RISK RETENTION 

GROUPS 

Clarifications Could 

Facilitate States’ 

Implementation of the 

Liability Risk 

Retention Act 

Report to Congressional Requesters

December 2011 

GAO-12-16 

United States Government Accountability Office

GAO 

On January 10, 2012, this report was reposted on the GAO 

website to correct information in appendix I that was not 

included in the previously posted file.
United States Government Accountability Office

Highlights of GAO-12-16, a report to 

congressional requesters 

December 2011 

RISK RETENTION GROUPS 

Clarifications Could Facilitate States’ 

Implementation of the Liability Risk Retention Act

Why GAO Did This Study

Congress authorized the creation of 

risk retention groups (RRG)—a group 

of similar businesses that creates its 

own insurance company to insure its 

risk—to increase the affordability and 

availability of commercial liability 

insurance. Through the Liability Risk 

Retention Act (LRRA), Congress 

partially preempted state insurance 

laws to allow RRGs licensed in one 

state (the domiciliary state) to operate 

in all other states (nondomiciliary 

states) with minimal additional 

regulation. In a 2005 report 

(GAO-05-536), GAO noted concerns 

with the adequacy of RRG regulation. 

This report (1) describes changes in 

the financial condition of the RRG 

industry from 2004 to 2010; 

(2) examines the regulatory treatment 

of RRGs across domiciliary and 

nondomiciliary states; and 

(3) examines changes to federal and 

state regulatory practices regarding 

RRGs since 2004. GAO analyzed 

RRG financial data, surveyed state 

insurance regulators (96 percent 

response rate), and interviewed RRG 

industry representatives.

What GAO Recommends

To further facilitate states’ 

implementation and help reduce the 

varying interpretations of LRRA, 

Congress should consider the merits of 

clarifying certain LRRA provisions 

regarding registration requirements, 

fees, and coverage. NAIC concurred 

with this matter for congressional 

consideration.

What GAO Found

Certain indicators suggest that the financial condition of the RRG industry in 

aggregate generally has remained profitable. In 2003, RRGs wrote about 

$1.8 billion, or 1.17 percent of commercial liability insurance. In 2010, RRGs 

continued to comprise a small percentage of the total market, writing about 

$2.5 billion—or about 3 percent of commercial liability coverage. Other financial 

indicators, such as ratios of RRG premiums earned compared to claims paid—

also suggest profitability. In addition, the number of RRGs has increased since 

2004, with the most growth occurring in health care-related lines. In 2010, more 

than 80 percent of RRGs were domiciled in Vermont, South Carolina, the District 

of Columbia, Nevada, Hawaii, and Arizona, but RRGs wrote about 95 percent of 

their premiums outside their state of domicile. Evidence suggests that RRGs may 

choose to domicile in a particular state, partly due to some financial and 

regulatory advantages such as lower minimum capitalization requirements. RRG 

representatives opined that RRGs have expanded the availability of commercial 

liability insurance—particularly in niche markets—but differed in their opinions of 

whether RRGs have improved its affordability. 

Different interpretations of LRRA have led to varying state regulatory practices 

and requirements in nondomiciliary states and disputes between state regulators 

and RRGs in areas such as registration requirements, fees, and types of 

coverage RRGs may write. For example, while some states have interpreted 

LRRA to permit RRGs to write contractual liability coverage, others have not, and 

therefore may not allow RRGs to write this coverage in their state. RRGs have 

challenged requirements established by nondomiciliary states that RRGs assert 

are not permitted by LRRA. However courts also have differed in their 

interpretations of LRRA. Some regulators with whom GAO spoke indicated that 

their actions toward nondomiciled RRGs reflect an effort to use their limited 

regulatory authority to protect insureds in their states as well as address 

concerns about RRG solvency. 

Some state regulatory practices for RRGs have changed since 2004, and federal 

legislation has been proposed. In 2005, GAO recommended implementation of more 

uniform, baseline state regulatory standards, including corporate governance 

standards to better protect RRG insureds. The National Association of Insurance 

Commissioners (NAIC) has since revised its accreditation standards to more closely 

align with those for traditional insurers which are subject to oversight in each state in 

which they operate. For example, all financial examinations of RRGs that have 

commenced during or after 2011 should use the risk-focused examination process. 

