is that many brokers and agents. especially 

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small agents in rural areas. may have only one or two carriers who will entertain a 50l(c)(3) nonprofit 

risk---and that only on a package and surplus lines basis. 

ANI adds another option. primarily for the small to mid-sized organizations whose agents trequently have 

limited markets. ANI is governed by nonprofits themselves through an elected board of directors 

representing the members. Because ANI is an RRG. we have been limited to writing only liability lines. 

which are typically long tail lines. Nonetheless, you can check out our financials and our A.M. Best rating 

of A (Excellent) and see that we have thrived. even though we have been handed the most difficult of 

these risks. such as sexual abuse and professional liability. with no ability to halance these long-tail lines 

with short-tail property. 

C. RRG Regulation 

When it passed the Risk Retention Act. Congress recognized that. because of their very narrow class of 

business and overall market size. RRGs v.muld not have adequate resources to be licensed and admitted in 

all states. These RRGs typically have a relatively small amount of premium iu any one state because they 

can only insure liability and only for a very small subset-their memhers-- which are all part of a narrow 

group of related businesses. This narrow f(lcus and small premium potential makes it inefficient and not 

JCasible to support a regulatory compliance function for their members across 50 states l(lr these specialty 

RRGs. 'l'he ingenious solution devised by Congress \vas a hybrid form of regulation licensing in one 

state and registration in all others. 

This hybrid approach respects the state-based regulation of insurance \Vhile introdtJcing eflicicncies to 

make it possible for industry-specific associations to create insurance companies to provide virtually the 

same specialized liability insurance and Joss control to their members in a! I 50 states. 

Over the past 30 years. it has become clear that different regulation, as it relates to RRGs. docs not mean 

inferior regulation. Congress provided different regulation l(1r RRGs because of the nature of the risks 

they arc insuring and the limited market availahlc to them in any one state. RRGs insure only commercial 

business. They write no personal lines and insure only their member-owners. They offer essentially the 

same specialty insurance products in all 50 states. They focus on only one type of business and develop 

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highly-specialized underwriting.claims handling and Joss control products specifically for that one 

business group. 

The Model Risk Retention Act effective January 2012. requires all states to regulate RRGs uniformly. 

Furthermore. efTective in January 2017. new governance standards adopted by the National Association 

of Insurance Commissioners (NAIC) require states that regulate RRGs to comply with uniform standards 

for governance. The proof of the success of the regulatory structure lor RRGs is in their track record of 

nearly 30 years. 

D. Nonprofit RRG Members Need Standalone Property 

Present law prohibits RRGs from offering their member-owners properiy insurance. If a nonprofit wishes 

to purchase property insurance or auto physical damage insurance, it must purchase it from a commercial 

insurance company in a ·"package"' policy. For small and mid-sized nonprofits, commercial insurance 

companies do not sell the needed standalone property and auto physical damage coverage without 

simultaneously requiring the purchase of liability insurance. 

Commercial insurers. when they arc wi !ling to ofTer coverage lor the unusual risks nonprotits represent, 

will otTer coverage to them only as a bundled package. That is. these smallnonprofits must purchase the 

liability insurance and the property insurance together as a package. somewhat like a cable triple play 

package. However. by federal law. as an RRO. ANI is allowed only to otTer liability insurance to our 

member-insureds. When insurance brokers and agents attempt to help nonprofit members or ANI 

purchase property insurance to go along with the !lability insurance provided hy us. they are told that the 

property is only sold if the liability is sold with it by that same commercial insurance company. 

The unavailability of standalone property insurance for nonprofits is not related to a general shortage in 

property insurance capacity. Instead the Nonprofit Property Protection Act is about a specific type of 

coverage----standalone property policies f(1f small 50 I ( c )(3) nonprofits· ··that is simply not available from 

commercial insurers. This is because the standard practice of commercial insurance companies is to only 

otTer property insurance combined with liability insurance as a bundled package for 501(c)(3) nonprotlt 

clients. This prevents 50l(c)(3) nonprollts. that obtain specialized liability insurance and loss prevention 

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services trom their Risk Retention Groups (RRGs), from finding satisfactory standalone property policies 

in the commercial market. 

Thousands ofnonprotits purchase specialized liability insurance, including tailored risk management 

services. from RRGs they own and govern. These small nonproftts are unable to purchase from the 

commercial market the insurance coverages they need, yet their RRG is not permitted by law to provide 

those coverages for them. In the absence of commercial standalone policies, many small 50 I ( c )(3) 

community-based nonprofit organizations, such as programs for the disabled, homeless shelters, drug and 

alcohol rehabilitation facilities, day care centers for children and seniors, animal shelters and rescues, 

counseling centers. arts organizations and others must forgo altogether the tailored risk management of 

their RRGs. 

K Other Proposed Solutions Inadequate 

RRGs serving nonprofit organizations have tried many solutions to this problem prior to asking for help 

from Congress. Nonprofit RRGs have developed group programs and used fronting companies to provide 

the property insurance their nonprofits need. but these solutions have proven unworkable because these 

standalone property policies tend to be very small in premium with minimum premiums as low as $250 

per year. Even in the aggregate. with thousands or nonprofits purchasing together, the premium across 50 

states is just too small to support regulatory compliance obligations making these solutions not 

economically viable over the long-term. 

F. Third-Party Research Confirms This Market Failure 

fn response to requests for additional detail from Congress, several third-parties have gathered and 

analyzed data to con finn whether standalone property and auto physical insurance policies are available 

from the commercial admitted insurance market in a f(mn needed by small and mid-sized 50 I ( c )(3) 

nonprofit organi?A:ltions. Summaries of those analyses are provided he low. 

Date of Research: Spring 2015 

Party Conducting Research: Independent insurance agents and brokers representing 2,000 nonprofit 

clients. 

Nature of Research: Email survey of ,17 insurance carriers. 

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Findings: Only 4 carriers indicated any interest in orfcring standalone property. but only f{x larger 

accounts, not in all states. and with significant restrictions on habitational exposures such as domestic 

violence shelters. group homes, homeless shelters. and drug and alcohol rehabilitation n1cilitics. No 

insurer was interested in providing standalone auto physical damage insurance. 

Date of Research: May 2017 

Party Conducting Research: Guy Carpenter, a Marsh & McLennan Company 

Nature of Research: Determine whether the American Association oflnsurance Services (AAIS) has 

produced for use, by its more than 700 insurance company members. a standalone property form or 

standalone auto physical damage form of the type needed by small and mid-sized 501(c)(3) nonprofits. 

Findings: AAIS confirmed that a search of their database revealed they have not produced such a fonn 

for either property or auto physical damage. They further advised they were not aware of any independent 

filings of this nature made by an admitted insurance carrieL 

Date of Research: May 2017 

Party Conducting Research: Guy Carpenter. a Marsh & McLennan Company 

Nature of Research: Detennine whether the Insurance Services Oftlcc (ISO) has produced a standalone 

property form or standalone auto physical damage form for use by commercial jnsurance companies of 

the type needed by small and mid-sized 50l(c)(3) nonprolits. 

Findings: ISO confirmed that a search of their database revealed they do not presently have such a f()rm 

for either propetiy or auto physical damage. They advised they had such a property l(mn prior to 2002: 

however, it was still mandatory that the insurance carrier ollered the property policy and the liability 

policy together. They concluded. that it was more efllcicnt to offer the propetiy and liability on one policy 

and discontinued offering the standalone property f()nn. They have never had a standalone auto physical 

damage offering. 

Date of Research: June 2017 

Party Conducting Research: l'crr & Knight is an independent, leading provider of insurance support 

services, including Actuarial Consulting, Competitive Intelligence, Data Services, Regulatory 

Compliance and Insurance Technology. 

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Nature of Research: Pcrf(Jrm targeted research in the states of Florida and New York looking f(Jr 

admitted insurance companies having tiled Business Owner's Policy (BOP) programs for organizations 

falling under IRS Section 501(c)(3) tax-exempt nonproflts which otTer standalone property insurance as 

well as commercial auto coverage providing standalone auto physical damage coverage. 

Findings: In New York and Florida. Pcrr & Knight J(Jtmd a filing made by North American Elite 

Insurance Company, part of the Swiss ReGroup of Cos. offering a BOP policy for 50l(c)(3) tax exempt 

nonprolits which offers standalone property insurance at the request of the Alliance ofNonprofits for 

Insurance, RRG (ANI). In addition. Perr & Knight found a New York filing by Mount Vernon Fire 

Insurance Company, part of Berkshire llathaway, in which a BOP policy was designed for 50l(c)(3) taxexempt nonprolits. The Mount Vernon Fire Insurance Company liling requires both property and 

general liability coverage to be purchased at the same time. They found no lilings f(lr standalone auto 

physical damage coverage. 

G. Consumer Protections Included in Nonprofit Proper!)" Protection Act 

The Nonprofit Properly Protection Act would permit only well-established RRGs to provide property 

insurance. It would apply only to a very narrow subscctor of RRGs. Specifically, only RRG members 

that are small and mid-sized 501 ( c )(J) nonprofit organizations--mganizations that qualify for donations 

that may be deducted from personal income taxes----qualify under this bill. Additionally_ the bill requires 

RRGs to meet the three following minimum criteria to provide property insurance to their members: 

l. Have provided liability insurance for at least ten years: 

2. Have at least $10 million in capital. although the domicile regulator may require more; and 

3. Insure any one member for a tnaximum Total Insured Value (TlV) of$50 million. 

RRGs are owned and governed hy their members and since RRGs may only offer this benefit to 501(c)(J) 

nonprofit member-insureds, the only beneficiaries of this bill arc the 50 I ( c )(3) nonprotits themselves. 

H. Benefits of the Nonprofit Property Protection Act 

The Nonprofit Property Protection Act would allow Risk Retention Groups (RRGs) to insure the property 

of their small and mid-sized 50l(c)(3) nonprofit members. in addition to the liability insurance they 

already provide. This is necessary because the standalone property insurance policies and standalone auto 

physical damage insumnce policies that small and mid-sized nonprofits need is not available from 

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NON PROFITS FOR 

INSURANCE A Head for insurana< A Heart for Nonprofit;;, 

commercial insurers. This would allow these nonprofit members of RRGs to purchase necessary 

coverages and make it easier and more efficient f(lr these smallnonprollts to satisfy their property and 

casualty insurance needs. This is more practical and well-suited regulation f(lr a very small and specillc 

segment of the market. The types of nonprofits for which this bill will provide relief are those providing 

direct services to some of the most vulnernble members of our communities. Organizations that oversee 

tens ofthousands of foster family agencies. provide enrichment and arterschool programs for young 

people, create atlordable housing. rescue and lind homes l(lr abandoned cats and dogs, provide daycare 

and enrichment for children and fl·agilc seniors, offer enrichment through art in underserved communities. 

serve meals to veterans. provide foodbanks and more will directly benellt from the Nonprofit Proper1y 

Protection Act, at no cost to government 

I. Conclusion 

This narrow bill solves a problem limited to small and mid-sized 501(c)(3) nonprofit organizations. The 

only RRGs that may qualify under the Nonprofit Property Protection Act are those serving 501(c)(3) 

nonprofit organizations. such as Boys & Girls Clubs, domestic violence shelters, afterschool programs. 

animal rescues. and programs for those \vith disabilities. Furthermore. these RRGs may not insure any 

individual nonprofit for more than $50 million in real property--a cap which limits the scope of this bill 

to a very small part ofthe commercial property market. This hill specillcally prohibits qualifying RRGs 

from providing health. life. disability or workers· compensation insurance. 

The Nonprofit Property Protection Act is narrowly dralled to solve a problem for an often overlooked. but 

vital segment of our economy--small and mid-si?C·d 501 ( c )(3) nonprofits--without in any way impacting 

the larger insurance industry. and the markets already being adequately served. This bill would give 

immediate relief to many thousands ofnonprotlts across the country. Eighty percent of these nonproflts 

have annual budgets of$1 million or less. Nonprnfits are not asking for a handout. They nrc simply 

asking for the ability to solve a prohlcm themselves. 

10 www.insurancefornonprofits.org 
39 


29710.016

AMERICAN 

INSURANCE 

ASSOCIATION 

Statement of the American Insurance Association 

Before the House Committee on Financial Services 

Subcommittee on Housing and Insurance 

United States House of Representatives 

"Examining Insurance for Non-profit Organizations" 

September 28, 2017 

www.aiadc.org 
40 


29710.017

Statement of the American Insurance Association 

13cf(Jre the House Committee on Financial Services 

Subcommittee on Housing and Insurance 

United States House of Representatives 

'·Examining Insurance for Non-profit Organizations" 

September 28. 2017 

INTRODUCTION 

Chairman Duffy and Ranking Member Cleaver thank you for the oppo1iunity to testify at today's 

hearing entitled "Examining Insurance J(Jr Nonprofit Organizations." lam Tom Santos. Vice 

President of Federal Affairs at the American Insurance Association (AlA). and I am pleased to 

provide AlA's perspective on what we believe is the critical aspect oftoday's hearing-whether 

to expand federal preemption contained in the Liability Risk Retention Act of 1986. 

AlA represents approximately 330 of the nation's leading insurance companies that provide all 

lines of property-casualty insurance to consumers and businesses in the United States and around 

the world. AlA members write more than $!17 billion annually in U.S. property-casualty 

insurance premiums and approximately $225 billion annually in worldwide property-casualty 

premiums. 

Our members have a strong interest in ensuring a competitive marketplace where the regulatory 

approach focuses on policyholder protection through appropriate financial standards applied in a 

fair and equitable way. 
41 


29710.018

BACKGROlJNO 

The Product Liability Risk Retention Act of 1981 was enacted in response to the product liability 

insurance needs of manufacturers. In 1986. the Liability Risk Retention Act (LRRA) was 

expanded to include all types of commercial liability coverage. again in response to widespread 

market issues during that time period. Seeking to narrowly address the liability insurance 

availability problem at hand, Congress wisely chose not to apply the LRRA to commercial 

property. workers' compensation. private passenger automobile, homeowners' insurance. and 

other types of insurance unaffected by availability issues. 

The preemption authority of the LRRA allows risk retention groups (RRGs) 1 to operate 

nationally with significantly less oversight than admitted insurers. Unlike admitted. propertycasualty companies that must adhere to the regulatory requirements of every state in which they 

operate, under the LRRA, RRGs arc only required to meet the regulatory requirements of the 

state in which they are chartered/licensed and a limited number of specific regulations in other 

states in which those RRGs operate. More specifically. under the LRRA. RRGs are subject to 

less rigorous solvency requirements. 

1 An RRG in as insurance company formed pursuant to the federal Risk Retention Act of 1981, which was amended 

in 1986 to allow insurers underwriting all types of liability risks except workers' compensation to avoid 

cumbersome multistate licensing laws. An RRG must be owned by its insureds. 
42 


29710.019

SHOlJLI) RRGs BE ALLOWED TO PROVIDE COMMERCIAL PROPERTY COVERAGE 

We recognize that RRCis have played a role in the commercial liability insurance market for 

more than 25 years. We also applaud the important work that many nonprofits do in communities 

all across the United States. However. since there is no demonstrable national availability 

problem in property insurance markets, like that experienced with respect to liability insurance in 

the 1980s. and considering that RRGs operate under a substantially diflerent and Jess rigorous 

regulatory regime. AlA opposes further expansion of the LRRA to include commercial property 

insurance. 

Over the years there have been several proposals to expand the LRRA to allow RRGs to ofter 

commercial property coverage. Most recently, such proposals have focused on nonprofit 

(50 1 (c)(J)) organizations. Proponents of expanding the LRRA suggest that a problem similar to 

the liability crises of the 1980s exists. But the data docs not support that argument. 

The proponents of this idea argue that nonprofit organizations are unable to easily acquire 

property coverage from the traditional insurance marketplace. At the same time, they 

acknowledge that nonprolits can readily secure property coverage in combination with liability 

coverage. The fact that nonprofit organizations are able to secure property coverage. even if 

combined. is evidence that there is no availability or market crisis in commercial propetiy 

coverage that mirrors the liability crisis of the 1980s. To the contrary, property insurers are 

looking to expand offerings and enter into new markets. as evidenced by shrinking markets of 

last resort for property insurance in even the toughest states. such as Texas and Florida. ln fact. 
43 


29710.020

Florida's residual property insurance market has shrunk by more than one million policies over 

the last six years, an unmistakable sign of increasing competition. 

Today's property insurance marketplace is very competitive and insurers offer commercial 

property and liability insurance products at appropriate and atTordable rates. The reality is that 

there is no market failure or availability crisis that vvan·anls the extreme step of expanding the 

LRRA into commercial property insurance. 

Further, no compelling evidence has been presented to the Committee suggesting an insurance 

availability problem warranting further federal preemption. In fact, the operators of RRGs have 

existing options to otTer propetiy insurance by using the revenue generated by their groups to 

fonn regulated captive. mutual or reciprocal insurers to otTer property and other lines of 

insurance. Accordingly, the real question is, after 30 years of RRG operations, ·'Why have they 

not done so?" The answer is regulatory arbitrage. 

RRGs want to grow and take on additional risk. Rut, but only if they can avoid certain state 

insurance regulations. This should raise very serious public policy questions for the Committee. 

Should an insurance operation be writing earthquake insurance in Calif()rnia without being 

subject to any of the rules, regulations and supervision of the California Department of 

Insurance? Should an insurance operation be writing hurricane coverage in Florida without 

being subject to any of the rules, regulations and supervision of the Florida Office of Insurance 

Regulation? If the LRRA is expanded into commercial property insurance. this would allow 

exactly that type of regulatory arbitrage. 
44 


29710.021

REGULATORY DIFFERENCES ANU CONO:RNS 

As we have already noted. RRG regulation difTers significantly from the type and scope of 

oversight applied to admitted insurance companies, which arc subject to licensing and regulation 

in each state in which they operate. The LRRA 's preemption allows RRGs to operate nationally, 

but without very important oversight, including less rigorous solvency requirements. 

AlA has long-argued that the most important consumer protection. when it comes to insurance, is 

ensuring the ability of the carrier to pay claims when an insured has a loss. This is particularly 

true when faced with significant losses from a major event (terrorist attack or large natural 

catastrophe). 

Civen their relatively small capacity. a RRG could be at greater risk of insolvency following a 

large loss event or catastrophe. lfthis occurred, it would leave policyholders without financial 

support at the very time they need it most. This outcome would be particularly acute f(Jr 

nonprofit organizations at a time when their constituents and communities would need them 

most. Therefore, concerns about the capital adequacy and financial solvency regulations must be 

addressed before any expansion of commercial writing by RRGs can be entertained. 

AlA is not alone in our concerns about the financial regulation applied to RRCJs. A 201 I rcpOii 

by the U.S. Covcrnmcnt Accountability Office (GAO) noted that. some RRG representatives and 
45 


29710.022

stale insurance regulators ..... expressed concerns about whether RRGs would be adequately 

capitalized to write commercial property coveragc."2 

Further, when looking at property casualty insurer impairments, a 2015 A.M. Best Special 

Repo1i revealed a rise in RRC) impairments during the period of2000-2015. The Best Report 

noted: 

''One interesting development, however, has been the rise of risk retention group 

(RRG) impairments during the period. For the period overall, there were 33 RRG 

impairments, representing 10%> of the total. However, looking at the study period 

in bands showed that RRGs represented 4% of impairments in 2000-2005; 12% of 

impairments in 2006-20 10; and 18'Yo of impairments during 2011-2015. To some 

extent the growth in RRG impairments reflects the growth in popularity of this 

structure. Another significant factor, however. may be unrealistic loss, operating 

expense, and pricing assumptions being utilized as these sell~ insurance entities are 

formed and undertake operations3 " 

Finally. according to National Association of Insurance Commissioners (NAIC), over the past 

five years (20 12-20 16), RRGs have gone into receivership at a much higher rate than admitted 

property-casualty insurers. 

Considering the observations noted in Best's Special Report, the concerns of state regulators, and 

the record of financial failures highlighted by the NAlC, we respectfully submit that Congress 

should not expand the LRRA to include commercial property insurance at this time. 

2 U.S. Government Accountability Office, Risk Retention Groups; Clarifications Could Facilitate States' 

Implementation of the Liability Risk Retention Act, December 2011 

3 Best's Special Report, 2015 Property/Casualty Impairments Update, October 2016, p. 2-3 
46 


29710.023

CONCLUSION 

Again, AlA as seen no demonstrable, national availability crisis that would warrant an expansion 

of the LRRA. Today. many AlA member companies have dedicated business operations 

specifically designed to address the needs of nonprofit entities. Non-profits arc able to purchase 

commercial property insurance in the private market and have a wide selection of insurers from 

which to choose. That being said, if there are situations in which some nonprofit entities are 

having diHiculty acquiring coverage. AlA would be open to helping fl1cilitate a solution between 

the nonprofit corporations and property-casualty insurers that specialize in providing service to 

nonprotits. 

Allowing RRG's to expand into commercial property under a less rigorous and preferential 

system of regulatory oversight will likely place policyholders at greater risk. lfRRGs want to 

write prope1iy coverage they should become admitted insurance companies and subject 

themselves to the same capital standards and regulatory oversight as the rest of the insurance 

industry. 

Thank you ttlr the oppmiunity to present our views this moming, and I'd be pleased to answer 

any questions. 
47 


29710.024

Statement of 

Baird Webel 

Specialist in Financial Economics 

Before 

Committee on Financial Services 

Subcommittee on Housing and Insurance 

U.S. House of Representatives 

Hearing on 

"Examining Insurance for Nonprofit Organizations" 

September 2R, 2017 

Congressional Research Service 

7-5700 

www.crs.gov 
48 


29710.025

Mr. Chairman, Ranking Member, and Members of the Subcommittee, thank you for the opportunity to 

tcsti(y before you today. My name is Baird Webcl. specialist in Financial Economics at the Congressional 

Research Service (CRS). CRS's role is to provide objective, nonpartisan research and analysis to 

Congress. CRS takes no position on the desirability of any specific policy. Any arguments presented in 

my written and oral testimony are for the purposes of informing Congress, not to advocate for a particular 

policy outcome. 