NAIC also has begun developing corporate governance standards that it plans to 

implement in the next few years. Proposed legislation would amend LRRA to allow 

RRGs to provide commercial property insurance and also include a federal arbitrator 

to resolve disputes between RRGs and state insurance regulators. While some RRG 

representatives and state regulators supported this legislation, others expressed 

concerns about whether RRGs would be adequately capitalized to write commercial 

property insurance and about federal involvement in state regulation.

View GAO-12-16 or key components. To view 

the e-supplement online, click GAO-12-17SP. 

For more information, contact Alicia Puente 

Cackley at (202) 512-7022 or 

cackleya@gao.gov. 
Page i GAO-12-16 Risk Retention Groups 

Letter 1 

Background 5

RRGs Generally Reported Increased Profitability and Continue to 

Write the Majority of Their Business in Nondomiciliary States 8

Varying Interpretations of LRRA Result in Different Regulatory 

Treatment of RRGs across States 24

NAIC Actions Address Some Regulatory Concerns, While Recent 

Federal and State Proposals May Affect Future RRG Operations 34

Conclusions 43

Matter for Congressional Consideration 44

Agency Comments and Our Evaluation 44

Appendix I Objectives, Scope, and Methodology 46 

Appendix II Comments from the National Association of Insurance Commissioners 51 

Appendix III GAO Contact and Staff Acknowledgments 53

Figures 

Figure 1: RRG Premiums Written by Percentage of RRGs Writing 

Specified Dollar Amounts, 2004–2010 9

Figure 2: Direct Premiums Written for the Overall Commercial 

Liability and Medical Professional Liability Industries, 

2007–2010 10

Figure 3: RRG Industry Average Net Written Premium, as a 

Percentage of Policyholder Surplus, 2004–2010 12

Figure 4: RRG Average Return on Equity, 2004–2010 13

Figure 5: RRG Industry Average Combined Ratio, 2004–2010 14

Figure 6: Number of RRGs, and Percentage of Total RRGs with 

Combined Ratios above 100, 2006–2010 15

Figure 7: Percentage of Overall RRG Gross Premiums by Business 

Line, 2004 and 2010 17

Figure 8: RRGs Licensed by Business Line, 1991, 1996, 2001, 2004, 

and 2010 18

Figure 9: Number of Active RRGs Domiciled by State, 2004 and 

2010 19

Contents 
Page ii GAO-12-16 Risk Retention Groups 

Figure 10: Number of Operating RRGs by State, 2004 and 2010 21

Figure 11: Percentage of Premiums RRGs Wrote in Nondomiciliary 

States (Shown by Domiciliary State), 2004 and 2010 22

Abbreviations 

GAAP generally accepted accounting principles 

LRRA Liability Risk Retention Act 

NAIC National Association of Insurance Commissioners 

NRRA National Risk Retention Association 

PLRRA Product Liability Risk Retention Act 

RBC risk-based capital 

ROE return on equity 

RRG risk retention group 

SAP statutory accounting principles 

View GAO-12-16 Key Component 

 Risk Retention Groups: Survey of State Regulators (GAO-12-17SP, 

December 2011), an E-supplement to GAO-12-16

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page 1 GAO-12-16 Risk Retention Groups 

United States Government Accountability Office

Washington, DC 20548 

December 8, 2011 

The Honorable Michael Capuano 

Ranking Member 

Subcommittee on Oversight and Investigations 

Committee on Financial Services 

House of Representatives 

The Honorable John Campbell 

House of Representatives 

Responding to shortages that constrained the availability and affordability 

of commercial liability insurance, Congress passed the Product Liability 

Risk Retention Act of 1981 (PLRRA) to authorize creation of risk retention 

groups (RRG)—similar businesses with similar risk exposures that create 

their own insurance company to self-insure their commercial liability risks 

on a group basis.1

 In 1986 Congress amended PLRRA by passing the 

Liability Risk Retention Act of 1986 (LRRA), which allows RRGs to extend 

coverage beyond product liability into most of the commercial liability 

market and establishes a regulatory framework that partially preempts 

state insurance laws.2

LRRA allows an RRG to be regulated primarily by its chartering 

(domiciliary) state, even when it sells insurance in other (nondomiciliary) 

states.3

 With one regulator, RRGs differ from “traditional” insurers, which 

are subject to licensing and oversight by regulators in each state in which 

they operate. While LRRA requires RRGs to provide to nondomiciliary 

state regulators copies of the RRG’s business plan or feasibility study and 

annual financial statements, it neither explicitly permits nor prohibits 

nondomiciliary states from requesting additional documentation or 

 

1

Pub. L. No. 97-45, 95 Stat. 949 (1981) (codified, as amended, at 15 U.S.C. §§ 3901-06). 