The subject oftoday's hearing is insurance f(lr nonprofit organizations. As the most recent legislative 

proposal on the issue (H.R. 3794 in the 114'" Congress) focused on risk retention groups (RRGs), my 

testimony today docs so as well. It begins with general background on insurance regulation and markets. 

followed by specific details on RRG regulation, the RRG market experience and possible RRG-related 

policy considerations. Finally, an appendix presents a brief legislative history of the RRG statutes. 

Background on Insurance Regulation and Markets 

Regulation of insmance markets was lett to the states in the 1945 McCarran-Ferguson Act.' This was a 

specific policy choice made by Congress, and Congress has continued to usc its underlying authority to 

regulate insurance in various ways since 1945. This has occurred both in broad financial regulatory laws, 

such as the Gramm-Leach-Bliley Act (GLBA)1 and the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank), 1 and in narrower laws aimed specifically at insurance. such as the Ten-orism 

Risk Insurance Act (TRIA).'' Both GLBA and Dodd-Frank generally confirmed the state regulatory 

system while nonetheless introducing new federal authority over insurers 5 A more recent example of a 

law narrov./ly preempting some aspect of state insurance regulation was the National Association of 

Registered Agents and Brokers Rcf{mn Act enacted in 20156 

The insurance industry, particularly property/casualty insurance, is known for alternating periods of 

"'hard" and "soli" markets. Turns in this cycle are typically traced to unexpected changes in the 

investment climate, or unexpected changes in insurance payouts. or both. During a typical hard market. 

the supply of insurance goes down. insurance prices go up, and underwriting standards become more 

stringent. This often leads to consumers encountering dil1iculty in tinding and aftording insurance. 

During a son market. prices are typically ilat, and insurers arc more willing to underwrite greater risks, so 

consumers typically do not face such ditliculties in obtaining insurance. In general, insurance markets 

have been sotl lor the last decade or so with large amounts of capital available worldwide. l-lowcvcr, 

although the capital sources for insurance may be worldwide, the insurance policies themselves arc very 

pat1icular and specific products. Thus_ specific lines of insurance or certain states may face market 

conditions that arc quite different than the general market conditions seen hy most market participants. 

1 P.L 79-15. 15 U.S.C ~§!Oil et seq. This act did not JiffCn:ntiatc bd\\\:Cn diffl-n.:nt 

oroocr"tv!r:asrJaltv. \\"hilc health insurun~c and lifl• insumnce arc relatively smu£n;uot'\\aru 

P.L. 106-102. 

auto. homeowners, profCssional 

insurance. Because the jurisdiction 

such as h~alth. !iiC, and 

orc•ncri;/<casualrl; is 

3 P.L 111-203; sec also CRS Rcpor1 R4 !372, 7he Dodd-Fmnk Wall Street f?r!(hrm and Consumer Protection Act: Insurance 

Prorisions. hy Baird Wcbcl. . 

-1 P.L 107-297. ~ 105 which preempted any state appn)\ a!s of insunmcc policy language excluding coverage of a terrorist attack. 

CiLBJ\ JCdcral insurers if the holding company 

or a the power to preempt state laws 

regulating lnsun:mcc under certain circumstam:cs. 

6 P.L 114-1, Title II. For more inf(mnation. CRS Report R43095. Insurance Agem Licensing: OrctTiC1t' and Hacl·;gmund on 

Federal ,\>1RAJ1 l,cgislmion. by Baird Vv'cbel. 
49 


29710.026

Legislative attention often tends to focus on insurance mal!ers during hard markets as constituents relate 

complaints about finding or affording insurance to their legislators, although the legislature in question is 

most otlen a state legislature. Among the solutions alTered at the state level has been the creation oC or 

allowance for. "alternative" market entities to increase the amount of insurance available to consumers. 

The alternative market is made up of entities or arrangements that spread and finance risk similar to an 

insurance company, but that operate outside the normal regulations goveming the world of "regular" 

insurance companies. Such altematives include nonadmitted or "surplus lines'' insurers' and captive 

insurance companies-' 

In the 1970s and 1980s, liability insurance became difticult to Jind for a wide variety of entities. In 

response~ Congress authorized tht; creation of alternative market entities known as risk retention groups 

(RRGs) in an attempt to expand insurance supply by simplifying insurance regulation. In the 1981 

Product Liability Risk Retention Act, subsequently amended in 1986 and known now as the Liability Risk 

Retention Act (LRRA). 9 crafted a narrow exception to the usual state insurance regulations for 

these groups, largely the groups from regulation except by the RRG's home statew 

Risk Retention Groups: Structure and Regulation 

By current federal law,'' risk retention groups are required to be state-chartered insurance companies; 

RRGs are allowed to insure commercial liability risks, such as the risk that a physician will be found 

liable t{lr medical malpractice, but not property risks, such as the risk that a physician's office might burn 

down. All policies issued by a risk retention group must bear a federally mandated warning that the policy 

is not regulated or guaranteed in the same way as other insurance. These insurance companies also must 

be owned by the members of the group. Group members are required to be businesses, including 

individual professionals such as physicians and attorneys. or government entities, such as public 

universities, school districts, and town or city administrations. that are engaged in a similar business or 

!~tee similar risks. The exact corporate structure of an RRG can vary. Many arc licensed as captive 

insurers. which may have lower capital requirements, but some are licensed as regular insurers. 

!frisk retention groups must be licensed as an insurer under the existing laws of an individual slate, two 

questions arise: (I) what advantages do they possess'' and (2) why go to the trouble and expense of 

creating such a group'' The answers are in the different regulatory treatment of these groups as they 

operate outside of the state in which they arc chat1crcd (or "domiciled"). Under normal circumstances, an 

insurer that wishes to operate outside of its domiciliary stale must receive a license and submit to 

regulation from every stale in which it wishes to do business. This means complying with up to S I 

different sets of state or district laws and regulations in order to do business across the country. The 

impact of this multiplicity of regulation is particularly high in insurance, as compared \Vith other 

businesses, because both the prices and the content of insurance policies are highly regulated in most 

states. 

7 Nonadmitted or surplus lines insurers are not licensed by the state in which they arc 

under a narrow range of conditions. particularly when u specific type of insurance is not 

state. 

online glossary 

mu>O:Itww:w.rii.orgl>>m iccslglo"""l,/c. Sec also http://\n\ w.capiivc.com. 

with 

9 l~ U.S.C §§3901-3906, created hy P.L. 97-45 and P.L. 99-563: f()f more ddail on these hms. please sec the Appendix. 

JO ·ult.~ LRRA also provided j()f risk purchasing groups which allow for group purchasing orliahility insurance. 

11 15 U.S.C. §§3901 i!l seq. 

to do <>o 
50 


29710.027

Risk retention groups arc exempted hy federal Jaw 1rom the requirement to be licensed in all states in 

which they operate as well as fi·om some other state Jaws regulating the business of insurance. RRGs must 

register and 1ile documentation with a state's insurance regulator, but aller this tiling. they arc essentially 

H·ee to do business in that stale. A !though this exemption from state law extends to most laws on the 

business of insurance. laws such as those on fraudulent trade practices, nondiscrimination. and unfair 

claim settlement practices still apply. RRGs must also pay stale premium taxes as regular insurers do. In 

addition, a non-domiciliary state's insurance regulator is empowered to monitor the financial solvency of 

a group, including requiring that a group submit to a financial condition examination if the chartering 

state regulator refuses to do such an exam. and seeking an ir~junction to f(lrce it to cease doing business if 

the group is in hazardous financial condition. This regulatory oversight is Jess than that accorded regular 

insurance companies, however, and some observers fear that this might lead to an increased danger of 

such groups becoming insolvent. 

The treatment of RRG policyholders in the unlikely event of an insolvency is one of the major ditlercnces 

that an RRG policyholder might experience compared with a policyholder of an insurer specitlcally 

licensed to operate in a state. In the case of most insurer insolvencies, the state-run guaranty funds step in 

to pay outstanding claims up to a certain limit even when the failed insurer's assets are insufficient to pay 

these claims. 12 Financial arc then made on the remaining insurers in order to provide the 

Ji.mding necessary to do this. RRGs by federal statute, however. arc prohibited Ji·om participating in the 

guaranty fund system. Thus, RRG policyholders would only he able to collect on claims to the extent that 

company assets existed to pay these claims and may face a more lengthy coun process in order to receive 

payments. 

Role of the National Association of Insurance Commissioners 

Although the regulation of insurance is left up to each state. the states act in common through the 

National Association of Insurance Commissioners (NAIC) to set standards and develop model laws and 

regulations. While the slates may in many cases choose which NAIC models to adopt. and sometimes 

change them in the process, there is a core accreditation program to promote financial solvency standards. 

Maintaining accreditation allows J(lr recognition of one state's solvency oversight by other states. and 

slates generally adopt the standards necessary to maintain accreditation. Thus, to the extent that RRGrclated standards are included in the accreditation process, it is possible for non-domiciliary states to 

intluencc the regulation ofRRGs even though by statute this regulation is solely up to the domicile state. 

The NAIC accreditation standards have specific standards tor RRGs including the application of a variety 

ofNAIC models to RRGs that arc organized as captives and operate in multiple states." These standards 

were supplemented at the beginning of 2017 with the requirement that the NAIC Model Risk Retention 

Act 15 he applied, particularly relatively nc\v language relating to corporate governance. The question of 

liabilities in insurer failures 

guaranty funds to operate. 

state law. For more inl(mnalion see National 

(;uaralllJ' l•'unds. at http;//ncigforf!hncdia bqs. 

the 1-'cdcral Ikposit lmurancc ('orporation 

hank !;1ilurcs c~m occur. In contrast. the 

1

" For more inf(mnation on of the standards. sec National As<;ociation of Insurance Commissioners (NAfC). Financial Regulation 

Standard.v and Accreditation Frogmm. August 2017. pp. ll-12. at 

Also. the ll.S. Gon.Tnlllcnt Accountability Office ((iAO). standards in Risk 

Clar(lications Could Fuci!itote ,)'tales· Implementation oft he Uubi!ity Risk Rncntion Act. CiA0-1 1-16. December 201 

·10. at http://www.gao.gov/a-;sets/590/5'6753 !.pdf 

1

' NAIC Model Risk l?('{entirm Act. #705. Jnnmll)" 2012. at http://ww\\.naic.org/ston:/frcc/t\H)L-705.pdL 
51 


29710.028

corporate governance standards was specilically iclcntiliccl by the Government Accountability Oflicc 

(GAO) in 2005 16 and also Wets the subject of previous legislation in Congress. 17 

Growth in the Risk Retention Markef18 

Market reaction to the expansion of the LRRA in 1986 was relatively swill. Hy 1988,52 risk retention 

groups had been created with more than 24,000 insureds and a total premium amount of $250 million. 