2

Pub. L. No. 99-563, 100 Stat. 3170 (1986). As amended, LRRA permits RRGs to offer 

commercial liability insurance, excluding worker’s compensation. 

3

See 15 U.S.C. §§ 3901-02. A domiciliary state is the state in which the RRG is chartered 

and primarily regulated, whereas a nondomiciliary state is any state in which the RRG is 

not chartered or regulated, but conducts business. 

 
 

Page 2 GAO-12-16 Risk Retention Groups 

charging fees.4 LRRA preempts the laws of nondomiciliary states to 

oversee RRGs selling insurance in their states except in specified 

circumstances.5

Congress intended for the regulatory framework established by LRRA “to 

strike a balance between the RRGs’ need to be free of unjustified 

requirements and the public’s need for protection from insolvencies.”6

 The 

legislative history indicates that Congress viewed RRGs as having 

incentives to practice effective risk management both in their own 

businesses and the RRG because the RRG is owned by insureds, who 

may have business assets at risk should the RRG become insolvent. To 

further encourage RRG members to establish adequate premiums and 

reserves, LRRA prohibits RRGs from participation in state guaranty 

funds.7

 According to recent data from the National Association of 

Insurance Commissioners (NAIC), eight RRGs became insolvent from 

2004 to year-end 2010.8

Our 2005 report on RRGs noted that RRGs played a small but important 

role in increasing the availability and affordability of commercial liability 

insurance in niche markets, but that they operated in a regulatory 

environment characterized by varying state standards due to the partial 

preemption of state insurance laws by LRRA.9

 We found that RRGs might 

not consistently protect the best interest of owners/insureds due to a lack 

of uniform corporate governance standards. Our report was prompted by 

 

4

15 U.S.C. § 3902(d)(2)-(3). See 15 U.S.C. § 3902(a)(1)(B), which allows any state 

(domiciliary or nondomiciliary) to require payment of premium and other taxes, but does 

not mention fees. 

5

15 U.S.C. § 3902(a)(1). 

6

H.R. Rep. No. 99-865, at 12 (1986), reprinted in 1986 U.S.C.C.A.N. 5303, 5309; S. Rep. 

No. 99-294, at 13-14 (1986). 

7

Insurance insolvency guaranty funds typically are maintained by contributions of 

insurance companies operating in a particular state and are made available to settle the 

claims of insureds in the event of insolvency of traditional insurance companies. 

8

NAIC is a voluntary association of the heads of insurance departments from each state, 

the District of Columbia, and five U.S. territories that provides a national forum for 

addressing and resolving major insurance issues (including those concerning RRGs) and 

for promoting the development of consistent policies among the states. 

9

GAO, Risk Retention Groups: Common Regulatory Standards and Greater Member 

Protections Are Needed, GAO-05-536 (Washington, D.C.: Aug. 15, 2005). 
 

Page 3 GAO-12-16 Risk Retention Groups 

a rise in the formation of RRGs coupled with the failure of several large 

RRGs—22 RRGs failed between 1987 and 2003—which raised questions 

about the adequacy of the RRG regulatory environment and safeguards 

to protect RRG members/insureds and consumers.10 We recommended 

that the NAIC develop and implement a set of broad-based, uniform, 

baseline standards for RRG regulation. These standards should include 

regularly filing financial reports using a uniform accounting method, 

because both NAIC and some nondomiciliary states reported difficulty 

assessing the financial condition and solvency of RRGs reporting under 

generally accepted accounting principles (GAAP) as compared with the 

condition of RRGs reporting under statutory accounting principles 

(SAP).11 We also recommended establishing minimum corporate 

governance standards, such as independent members on an RRG’s 

board of directors. 

As we also reported in 2005, some states may have modified policies and 

procedures to attract RRGs to domicile in the state, such as lowering 

statutory minimum capital and surplus requirements. Some regulators 

also expressed concerns over aspects of RRGs’ operations that they 

would not be able to influence, such as minimum capital and surplus 

requirements for RRGs operating in but not domiciled in their state. The 

various interpretations of LRRA by state insurance regulators have led to 

disputes and in some cases litigation between RRGs and states.12 More 

recently, legislation has been proposed to develop a federal mechanism 

to arbitrate disputes between RRGs and states as well as to permit RRGs 

to offer commercial property coverage in addition to commercial liability 

coverage.13 Some state insurance regulators expressed concerns about 

the capital adequacy of RRGs wishing to incorporate commercial property 

coverage into their business lines. 