The number climbed to 79 in 1991 and then largely plateaued for the next 10 years, declining to 72 by 

20()1. The number of insureds and the total premium amount. however. continued to increase, reaching 

more than l 72,000 insureds and $944 million in premiums in 2001. Within the aggregate statistics. there 

was significant churning, as individual groups were formed and retired based on the business decisions 

made by those seeking insurance. ln the period from 1987 to 200!. a total of 142 RRGs were formed and 

73 retired. Reasons fnr a group retirement vary greatly. Some became insolvent, some changed status to 

become a regular insurer or were absorbed hy a regular insurer, and some simply ceased operation when 

insurance on the regular market became more af({m!able.'" 

The relative calm in the marketplace that prevailed through the 1990s ended quickly with the hardening of 

the insnrance market in 2001. This hard market has been ascribed to the downturn in hnth interest rates 

and the stock market as well as to unexpected losses, particularly the approximately $35 billion in insured 

losses due to the terrorist attacks on September II, 2001. Interest in RRGs increased along with the prices 

of insurance and reinsurance. The number ofRRGs and premiums increased fairly steadily from 72 

groups and $994 million in premiums in 200 l to 245 groups and $2.6 billion in premiums in 2006. The 

number of RRG insureds. however, did not follow the same pattern. The insureds numbered 172.713 in 

2001. declined to !39.837 in 2002, bef(1fc increasing to nearly 218,000 in 2006. 

Risk retention group growth during the hard market of the early 2000s occurred particularly in the health 

care arena. In a 2004 Risk Retention Reporta survey, for example. 28 of the 4lnew groups were insuring 

some f(mll of health care liability. In a 2007 Risk Retention T?eporrer study. the comparable number was 

34 of 52 new RRGs. Within health care, nursing homes showed the largest growth, going lrom zero 

nursing home RRGs in 2002 to 20 at the end of2005}0 The growth in health care RRGs seemed largely 

due to widely reported difficulties that health care providers were encountering in obtaining medical 

malpractice insurance. 

The liability insurance market generally has softened since :2005 or so and the years since the financial 

crisis of2007-2009 ha\'e been marked by low interest rates and a relatively large supply of capital t(>r 

most types of insurers. Medical malpractice insurance. which was the source of much RRG growth, has 

also seen a significant change in financial results, with relative claim amounts dropping and significantly 

improved profitability. As might be expected in softer market conditions, RRGs have not grown in the 

past decade as they had before. According to the 2008 Risk Rc!cnlion Reporter survey, the total number of 

RRGs peaked in 2008 at 272. By 2016, however. there was a net drop of nearly 40 RRGs. Most of this 

drop occurred in 20 !J-20 14 among relatively new or small RRGs. Ofthc 40 RRGs that retired ti·om 

January 2013 to November 2014. '"live never became operational, 18 voluntarily dissolved and entered 

16 St::~.: GAO, Risk Retention Groups.' ('om moll Rcgulat01y Standards and Greater }fcmhcr Pro!cctim15 Arc Needed, GA0¥05¥ 

536. August 2005. 

17 h)f t'xampk 1 LR. 2126 in the 112th ( 'ongrc:-;s. 

18 Except where noted. statistics in this section arc taken from succcssiH.~ annual surveys done by the Risk Retention Rcporrcr 

(Pasadena. CA: hnp:i/rrr.wm/). 

1

'

1 Sec "Son Market Fueled Risk Rckntion Group Retirements Dming 1990s." Risk Retention Reporter. February 2002. 

::'.tl "Premium (icncratcd By llcalthcarc RlUis More rlum Triples Sine<: 20tH:· Nisk Retention Reporter. December 2002. 
52 


29710.029

nm-on: six merged into another captive or three merged into another RRG, one converted into a 

traditional insurer, and seven became insolvent. Although the reporicd number of RRGs has dropped. 

the premium volumes and numbers of insureds have continued to increase somewhat over time, 

suggesting that larger RRGs have been more successtlrl through the soft market For 2016 total premium 

volume for 236 operating RRGs is estimated to be slightly over $3 billion, with more than 500.000 

insureds. 

Some Difficulties Have Come Along with Growth 

The growth of risk retention groups has not been without problems. Perhaps the most notable RGG failure 

was that of the National Warranty Insurance Risk Retention Group (hereinafter "National Warranty''). 

Although physically headquariered in Lincoln, Nebraska, National Warranty was incorporated in the 

Cayman Islands. It was one of a handful ofRRGs that were incorporated outside of the United States 

before 1985 and was thus grand fathered out of regulation by any of the individual states in the 1986 

amendment. Prior to its being declared insolvent in August 2003, it acted as an insurer of the obligations 

taken on by its members, mainly marketing companies and auto dealerships that sold vehicle service 

contracts. Although the actual group was made up of only approximately 580 members, the effect of the 

insolvency was more as these members sold contracts to or through more than 5.000 auto 

dealerships in 49 states. 

The LRRA requires insureds to be members and part owners of an RRG; however, this line was 

apparently somewhat blurred in the National Warranty ease. National Warranty acted both as an 

administrator, adjusting claims on behalf of its members, and as the insurer of these members. 23 This dual 

role apparently gave the impression that the final consumers were purchasing service contracts directly 

from National Warranty rather than from the individual group members. 

In the aggregate, the total number of RRG failures is not particularly large, but the recent trend may 

provide reason for concern. The insurance rating service A.M. Best identified 33 RRG "impairments" 

from 2000 to 2015." The number ofRRG impairments increased over this time period, with 6 in :?000-

2005. 9 in 2006-2010, and 18 in 2011-2015. This contrasts to the experience in other types of insurers, 

whose impairments peaked at a total of 156 in 2000-2005, fell to 68 in2006-2010, and rose to 80 in 2011-

2015. The increasing popularity of RRGs is cited as a pos:;ible reason for the growth in impairments. but 

J\.M. Best also identifies '"unrealistic loss, operating expense, and pricing assumptions'~ as a significant 

factor. 

Policy Issues and Considerations 

The fundamental que:;tions surrounding potential LRRA expansion arc essentially the same as those 

addressed by Congress when the ilrst act was passed in 198 I. and when it was expanded in 1986. 

Stripping away jargon, this question can be phrased as an issue of availability versus reliability. 

21 '"201~ Risk Rdcntion 

Reporter. vol. 2tt no. 11. 

ofRbk Retention Group Premimn. Policyholtkrs. and fnsurcds. Risk Retention 

22 Figures tfom John Ta) !or. "lrak: Con::>mncrs l:i!c Class-Action Suit ag_ainst Lincoln. Neh .. Firm." Omaha Jror!d-!lerald. 

September 23. 2003. 

21 Caroline McDonald. "Lessons from National Warranty:· ,!j:ational Undenrriter, Prorary & Casua!zr !hvk & Rem:fits 

,\lanagemenl F.dition. Octoh-::r 24. 2003. 

An impairment is dclincd as ''situations in which has been placed, via court order. in!o conservation. rehabilitation. 

and/or in~oh'cnt liquidation." S-::c AJvt. Best_ 2015/'ro[)f!rfy Lf)(/aJc. October 13.2016. p.!. 

2

) A.M. Bcs.L 20/5 Propcr!yCasualty lmpairments Ljn.lai!'. Octohcr U. 2016. p. 3. 
53 


29710.030

Arguments in support of expansion ottcn locus on a failure of the insurance market, and the regulatory 

system, to make a sufficient supply of insurance available so that consumers who need insurance can lind 

it a! a reasonable price. The question posed is essentially: "What happens to a community when a 

business, a school, or a doctor cannot find or atTord insurance?" A change in regulatory structure may not 

be the only way to answer this question; however. this is the path Congress chose in passing the LRRA. 

Arguments opposing expansion often focus on the dangers in allowing insurance to be sold that is not 

subject to the same regulatory standards as "normal"' insurance. The question posed is essentially: "What 

happens to a community if the insurer horn which this business. schoot or doctor purchases insurance 

ends up bankrupt or if the policy docs not cover what needs to be covered?" The requirements of the 

LRRA that RRG policyholders also be owners oft he RRG provides somewhat of an answer to this as, 

presumably, the RRCi policyholders/owners would not desire to purchase unreliable insurance. The same 

statute, however, prohibits RRG guaranty fund participation. thus ensuring that RRG policyholders will 

not have the same benetlts in an insolvency compared with an insurer licensed in that state. 

Assessing the arguments on either side may be a for Congress. The broad question of 

availability versus reliability can be framed by some as a philosophical question about the degree of 

regulation needed by insurance markets and may not have an absolute empirical answer. Some see 

insurance philosophically as a public good, akin to a basic utility, and one that must be highly regulated in 

price and content lo protect consumers. Others do not share this philosophy and feel insurance should be 

I ightly regulated, with the market determining prices and content In general, the states, which have faced 

such basic insurance regulatory questions for many years, have attempted to suit the amount of regulation 

to the perceived sophistication of the consumer. Thus, the market for commercial insurance is usually lett 

relatively less regulated on the theory that the businesses purchasing in the commercial market have the 

knowledge and experience to discern the intricacies of insurance policies and companies, or at least hire 

professionals to make these "reliability" judgments f(w them, Individual consumers are often presumed to 

be less well placed to make these judgments: thus, the market f(lr such insurance, particularly 

homeowners and auto, tends to be more regulated. 

Risk retention groups occupy a small part of the insurance market The approximately $560 billion"' of 

direct premium written in the property/casualty market in 2016 Car exceeded the approximately $1 billion 

in RRG premium. Economic theory suggests, however, that it is not necessary for a competitor to have a 

large market share in order to have an impact on prices or availability. Anecdotal cases also suggest that 

the LRRA is expanding the availability of insurance, especially in local situations with severe supply 

diflicul!ies. The Department of Commerce came to the conclusion in 1989 that the !986 act had been 

successful in addressing supply problems, and the GAO reported similar findings in the previously 

mentioned 2005 report 2r; and a 20 II report.-:~ 9 

A.M. Best, -IQtr 20/ti Properzr Ca.\·uol~r Financial Results. March t 5. 2017. p. 3. 

~~See U.S. Department of Commerce. !.ivhility Risk Retention Act q(J986· OfH!rations Report 1989. NTJS PB 90~123134. 

!he availability a.nd afl(wdabitity of commcrcialliahility insurance 

RRGs ban: 

Jmnle.meJ11otion (~(the 

at http://v.,,\w.gao.gov/asscts/590/58753l.pdf. 

Xcedcd. 
54 


29710.031

Appendix. Risk Retention Act Legislative History 

The 1981 Product tiability Risk Retention Act 

The first "Product Liability Risk Retention Act" was introduced in 1979, and an amended version became 

P.L. 97-45 in 1981. Its origin can be traced to an interagency task force created by the White House in 

197510 to examine difliculties in the availability of product liability insurance. Among the proposals 

discussed by the task f(lrcc's was the possible creation of alternatives to the traditional insurance 

market. The 1981 act was narrow, limiting risk retention groups and risk purchasing groups to 

insurance covering product as well as completed operations liability. The I 981 also limited 

members of these groups to "product manufacturers, wholesalers. distributors and retailers. Risk 

retention groups had to be chartered, and thus as an insurer in one of the United States or U.S. 

jurisdictions, or in Bermuda or the Cayman Islands. The act specifically exempted risk retention groups 

from most regulation by any state in which they operate. aside ti·om the chartering state. This federal 

exemption, however, did not cover laws that were not specific to the business of insurance, such as fraud 

or deceptive practice laws. The act also preempted any state laws preventing risk purchasing groups from 

purchasing the same narrow range of insurance as that allowed to be otrcrcd hy risk retention groups. 

By the time the act became law in September !981. the liability market diftlculties that prompted so much 

attention had largely passed. With regular commercial insurance available and relatively inexpensive, 

there was little incentive for companies to undertake the expense of forming risk retention or purchasing 

groups. and only three of the former and four of the latter were f(,rmed in the first lour years of the act's 

operation. 

Despite the lack of market action, congressional interest in the issue continued. [n I 983, a Clarification of 

the Risk Retention Act (S. I 046, eventually P.L. 98-193) was passed by voice votes of both the House and 

the Senate. This act was a response to a model state law promulgated by the NAIC. This model law 

referenced the various state tot1laws in its definition of ''product liability" rather than following the 

definition passed by Congress in the 1981 act The state tort laws tended to have a more narrow definition 

than that desired by Congress. P.L 98-193 specified dearly I hat the in the federal statute 

would be the controlling definitions f(w purposes oft he Risk Retention Act 

l'ask Force on Product Liability. Its final report was publi:-.hcd by the Department of Commerce in 1977 (NTIS 

a buyer or third party." 

discussion. 

his product !<' the 

Vi\' ian S. Chu 

1] liability insurance generally covers daims arising after the completion of a projcc1 (for example. if a 

a house. hut a ddCct was j{)und so!IK' time later). 

~~::;~;';:~:,~,~'~; Froduci Uabi!ity Risk : ( GPO. 1981). p. 1: and U.S. 

Retention Act r?( 1981. report to acnm1pany ILR. 

14 The authority to {(1rm risk retention groups outside of the United Statts limited in time. expiring <.m January 1. 1985. 

'~ For more discussion. sec t l.S. ( ·ongrcss. Senate t 'ommitkc nn ( 'ommcrcc. Science. and 

l?cterlfion Act. report to ac~ompany S. 1046. 981

h Cong .. l'-t S.RcpL 98-172 (Washington. 

Clar{/ication (~f the Risk 

I<JR3). 
55 


29710.032

The 1986 Liability Risk Retention Act 

In the mid-l980s, insurance markets began to harden again and Congress heard of many problems f(tccd 

by businesses and individuals in finding and affording insurance. One of the congressional responses was 

to reconsider the 1981 act Numerous bills were introduced to expand the provisions so that more 

consumers might avail themselves of the additional insurance supply mechanism that Congress had 

created. 

Congress ultimately passed S. 2129 (eventually P.L. 99-563). which renamed the 1981 act the ··Liability 

Risk Retention Acr' and brought the law to its present form. P.L. 99-563 expanded the scope of the 

insurance to include most types of commercial liability insurance and expanded the organizations that 

could form such groups to include any business as well as state or local governments or governmental 

entities as long as all the members of a single group were engaged in similar business activities or were 

exposed to similar risks. This expansion, however. did not retroactively include the small number of 

foreign-based risk retention groups. These groups. formed under the temporary authority described above. 

were allowed to continue in the area of product liability insurance but were not permitted to expand into 

other kinds of commercial liability insurance. P.L. 99-563 also included changes designed to allow some 

increased oversight of risk retention and purchasing groups, including the requirement to Jilc 

documentation in non-chartering states. and the right of non-chartering commissioners to conduct 

examinations if the chartering state fitils to do so and to seek injunctions against groups in a hazardous 

financial situation. In generaL however, the perceived intent of Congress remained to allow these groups 

to operate throughout the country while being regulated largely. if not solely, by a single state regulator, 

rather than facing 51 jurisdictions with different laws and regulatory styles. 
56 


29710.033

The Honorable Scan P. Du!Ty 

Chairman 

September 26. 2017 

Subcommittee on Housing and Insurance 

2129 Rayburn House Office Building 

Washington. D.C. 20515 

Dear Chairman Duffy: 

We applaud the !lousing and lnsnrancc Subcommittee f(lr holding a hcariug to examine 

insurance for nonprofit organizations. The Council oflnsurance Agents and Brokers (ClAB) 

supports the legislation. the Nonprofit Property Protection Act sponsored by Congressman 

Dennis Ross (R-FL) and Congressman Ed Perlmutter (D-CO) in the previous Congress. T·he 

legislation allows ccttain Risk Retention Groups (RRGs) to insure property of their small and 

mid-sized 501(c)(3) nonprofit members. in addition to the liability insurance they already 

provide. 

Historically. the CIAB has supported legislation that expands the insnrance market. During 

periods of hard commercial markets. insureds ·-particularly sophisticated commercial clientsare increasingly drawn to the appeal of alternatives to the traditional. regulated marketplace to 

expand their coverage and hold down costs. One such mechanism that offers an alternative is 

Risk Retention Groups, created under the provisions of the federal Liability Risk Retention Act. 

While we have supported broader risk retention legislation in the past. the current proposal is 

narrowly tailored to address the market inadequacies for nonprofits. 

One of our members. Guy Carpenter. a Marsh & McLennan Company and a global leader in 

providing risk and reinsurance intermediary services. recently completed a study on the market 

for standalone property insurance. During the months of May. June. and July of 2017. Guy 

Carpenter undertook a series of steps to determine the existence of insurance company filings f(lr 

standalone auto physical damage or standalone property on a Businessowners Policy (BOP) for 

50 I (c)(3) nonprofits. ln particular. the research was conducted to determine the availability of a 

BOP property form that would allow an admitted insurance carrier to provide property coverage 

only to 50l(c)(3) nonprotlts. without requiring liability coverage to be purchased simultaneously. 

Guy Carpenter performed some of this research internally and also engaged the services of Perr 

& Knight. a leading provider of insurance support services. 

Despite extensive research over several months, Guy Carpenter was not successful in locating 

standalone auto physical damage or standalone property coverage filings that could be used to 

provide appropriate mono line coverage for 50 I ( c )(3) non profits wishing to purchase a property 

or auto physical damage policy without simultaneously purchasing liability coverage. The few 

filings applicahle to small and mid-sized nonprofit organizations required the simultaneous 
57 


29710.034

purchase of property and liability insurance. This study highlights the market failure that the bill 

is trying to solve for nonprofits. 

We also want to commend the sponsors for including additional consumer protections in the 

legislation, particularly the minimum capital standard. the ··seasoning requirements'" (i.e. a Risk 

Retention Group must be licensed and operating as a liability Risk Retention Group for I 0 years 

before being able to offer prope1iy coverage). and a total insured value (TIV) cap to ensure that 

the bill primarily addresses small and community-based nonprofits. Larger nonprolits should 

have no difficulty finding standalone coverage in the marketplace. 

Risk Retention Groups have served the market well in the last 30 years by providing liability 

coverages for their members. The hill o!Tercd by Congressman Ross and Congressman 

Perlmutter is narrowly tailored to address the unique niche market failure limited to small- and 

mid-sized 501 (c)(3) nonprofit organizations without impacting the traditional insurance market. 

This narrow hill would provide relief to thousands ofnonprolits across the country. By giving 

certain Risk Retention Groups that primarily serve nonprofits the ability to provide standalone 

auto physical damage or standalone property insurance to go along with the liability coverage 

they currently provide, it will create efficiencies in the marketplace that will henctit nonprofits 

and the populations they serve. 

For these reasons. the CIAB supports the Nonprofit Property Protection. 

Sincerely, 

Ken A. Crerar 

President 

Treasurer. CounciiPAC 

Joel Wood 

Senior Vice President 

Government Affairs 

cc: House and Insurance Subcommittee Memhers 

Joel Kopperud 

Vice President 

Government Affairs 
58 


29710.035

Statement for the Record 

By The Cincinnati Insurance Companies 

for the House Financial Services Committee 

Subcommittee on Housing and Insurance 

Hearing on "Examining Insurance for Nonprofit Organizations" 

September 28, 2017 

On Thursday, September 28, 2017, at 9:30a.m. in Room 2128 of the Rayburn House Office 

Building, the Housing and Insurance Subcommittee will hold a hearing entitled "Examining 

Insurance for Non-profit Organizations." Given the witness lineup announced by the 

Subcommittee, we expect one or more of the hearing witnesses to argue for expansion of the 

liability Risk Retention Act of 1986 (the "LRRA") for the purpose of allowing thinly regulated risk 

retention groups (RRGs) to provide all forms of commercial insurance to 501(c)(3) nonprofit 

institutions. 

The Cincinnati Insurance Companies would oppose any such effort to expand the LRRA. The 

LRRA was enacted to ensure the availability of insurance coverage when coverage is not widely 

available for a certain segment of the insurance marketplace. Such was the case in 1986 when 

the LRRA was enacted to address availability issues in the product liability insurance 

marketplace. 

That is not the case with 501(c)(3) nonprofit institutions in 2017. There is no crisis of availability 

in this very competitive segment of the admitted commercial insurance marketplace. As such, 

there is no reason to put nonprofit insurance consumers at risk by allowing RRGs, which are 

generally exempt from the consumer protection and financial surveillance requirements of the 

state insurance regulatory system, to provide full commercial insurance coverage in this 

segment of the marketplace. 

In considering this expansion, Congress should also keep in mind that RRGs are not eligible for 

assistance under the state insurance guaranty fund system. This would put nonprofits at 

greater risk of loss from insurer insolvencies since nonprofits insured by RRGs would have little 

recourse against a failed RRG. It should also be noted that RRGs are generally at greater risk of 

insolvency since they are not subject to the same level of stringent financial oversight as 

admitted insurers in the commercial marketplace. 

For these reasons, we urge Congress to oppose expansion of the LRRA to allow thinly regulated 

RRGs to market all lines of commercial insurance to 501(c)(3) nonprofit institution. 

Submitted by: 

Scott A. Gilliam 

Vice President I Government Relations I The Cincinnati Insurance Company 

6200 S. Gilmore Road, Fairfield, OH 45014 

Work: 513.870.2811 I Cell: 513.607.5717 I Fax: 513-881-8988 

Email: scott_gilliam@cinfin.com 
59 


29710.036

STATEMENT BEFORE 

THE UNITED STATES HOUSE OF REPRESENTATIVES 

FINANCIAl SERVICES COMMITTEE 

HOUSING AND INSURANCE SUBCOMMITTEE 

HEARING ENTITLED "EXAMINING INSURANCE FOR NONPROFIT ORGANIZATIONS" 

September 28, 2017 

I. Introduction 

The Independent Insurance Agents and Brokers of America (Big "I" or IIABA) respectfully submits the 

following statement outlining insurance options for nonprofit organizations and to express the 

Association's opposition to expanding the Liability Risk Retention Act of 1986 (LRRA). Specifically, IIABA is 

concerned about recent proposals to enable Risk Retention Groups (RRGs) to provide commercial 

property and auto insurance coverage to nonprofit organizations and others1 IIABA believes that 

expanding the types of insurance that RRGs can provide to include commercial property and auto 

insurance would needlessly undermine state insurance regulation, distort insurance markets by creating 

a parallel insurance marketplace that is essentially unregulated, and ultimately harm consumers, including 

the nonprofit organizations that are the subject of today's hearing. 