 

10In 2003, 127 RRGs were licensed to write business. 

11SAP is a set of accounting principles dominant in the traditional insurance industry that 

is geared towards assessing solvency, and produces some variations from another set of 

accounting principles—GAAP—which are more widely used outside the insurance 

industry to assess the general performance of a business. 

12See, e.g., Ophthalmic Mut. Ins. Co. v. Musser, 143 F.3d 1062 (7th Cir. 1998); National 

Warranty Ins. Co. RRG v. Greenfield, 214 F.3d 1073 (9th Cir. 2000). 

13See, e.g., H.R. 2126, 112th Cong. (2011). 
 

Page 4 GAO-12-16 Risk Retention Groups 

In light of regulatory and industry concerns, as well as recent proposals to 

expand LRRA, you asked us to update our analysis from our 2005 report. 

This report (1) describes changes in the financial condition of the RRG 

industry from 2004 through 2010; (2) examines the regulatory treatment 

of RRGs across domiciliary and nondomiciliary states; and (3) examines 

changes to federal and state regulatory practices regarding RRGs since 

2004. 

To determine the financial condition of the RRG industry, we analyzed 

data on the commercial liability insurance market such as trends in the 

types of coverage provided, concentration of domiciled RRGs, and 

financial ratios based on data from NAIC. We also reviewed 

documentation from 2004 through 2010 from NAIC and the Risk 

Retention Reporter, a trade journal and industry data source. We 

determined that the data were sufficiently reliable for the purposes of our 

report. To evaluate the differences in regulatory treatment of RRGs 

across states, we reviewed and analyzed LRRA and its legislative history. 

We conducted a web-based survey of insurance regulators in the 50 

states and the District of Columbia (96 percent response rate) and 

interviewed 13 domiciliary and nondomiciliary state insurance regulators 

from a nonstatistical sample.14 States were selected based on the number 

of domiciled RRGs or the amount of premiums written by RRGs and 

perceived differences in regulatory treatment of RRGs in these states. We 

held two discussion groups with multiple RRG representatives that 

volunteered to participate and interviewed representatives from a 

nonstatistical sample of 11 RRGs. These RRGs were selected based on 

the amount of premiums written, state of domicile, number of states in 

which they operated, and type of insurance coverage provided. We are 

not able to generalize results from this sample to the entire RRG industry. 

Further, we interviewed representatives of two industry associations on 

their members’ regulatory experiences operating in domiciliary and 

nondomiciliary states. We reviewed correspondence from state insurance 

regulators to RRG representatives about topics such as registration 

processes and fees charged to RRGs. To examine changes in regulatory 

practices since 2004, we analyzed documentation on and interviewed 

NAIC officials about changes to the accreditation process affecting RRGs 

and measures to develop corporate governance standards for RRGs. We 

also asked representatives of RRGs and state insurance departments, as 

 

14The survey and corresponding results can be viewed at GAO-12-17SP. 
 

Page 5 GAO-12-16 Risk Retention Groups 

well as an actuarial expert, about the potential impact of these efforts. Our 

web-based survey also asked about regulatory changes. Finally, we 

reviewed key legislation concerning RRGs that had been introduced at 

the federal and state levels since 2004. We conducted this performance 

audit from October 2010 to December 2011 in accordance with generally 

accepted government auditing standards. Those standards require that 

we plan and perform the audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and conclusions based on our 

audit objectives. We believe that the evidence obtained provides a 

reasonable basis for our findings and conclusions based on our audit 

objectives. Appendix I provides additional details about our objectives, 

scope, and methodology. 

Traditional insurance companies sell insurance to the public and are 

subject to the licensing requirements and oversight of each state in which 

they operate. The licensing process allows states to determine if an 

insurer domiciled in another state but operating in their state meets the 

nondomiciliary state’s regulatory requirements before granting the insurer 

permission to operate in their state. According to NAIC’s uniform 

application process, which has been adopted by all states, an insurance 

company must show that it meets the nondomiciliary state’s minimum 

statutory capital and surplus requirements, identify whether it is affiliated 

with other companies (that is, part of a holding company system), and 

submit biographical affidavits for all its officers, directors, and key 

managerial personnel. After licensing an insurer, regulators in 

nondomiciliary states can conduct financial examinations, issue an 

administrative cease-and-desist order to stop an insurance company from 

operating in their state, and withdraw the company’s license to sell 

insurance in the state. In addition, most nondomiciliary states have 

“seasoning requirements” that call for an insurance company to 

successfully have operated in its state of domicile for anywhere from 1 to 

5 years before it can qualify for a license. 

Although RRGs have some regulatory relief due to the lead state 

regulatory framework established under LRRA, they still are expected to 

comply with certain other laws administered by nondomiciliary states.15

 

1515 U.S.C. § 3902(a)(1). 

Background 

Regulatory Framework for 

RRGs 
 

Page 6 GAO-12-16 Risk Retention Groups 

For example, RRGs must pay applicable taxes on premiums and other 

taxes imposed by nondomiciliary (as well as domiciliary) states.16 LRRA 

also imposes other measures that offer protections or safeguards to RRG 

members including the requirement that each RRG must submit to the 

domiciliary state insurance regulator a plan of operation or feasibility 

study that includes the coverages, deductibles, coverage limits, rates, and 

rating classification system for each line of insurance the RRG intends to 

offer.17 The RRG must (1) provide a copy of the plan or study to the 

insurance regulator in the nondomiciliary states in which the RRG intends 

to conduct business before it can write any insurance coverage in that 

state;18 (2) provide a copy of the group’s annual financial statement 

(certified by an independent public accountant) to the insurance 

commissioner of each state in which it is doing business (the financial 

statement should include a statement of opinion on loss and loss 

adjustment expense reserves by a qualified loss reserve specialist or 

actuary);19 and (3) submit to an examination by a nondomiciliary state 

regulator to determine the RRG’s financial condition, if the domiciliary 

state regulator has not begun or refuses to begin an examination.20

Nondomiciliary, as well as domiciliary, states also may seek an injunction 

in a “court of competent jurisdiction” against RRGs that they believe are in 

hazardous financial condition.21

RRGs are not the only form of self-insurers. “Captive insurance 

companies” (captives), also chartered and regulated by states, are 

established by single companies or groups of companies to self-insure 

their own risks. States chartering captives offer some regulatory relief to 

these companies based on the presumption that owners of captive 

 

16Id. § 3902(a)(1)(B). 

17Id. § 3902(d)(1). 

18Id. § 3902(d)(2). 

19Id. § 3902(d)(3). Loss reserve is the estimated liability, as it would appear in an insurer’s 

financial statement, for unpaid insurance claims or losses that have occurred as of a given 

evaluation date. Loss reserves usually include losses incurred but not reported, losses 

due but not yet paid, and amounts not yet due. For individual claims, the loss reserve is 

the estimate of what ultimately will be paid out on that claim. 

2015 U.S.C. § 3902(a)(1)(E). 

21Id. § 3902(a)(1)(H), (e), (f). 

Other Self-Insurance 

Structures 
 

Page 7 GAO-12-16 Risk Retention Groups 

companies have sophisticated knowledge about managing their risks and 

would protect their own interests. States can charter RRGs under 

regulations intended for traditional insurers or for captives. Non-RRG 

captives exist largely to cover the risks of their parent, which can be one 

large company (pure captive) or a group of companies (group captives). 

Group captives share certain similarities with RRGs because they also 

comprise several companies, but group captives, unlike RRGs, do not 

have to insure similar risks. Further, captives may provide property 

coverage, while RRGs currently may not. Regulatory requirements for 

captives generally are less restrictive than those for traditional insurers. 

However, non-RRG captives, like traditional insurance companies, 

generally cannot conduct insurance transactions in any state except their 

domiciliary state, unless they become licensed in that other state. 

State insurance regulators that oversee both traditional insurers and 

RRGs participate in NAIC’s voluntary accreditation program for the 

regulation of insurers’ financial solvency.22 NAIC accreditation is a 

certification given to a state insurance department once it has 

demonstrated it has met and continues to meet an assortment of legal, 

financial, and organizational standards. According to NAIC officials, all 50 

state insurance departments and the District of Columbia were accredited 

as of March 2011. NAIC developed its Financial Regulation Standards 

and Accreditation Program in 1989 and adopted its formal accreditation 

program in June 1990. The mission of the program is to establish and 

maintain standards to promote sound insurance company financial 

solvency regulation. To execute this mission, NAIC assesses how each 

state insurance department reviews and monitors the solvency regulation 

of multistate insurance companies and RRGs to ensure states have 

(1) adequate solvency laws and regulations to protect consumers, 

(2) effective financial analysis and examination processes, and 

(3) appropriate organizational and personnel practices. 