The Big "I" is the nation's oldest and largest trade association of independent insurance agencies, 

representing a nationwide network of approximately a quarter of a million agents, brokers and 

employees. Big 'T' members sell all lines of insurance-property/casualty, life, health, employee benefit 

plans and retirement products to business, individuals and non-profit clients. The Big ''I" supports 

1 See, e.g. H.R. 3794, the "Nonprofit Property Protection Act of 2015" by Reps. Dennis Ross (R·FL) and Ed Perlmutter 

(D·CO). (This legislation would have widely expanded the LRRA and broadly preempted state insurance laws to allow 

a certain subset of large RRGs to offer commercial property insurance to millions of nonprofit and educational 

institutions, while abiding to lower regulatory standards than traditional insurance companies.) 

1 
60 


29710.037

competitive state insurance marketplaces and for decades has been a leading supporter of a modernized 

state regulatory system. The association strongly opposes the federal regulation of insurance. 

11. Congress authorized the use of RRGs in the 1980s for a limited purpose in response to a 

specific economic crisis and did not intend for RRGs to be used broadly to insure multiple 

types of risks. 

When Congress enacted the Product Liability Risk Retention Act in 1981 and amended the statute by 

passing the LRRA in 1986, it was responding to a specific and serious national crisis. In the 1980s, liability 

coverage was often unavailable at any price, and businesses were confronted by policy cancellations, 

dramatic reductions in coverage, significant increases in deductibles, and exponential premium increases. 

The magnitude of the crisis is difficult to overstate, and it dominated news headlines at the time. 

Congress took notice and held multiple hearings (including nine hearings alone in the House Commerce 

Committee during the 99'h Congress) and after much research and debate found "entire lines of insurance 

virtually unavailable at any price."' Congress responded to these extreme and exigent circumstances by 

taking the radical and unusual step of creating a new limited type of insurance company: the RRG. In doing 

this, Congress preempted state insurance laws to allow RRGs licensed in one state to operate in all other 

states with minimal additional regulation. 

While the crisis was overwhelming, the solution was targeted. The changes made to federal law in the 

1980s were intended to increase the supply of commercial liability insurance available in the market; not 

to broadly confer special rights on to certain insurers in a way that could distort insurance markets that 

were not impacted by the availability crisis. One important and appropriate limitation on RRGs is that they 

can only offer commercial liability insurance and cannot write commercial property coverages. RRGs were 

created in response to the specific problems that existed in the commercial liability insurance markets in 

the 1980s, so Congress naturally restricted the reach of RRGs. RRGs were not authorized to offer 

commercial property coverages because those coverages were and continue to be- widely available in 

traditional insurance markets. In fact today, unlike the 1980s, commercial liability coverage is also widely 

available in the traditional market. 

Ill. There is no compelling reason to expand the types of insurance that RRGs can provide 

because commercial liability and property insurance is widely available and there is no crisis 

in the insurance markets like the one that precipitated the creation of RRGs in the 1980s. 

Some RRG proponents now suggest that there is a property insurance need similar to the liability 

insurance crisis of the 1980s and that some groups, including non profits, are unable to obtain affordable 

commercial property coverage in the traditional marketplace. Yet, there is no valid data to support this 

assertion. According to the Urban Institute there are approximately 1.5 million non profits registered with 

the Internal Revenue Service. However, the Big "I" is only aware of one organization (with approximately 

16,000 nonprofit members) that has been pursuing a specific expansion of federal law that would 

essentially allow an RRG operated by that organization the ability to expand to offer commercial property 

insurance to millions of organizations under less stringent regulatory standards than traditional insurers.' 

'See, H. Rep. 99-865 (1986), reprinted in 1986 U.S.CAAN. 5303 

3 See, the Non profits Insurance Alliance Group 2016 Annual Report at page 1, available at: 

ht1Q.l:JJJD2~Iilng:fQCQg.[lJ.liOf'li2IMPJ!~i.l\!l'l.UiJ]ReQ_ortf.filgsJa.~gJ.sjs;Q[11'l'cQD@\A!.tl_lga ds/J?J!RJL~<Jl[QnJl.Qf. 

2 
61 


29710.038

Commercial property insurance for nonprofit groups is broadly available in the traditional insurance 

market. According to the National Association of Insurance Commissioner (NAIC) there are approximately 

250 RRGs in operation today and there are over 2,500 insurance companies that offer a wide variety of 

property and casualty insurance products across the U.S4 Many of these 2,500 carriers including major 

national and regional insurance companies, not only offer general products and services to nonprofit 

organizations, but have developed products specifically tailored to address the unique needs of 

non profits. 

Today's insurance markets can provide multiple products for nonprofits, including both commercial 

liability and commercial property and auto coverages which can be purchased together or separately at 

reasonable prices depending on the specific needs of the nonprofit organization. For example: 

Liberty Mutual offers numerous types of insurance coverages specifically for nonprofit 

organizations, such as community health clinics, counseling centers, homeless shelters, and 

special needs schools in 48 states5 

Travelers Insurance offers both standalone and bundled insurance coverages crafted expressly for 

nonprofit organizations. 6 

GuideOne'" Mutual Insurance Company insures more than 51,000 commercial policyholders and 

offers a variety of property and liability coverages on a standalone or bundled basis to non profits. 

GuideOne'M operates in all 50 states and specializes in churches, educational intuitions, senior 

living and healthcare centers, and nonprofit organizations. 7 

Philadelphia Insurance Companies offers insurance products "uniquely designed to provide a wide 

range of special insurance needs for the nonprofit, social services, and human services sector as 

defined under IRS code 501 (C)(3)."8 

Farmers Insurance offers "personalized coverages" specifically for the education and nonprofit 

sectors9 

In fact even a limited survey conducted by an entity that supports expansion of RRGs for the sole purpose 

of determining that no insurers offer standalone property and auto insurance coverage found that four of 

46 insurers surveyed do offer standalone property coverages in some form, including Cincinnati Insurance 

Company, Seneca Insurance Company, the Hartford, and AIG10 

4 See, Insurance Information Institute, Facts+ Statists: Industry Overview, available at: .h.t!P.?..Jb:Y.)Y.~Y~HLQIPifsi_:t-:: 

6 See, the Travelers website at: f.ltlJ!il.Lc!-!.'>'!~t.@)!£t.gr~d:s:m,c.~_\!ili'i'5.o:!Il?.Y.!:il.llftlfl!2!l:Jl!_c~t!!::l'l2!!:£'l<;.~. 7 See, the GuideOnerM Insurance website at: h.!.!_Qs:/ /wV{,~QJi.....one.£g.Q1L£D.?uran_illD.Qnorofit. 

8 See, the Philadelphia Insurance Companies website at: L'L.I±'2.cLL'~-''-"''~'"'L'-"''''l'.'"'"'~''c'L".'"-"'-L~1.'~L'2l:C~· 9 See, the Farmers Insurance website at: JiJ1Q2.:.L6:':{~'2[y~JiJLrD.~i2:_£9JJ.!l12-u;:LQ_~L'lfi_\:!2_t;xyl.Qfildllil9l1::.0.QE::.QFPll~-

10 The survey conducted in March and April 2015 found that four insurance companies offer standalone commercia! 

property insurance to non profits, however the survey sample was only 46 of approximately 2,500 property and 

casualty insurance companies nationwide and was conducted by 11 individuals emailing companies seemingly at 

random. Because this represents less than two percent of insurance companies that can write commercial property 

coverage and because there is no information in the survey to indicate that uniform questions and follow up 

procedures were used across the group surveyed, it is not possible for IIABA to confirm that the survey results are 

statistically valid. The association believes it is likely the survey misstates the realities of the market, but uses the 

3 
62 


29710.039

While only a handful of companies are specifically referenced in this statement as examples, there are 

many insurance companies that independent insurance agents and brokers work with to help nonprofit 

organizations obtain a variety of insurance coverages at reasonable rates. As such, there is no 

demonstrated marketplace need to expand the narrow purpose of RRGs. The insurance marketplace 

today is very competitive, and insurers offer commercial property (and liability) coverage to nonprofits at 

reasonable rates. In fact, some insurance regulators have gone so far as to question the need for RRGs to 

even continue to provide commercial liability insurance. 11 

IV. Expanding the types of insurance that RRGs can provide would undermine state insurance 

regulation, distort insurance markets, and could ultimately harm consumers. 

RRGs enjoy preferential regulatory treatment vis-a-vis traditional insurers. Under federal law, RRGs are 

subject to significantly less oversight than traditional insurance carriers. Traditional insurance companies 

must be licensed and comply with the insurance rules of each state in which the company operates. RRGs 

however can be licensed to operate in only one state but offer insurance in all other states with minimal 

additional regulation. RRGs are generally not subject to the insurance laws of any state except the state 

where the RRG is domiciled. 

Interestingly, about 80 percent of RRGs are domiciled in only five states (Vermont, South Carolina, 

Nevada, Hawaii, and Arizona) and the District of Columbia, but RRGs write about 95 percent of their 

premiums outside their state of domicile. This suggests that federal preemption of multi-state regulation 

has allowed RRGs to choose their domicile state based on certain regulatory advantages. 12 As such, 

expanding the products that RRGs are permitted to offer would only further exasperate this regulatory 

arbitrage. 

Lax oversight of RRGs has been consistently criticized by many state insurance regulators, particularly as 

some RRGs have gone insolvent13 While insolvency rates for RRGs are low overall, according to NAIC 

data, historically RRGs fail at a rate that is roughly double that of traditional property and casualty 

insurance companies. Furthermore, RRGs do not pay into nor are they covered by state guaranty funds, 

which are used to pay policyholders should an insurance company be financially unable to pay claims, an 

important consumer protection. 

State regulators have also expressed concerns that allowing RRGs to write commercial property insurance 

like a traditional insurer, while retaining a weaker and preferential system of regulatory oversight will 

place traditional commercial insurers at a tremendous disadvantage, distort the competitive balance 

within the insurance industry, and place consumers at greater risk. 14 RRGs have narrowly offered 

commercial liability insurance to their members for nearly 30 years, but permitting these entities to offer 

property and potentially other commercial coverages does not make sense. The members of individual 

survey in this statement to point out that even given the survey's shortcoming and goal to derive a specific answer 

(whether or not it was the market reality) the survey still concluded that non profits can obtain property coverage in 

the traditional insurance market. 

See, "Risk Retention Groups: Clarifications Could Facilitate States' Implementation of the Liability Risk Retention 

Act," U.S. Government Accountability Office (Dec. 2011) at page 23, available at: 

ffitp ://www .gao. g ov I assets/5 90/5875 31±9!. 12 ld. at pages 19·22. 

n !d. at page 33. 14 ld. at pages 40-42. 

4 
63 


29710.040

RRGs are homogeneous in ways that expose them (by definition) to comparable liability risks, but these 

same traits do not exist when it comes to property insurance. The property risks of an RRG's membership 

are inherently dissimilar because they are based in disparate geographic locations and are vulnerable to 

a diverse set of property perils. Expanding federal law to allow RRGs to offer commercial property and 

auto insurance unnecessarily lowers insurance regulatory standards and puts consumers at risk. 

V. There is an option for RRGs that wish to offer commercial property and auto insurance 

coverage that does not lower regulatory standards and protects consumers: convert to a 

traditional insurance company. 

IIABA believes that allowing RRGs to offer commercial property insurance while maintaining a system of 

preferential regulation in contrast to traditional insurers would cause competitive imbalances in insurance 

markets, and leave consumers less protected. Should an RRG wish to expand its offerings beyond the 

scope of federal law it should take the regulatory steps necessary to convert to a traditional insurance 

company. 

The majority of RRGs are small, according to the GAO about half of RRGs write less than $5 million in 

annual in premium." The biggest RRGs, however, account for hundreds of millions in premium and have 

the resources to comply with state insurance law. Yet, it has thus far been large RRGs that have expressed 

the desire to expand their product offerings to compete directly with traditional insurers, while 

maintaining weaker regulatory oversight. 

For example, the Non profits Insurance Alliance Group (NAIG) provides insurance products to its nonprofit 

members in 32 states, and has an RRG. NAIG has over $443.7 million in assets at the group level. 16 

Furthermore, the Alliance for Non profits of Insurance (ANI) the RRG that is part of NAIG has $128.9 million 

in assets." NAIG has over 54,000 policies in force and is larger than a number of traditional insurance 

carriers currently in the market, suggesting that NAIG or ANI could reasonably covert to a traditional 

insurance carrier subject to more appropriate regulatory and consumer protection standards should the 

organization desire to expand to offer a wider range of insurance products to its nonprofit members18 

The Big "I" is aware of some RRGs that have successfully converted to traditional insurance companies in 

recent years, including but not limited to the Podiatry Insurance Company of America (PICA) based in 

Tennessee, ALPS Corp. based in Montana, and Coastal Insurance Company Inc., which was originally an 

RRG based in Alabama. 19 IIABA is aware of no compelling reason, other than a desire to avoid state 

solvency and consumer protection laws, why a large RRG that wishes to offer commercial property 

coverages cannot convert to a traditional insurance carrier. 

VI. Conclusion 

The Big "I" understands the importance of having readily available insurance coverage options for 

non profits, but does not support significant preemption of state law to allow RRGs to provide commercial 

property or auto insurance because: 

15 GAO Report at page 9, figure 1. 15 See, the Non profits Insurance Alliance Group 2016 Annual Report at page 9. 17 ld. at page 11. 18 ld. at page 9. 19 This information was obtained from various articles in Risk Retention Reporter. 

5 
64 


29710.041

Congress authorized the use of RRGs in the 1980s for the targeted purpose of increasing the 

supply of commercial liability insurance in response to an economic crisis and did not intend for 

RRGs to be used broadly to insure multiple types of risks. That is why Congress carefully limited 

RRGs to providing only commercial liability insurance. 

There is no compelling reason to expand the types of coverages RRGs can offer because 

commercial liability and property coverage are readily available in regular insurance markets. 

Traditional insurance companies provide both standalone and bundled liability and property 

insurance products at an appropriate price in a highly regulated environment. 

Allowing RRGs to broadly provide different types of insurance would undermine the state 

regulation of insurance, distort insurance markets by giving certain companies statutory 

competitive advantages, and put consumers at risk. 

If an RRG wishes to offer products outside of those that RRGs are permitted to offer in any state, 

the RRG can become a traditional insurance company. 

Finally, if there are regulatory conditions in state insurance markets that exist today that make it difficult 

to find certain types of insurance coverage, then policymakers should address those issues at the state 

level. IIABA members support competitive state insurance markets and encourages Congress not to pick 

winners and losers in the marketplace by further preempting state solvency and consumer protection 

laws for certain insurers. The Big "I" hopes that the Committee will consider the information provided 

here should legislation to expand the role of RRGs be introduced in the future. The Big "I" thanks the 

Committee for considering the views of independent insurance agents and brokers. 

6 
65 


29710.042

National Association of 

Insurance Commissioners 

&rile CENTER 

for INSURANCE . POLICY 

a11d RESEARCH 

Statement for the Record 

Fmm the National Association of Insurance Commissioners 

for the House Financial Services Committee 

Subcommittee on Housing and Insurance 

Hearing on "Examining Insm·ancc for Nonpwfit Organizations" 

September 28,2017 

Chairman Duffy. Ranking Member Cleaver. and members of the subcommittee. the National 

Association of Insurance Commissioners (NAIC) 1 appreciates the opportunity to submit this written 

statement for the September 28. 2017 hearing on ··Examining Insurance for Nonprofit Organizations." 

As state insurance regulators, our lixus is on the dual objectives of protecting insurance consumers and 

ensuring competitive and stable insurance markets in our states. We assure the solvency and reliability 

of insurers. promote availability and affordability of insurance coverage. and enforce fair and equitable 

treatment of insurance consumers. We recognize the importance of exploring nonprofit organizations" 

access to insurance products and appreciate the subcommittee's attention to these issues. As the 

subcommittee examines these matters. we urge caution and would oppose legislative proposals that seek 

to expand the scope of the Liability Risk Retention Act (LRRA) to allow Risk Retention Groups (RRGs) 

to write commercial property insurance. 

During the 1980s, the availability of commercial liability insurance became severely restricted. The 

purpose of the LRRA was to address this availability crisis by limiting the regulation of RRGs. RRGs 

have dilfcrent regulatory and linancial solvency requirements that arc designed to address concerns with 

the availability for liability coverage as compared to admitted market requirements lor property 

coverage. which is widely available. The LRRA contains limitations on the regulatory authority ol' state 

insurance commissioners. An RRG is regulated almost exclusively by its domiciliary state regulator and 

there are prohibitions against other non-domiciliary states. A traditional admitted insurer must receive a 

license and submit to regulation from every state when: it writes business. By comparison. admitted 

insurers must comply with all consumer protection laws in all states where they do business while RRGs 

arc only required to comply with the laws of their domiciliary state and the unfair claim settlement 

practices laws and certain laws related to deceptive, false or fraudulent practices in their non-domiciliary 

states. In the admitted market the regulatory oversight of the financial solvency of an insurer is 

generally the responsibility of the domiciliary stale. but oversight is enhanced by the ability of any state 

to examine a non-domiciliary admitted insurer. Further. the LRRA prohibits RRGs from participating in 

state guaranty funds. which serve as a backstop and protect policyholders of property and casualty 

1 Founded in 1871, the NAIC is the U.S. standnrd-sctting and 

chief insurance regulators from the :"0 states. the District of Columbia 

insurance regulators establish standards and best practices. conduct 

NAIC members, together with the central resources of the 

regulation in the U.S. 

organization created and governed by the 

U.S. territories. Through the NAJC, state 

review, and coordinate their regulatory oversight 

form the national system of state-based insurance 
66 


29710.043

insurance_ This is particularly concerning as RRGs have historically had a higher rate of insolvencies 

when compared to admitted insurers. 

While such an approach may have been appropriate in the 1980s when the liability insurance market 

faced dramatic increases in commercial liability insurance premiums and reductions in coverage 

availability, we arc not a\Varc or such a large scale crisis in the commercial propc1iy insurance market 

today that would merit the expansion of the LRRA and preemption of state insurance regulatory laws 

that arc designed to protect policyholders. At the NAlC's 2015 Fall National Meeting. insurance 

regulators heard a presentation regarding the availability of certain lines of property coverage fix 

nonprofits. llowever. no compelling evidence was presented that suggested the existence of a 

widespread availability crisis of property coverage for nonprolits that might merit broad based state 

regulatory action. let alone the drastic remedy of federal preemption. 

The NAIC is concerned that allowing RRGs to sell property coverage could create more risks lor the 

RRGs and ultimately. their insureds. The current regulatory framework for financial oversight of RRGs 

was designed with the more limited pwvose of promoting the availability of liability coverage not for 

protecting policyholders of property insurance. The nature of this framework coupled with the lack of 

state guaranty lund protection. could expose nonprofit organizations and those who rely upon them to 

unnecessary risks. We encourage RRGs interested in expanding into writing commercial property 

coverage to explore converting to an admitted carrier. he subject to the same regulatory requirements as 

traditional admitted property and casualty insurers and compete with those insurers on a level playing 

field. 

In conclusion. we arc not currently aware of a large scale property insurance availability problem for 

nonprofit organizations. Even in the event such concerns develop or become imminent. expansion of the 

LRRA is not an appropriate solution to the problem. Rather, we encourage any nonprofit policyholders 

that have difficulties with obtaining property coverage to bring them to the attention of state insurance 

regulators so we can seck to address such issues through appropriately tailored state-based regulatory 

solutions as we do with all other lines of insurance. We appreciate your consideration of our views and 

thank you for the opportunity to submit this written statement fc1r the record. 
67 


29710.044

Question 3-Tom Santos, Vice President, Federal Affairs, American Insurance Association 

Your testimony mentions that RRGs have existing options to offer property insurance by using the 

revenue generated by their groups to form regulated captive, mutual or reciprocal insurers to offer 

property and other lines of insurance. 

How would they go about doing this? 

As my testimony noted, Risk Retention Groups (RRGs) can become admitted insurance carriers if they'd 

like to offer property coverage. In fact, there are examples of RRGs doing just that. I am attaching two 

articles highlighting the conversion of three RRGs into admitted carriers, one- the Podiatry Insurance 

Company of America- converted into an Illinois mutual insurer in January 2014. 

To effectuate such a conversion, the RRG would have to meet state requirements to become an insurer 

and subject itself to the regulatory requirements of the state(s) in which it would like to offer property 

coverage, including insurance coverage requirements and consumer protections incorporated into state 

Jaw. 

Why do you think this hasn't happened? 

As noted previously, there are examples of RRGs converting to admitted carriers. That said, it is the RRG 

that makes decisions about its own growth and operations and how to best serve its members. Thus, it 

is speculative for me to answer why this has not happened for any given RRG, but one reason may be 

that an RRG does not want to become subject to a more rigorous regulatory system. 

Question 4- Tom Santos, Vice President, Federal Affairs, American Insurance Association 

Can you discuss some of the risks of federal preemption in the context of the liability Risk Retention 

Act of 1986? 

As noted in my written statement, the exemption from state laws and regulations afforded RRGs under 

the Liability Risk Retention Act (LRRA) is quite broad. The effect is that the RRGs are primarily subject to 

the insurance regulatory requirements of the state in which it is domiciled. The LRAA significantly limits 

the non-domiciliary state insurance regulator's oversight of the RRGs operating in their states. 

Insolvency guaranty funds, that protect policyholders, are not available for RRGs. This is particularly 

concerning given that RRGs have historically had a higher rate of insolvencies when compared to 

admitted carriers. In terms of property-casualty coverage, the less rigorous solvency requirements are 

particularly concerning, as property insurance frequently involves large losses in catastrophes and 

casualty insurance often involves risks that develop over long periods of time. 
68 


29710.045

Coastal RAG Completes Conversion to Traditional Insurer 

Coastal insurance RRG, Inc. (CIRRG) has compk·tt .. ~d 

its conversion to a trndilional insurer-Coastal 

Insurance Company, Inc. Coastal '""as tht.., only RRG 

domiciled in the stat<:' of Alabama and was fonned in 

to the 2003 failure of Reciprocal of America 

RRG vvas designE'd to avoid this sh•wt<·nnlin·e 

At the time of CJR1~G' s formation, the 

to 

hav{~ a place in the insurance Capdl 

noted. However. Lhc: specificity of the RRG model can 

also be restrictive \vhen a company needs to cxp:::md. 

Risk Retention Reporter 

analysis nf the 

was recognized the "amount of 

from conuncrcial insurance companies was 

and that this tn~nd was not going to 

the future," said CapelL '·Therefore, the 

other ;;oun.'c~ of revrnuc, including \vriting 

business. The RRG structun• will not alh)w this of 

{kAibility. 11 Due to this need for expanded of 

made the dL'cision to convert ClRRG 

into a insurer. 

February 2013 
69 


29710.046

ALPS RRG To Soon Finish Transition to Admitted Company 

ALPS Corp. (ALPS) the holding company for the 

insurance subsidi.1ry historically kno•vn as the Attorneys 

Liability Protection Society, A Mutual Risk Retention 

Group, is ,,vcll on its way to completing the of 

transfom1ing itself into a traditional admitted 

next to David Bell, president and 

Missoula, Montana 

This will b0 the :-;econd largest conversion 

into a traditional carrier when measured in terms of 

gross premium. Th~._• largest is still Podiatry Insurance 

Company of America {RRG), which reported premium 

of $64.9M in 200,1 before converting into an Illinois 

mutual insurer in Januarv 2014. 

"\·Vt..•'ve rcal!v taken .our time," 

noting that the. cnmpany first 

transition in 20'1 0. "We had the 

under a time cnmch, ~md we 

ALPS has bl'Cn converting 

carrier :-;tate-by-state, first in tlw states where it has a 

significant presence then in states where it plans to 

t'xpand once the transition is finalized. 

"Every state is different," &>ll noted, in terrn.<> of what 

they wanl ALPS to do to complelt' the transition and the 

tlmdine for the And until the is 

state, continues to be a and 

Ri:;;k Rett>ntion Act, he said. 

1998 to provide liability 

who \'>·ere facing difficulties 

in traditional mMh'tplace at the 

2009, the CEO Robert VI/. Minto Jr. asked the 

of directors to analyze the nf 

they voted 

WhiJe his c0mpany is leaving lhC' RH:G fold, BC'll said 

!hat he does not think becotning an admitted company is. 

ncces-;.a.rily the only option for RRGs that grow to d ldrgc 

size. 

"Our d('cision WdS based on our strategic 

coupled with our capital structure, 

determined what type iJf would be best for us 

R1sk Retention Reporter 

" Bell said. "Our growth 

ne,'eso;itated a transition." 

noted that there ar(' particular advantages to 

RRG. "l miss with one regulator," he 

Howevt'r, as an 

" Being an admitted 

n1eans ,.,when vou arc 

data is telling you 

of a regulator)' 

able lo offer a wider range of products to its insun'ds 

and be better able to tailor ils coYeragc to be 

slate-specific Plus the company will be able to 

in ::;tate guaranty funds and attract a wider 

pott'ntial investors. "Tlwre are and cons, 

us it \\'as time to convert," he 

February 20i 3 
70 


29710.047

ASSOCIATIO!\ OF MUTUAL INSU 

Statement to the 

COMPANIES 

United States Representatives 

Committee on Financial Services 

Subcommittee on Housing and Insurance 

Hearing entitled 

Examining Insurance for Nonprofit Organizations 

September 28) 20 17 
71 


29710.048

Introduction 

The National Association of Mutual Insurance Companies (NAMIC) is pleased to provide 

comments to the !louse Financial Services Subcommittee on Housing and Insurance regarding 

the possible expansion of the role of Risk Retention Groups (RRGs) into the commercial 

property insurance market. 

NAMIC is the largest property/casualty insurance trade association in the country, with more 

than I AOO member companies representing 39 percent of the total market. NAMIC supports 

regional and local mutual insurance companies on main streets across America and many of the 

country's largest national insurers. NAMIC member companies serve more than 170 million 

policyholders and write more than $230 billion in annual premiums. Our members account for 

54 percent of homeowners. 43 percent of automobile. and 32 percent of the business insurance 

markets. 

NAMIC opposes broadening the scope of Risk Retention Groups to allow them to olTer 

commercial property insurance. Thus, NAMIC opposes the Nonprofit Properly Protection Act 

and other legislative concepts that expand the scope of RRGs. RRGs were given a unique 

regulatory structure and were created as a result of very specific circumstances to serve a very 

specific purpose. The sole purpose of RRGs was lo fill a perceived void created by conditions in 

the product liability and commercial liability insurance markets. 

Ollering commercial property insurance products would be inconsistent with the original intent 

and reasoning of Congress when RRGs were first established. Allowing RRGs to sell 

commercial property lines of business already and extensively offered in the admitted markets 

would give them an unfair competitive advantage over traditional insurance companies that abide 

by the regulatory standards and consumer protections of each state in which they operate. 

\ lltimatcly, this would unnecessarily expose commercial property policyholders to weakened 

consumer protections. 
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29710.049

Creation of Risk Retention Croups 

RRGs were created to help address a crisis in the commercial product liability insurance market. 

In the 1970's and 1980's this area of the insurance market was faced with a number of 

challenges that t<xccd many traditional insurance companies to exit the market. Number one 

among them was a sharp increase in the risk associated with these products. 

Risk factors that had not previously been seen in the market caused losses, and the potential for 

losses. to increase to untenable levels for many product liability carriers. A primary risk factor 

was a sharp uptick in litigation. Prior to this time, there were far less product liability lawsuits 

brought by consumers. As consumers began filing and winning suits at an unprecedented pace. 

claims on these policies and particularly the size of the claims steadily increased. This caused a 

sharp contraction in the market for these products. 

While contractions in insurance markets are a normal part of the business cycle of the insurance 

industry. the contraction of this particular market was irregularly intense. As the market 

contracted and the availability of products decreased. so did the number of carriers offering the 

products, which led to a high level of risk concentration. Additionally. as the risks associated 

with product liability increased. so did the demand for the insurance policies to protect against 

those risks. The combination of increased risk. market contraction. and increased demand led to 

sharp cost increases. 

Facing challenges of both availability and aff(lrdability. industries dealing with increasing 

product liability found themselves in a crisis. Without available and affordable product liability 

insurance products. some industries vital to American society such as the medical device 

industry could have become unsustainable. Recognizing this as a serious threat, Congress 

responded by passing the Products Liability Risk Retention Act in 1981. This allowed the 

creation of Risk Retention Groups. RRGs arc group selt~insurance mechanisms that are licensed 

to underwrite product liability insurance for their owners. Owners of an RRG must he engaged in 

similar business activities or exposed to similar risks. Following another crisis of availability of 

commercial liability policies particularly for non-profits·- in 1986. Congress revised the law in 

passing the Liability Risk Retention Act (LRRA). The LRRA allowed RRGs to expand into 

commercial liability insurance lines. 
73 


29710.050

Risk Retention Group Regulatory Regime 

To help facilitate the creation of RRGs and enable th.:m to offer products that were challenging 

for traditional insurance markets. RRGs were given a unique regulatory regime. This regulatory 

regime provides RRGs with a less stringent regulatory system that allows them to reduce 

regulatory costs and evade many of the same requirements that traditional insurance companies 

must follow. RRGs arc allowed to operate nationwide, hut they arc only subject to the 

regulations of the state in which they are domiciled. On the other hand, traditional admitted 

insurance companies must abide by the state insurance laws of every slate in which they offer 

polices. This allows each state to regulate insurance in the way that fits its residents best. 

Reductions in consumer protections arc a concern. Every state has determined the best method to 

regulate their insurance industry based on factors that could be inherent to that particular state. 

States may have encountered different situations and circumstances that have led them to 

institute consumer protections that different states have not found necessary. Since RRGs may 

not be subjected to the same measures as admitted writers, attempts by state regulators to tailor 

the regulatory conditions in their state would not apply equally to all companies operating in 

their state. 

An additional component that the RRG regulatory regime is missing and is ll.mdamcntal to 

protecting policyholders is mandatory pmiicipation in all guaranty funds. Every state has some 

version of a guaranty fund. A guaranty fund is a stale sponsored backstop to protect 

policyholders in the event of a failure.ln the case of a lailurc in which the assets of the failing 

company cannot cover policy claims. policies arc paid by the guaranty fund. While guaranty 

funds arc state sponsored, they are funded by assessments on traditional insurance companiesonly funds from the private sector arc utilized. As a result. insurance companies inherently desire 

adequate regulation to ensure safety and soundness because ultimately, they would pay the price 

for the failure of an insolvent insurance company. 
74 


29710.051

Competitive Advantage 

The Nonprofit Property Protection Act seeks to allow RRGs to offer commercial property 

insurance to federal tax-exempt nonprofit charitahle or educational institutions when there is 

currently no shortage of available and affordable products in the market. The predominant 

reasoning behind the unique regulatmy structure of RRGs is to help make insurance products 

availahle for areas in the market in which conditions have made it dit1icult to offer insurance. To 

help facilitate a market for insurance products that presented an unusual and unsustainably high 

level of risk. Congress through the LRRA created a regulatory structure to ease the challenges 

for RRGs. Traditional insurers face a daunting multi-state compliance burden. Since RRGs arc 

only regulated in the state in which they arc domiciled, they do not face the same burden or costs 

associate with compliance. 

Tyler Lcvelty has estimated1 that the structure ofRRGs reduces the cost of compliance by 26% 

in comparison to similar traditional insurers. RRGs were given this advantage for one reason. 

which was to ensure products were available in high risk product lines that had availability and 

affordability issues. However, the commercial property insurance market docs not fit this 

description. With passage of the Nonprofit Property Protection Act or similar legislative 

concepts, RRGs would enjoy an unfair competitive advantage in markets where there is no 

demonstrable need. Since the commercial property insurance needs arc already being met, the 

only purpose the Nonprofit Property Protection Act or similar legislative concepts would serve is 

putting traditional insurers at a competitive disadvantage. 

Ultimately, if there is an interest among RRGs in expanding into other. admitted lines markets, 

there is an option that some have already utilized which avoided an unfair and unlevel playing 

licld: reorganize as a traditionally admitted insurance company. 

' Leverty, Tyler. "The Cost of Duplicative Regulation: Evidence from Risk Retention Groups," 2012. 
75 


29710.052

Conclusion 

Given that there is a strong, thriving. and competitive commercial property insurance market, it 

would be both unnecessary and imprudent to expand the role ofRRGs to include commercial 

property insurance. 

RRGs were created out of necessity to serve a niche market that presented unusually diJTicult 

challenges to the traditional insurance industry. Therefore. their structure and regulatory 

requirements were designed specifically to allow them to operate under special conditions. When 

Congress created the RRG structure they did not intend for it to expand into insurance lines that 

were and continue to be well served by traditional insurers. Allowing RRGs to expand into 

commercial properly would be ill-advised and Congress should not pass legislation allowing 

them to do so. 

0