 

22In general, accreditation is a process by which a program has been certified as fulfilling 

certain standards by a national professional association. 

NAIC and State 

Coordination 
 

Page 8 GAO-12-16 Risk Retention Groups 

Based on data reported by RRGs to NAIC since 2004, RRGs in 

aggregate have shown an increase in premiums written and in their share 

of the broader commercial liability market.23 In 2005, we reported that 

RRGs wrote about $1.8 billion of commercial liability coverage, which 

constituted about 1.17 percent of the overall market in 2003.24 According 

to NAIC data, in 2010 RRGs wrote about $2.5 billion in premiums, which 

was about 3 percent of the total $92 billion of commercial liability 

insurance coverage written industrywide.25 An analysis of direct written 

premiums by dollar amount indicates that between 2004 and 2010, the 

largest percentage of RRGs (31 to 37 percent) wrote premiums between 

$1 million and $5 million (see fig. 1). 

 

23Premiums written are the total amount of premium charges in a particular period for all 

policies the insurer “writes.” 

24GAO-05-536. 

25Commercial liability comprises various insurance lines, which include the liability portion 

of commercial multiple peril; other liability; products liability; commercial automobile 

(personal injury protection); other commercial automobile liability; warranty; and medical 

professional liability. The medical professional and other liability data consolidate 

occurrences (an event resulting in an insured loss during the policy period) and claims 

made (claims filed during the policy’s term or applicable reporting period). Workers’ 

compensation premiums for traditional insurance companies are excluded as RRGs 

cannot write this type of coverage. See 15 U.S.C. § 3901(a)(1). The difference in the total 

premiums written by RRGs and the total premiums written industrywide equals the 

coverage written by traditional insurance companies. 

RRGs Generally 

Reported Increased 

Profitability and 

Continue to Write the 

Majority of Their 

Business in 

Nondomiciliary States 

Premiums Written by 

RRGs Generally Increased, 

Particularly in Health CareRelated Lines 
 

Page 9 GAO-12-16 Risk Retention Groups 

Figure 1: RRG Premiums Written by Percentage of RRGs Writing Specified Dollar Amounts, 2004–2010 

Note: According to NAIC, negative premiums may be due to premiums returned to the purchasers of 

the policy after cancellation or the company writes little business and the direct written premiums are 

uncollectible. 

Of the almost $92 billion of commercial liability insurance written industrywide 

in 2010, about $10.6 billion was written in the medical professional liability 

line—also known as medical malpractice. In an analysis of the premiums 

written for the medical professional liability line, RRGs had a higher share of 

this specific market compared with their share of the overall commercial 

liability market. RRGs wrote about 13 percent ($1.4 billion of the total $10.6 

billion) of medical professional liability insurance in 2010 (see fig. 2). We 
 

Page 10 GAO-12-16 Risk Retention Groups 

further discuss growth in the number of RRGs offering health care-related 

insurance later in this section. 

Figure 2: Direct Premiums Written for the Overall Commercial Liability and Medical 

Professional Liability Industries, 2007–2010 

Note: Premiums written for workers’ compensation insurance were excluded from this analysis as 

RRGs cannot provide this coverage. Separate data were not available for RRG direct written 

premiums for the medical professional liability line from 2004–2006. 

Based on several measures of financial strength or profitability, the RRG 

industry as a whole generally reported year-to-year gains from 2004 to 

2010 (see fig. 3). A key factor in determining an insurer’s overall financial 

strength is capital and surplus—also known as policyholder surplus—

which reflects the amount by which an insurer’s assets exceed its 

liabilities. Regulators require insurers to maintain adequate surplus so 

that an insurer can remain solvent even in the face of greater losses than 

predicted or lower earnings than projected. One of the indicators used to 

measure the adequacy of policyholder surplus is the ratio of an insurer’s 

premiums written to its policyholder surplus, which measures an insurer’s 

ability to pay claims given the volume of premiums written. A lower ratio 

of premiums written to surplus means an insurer has more net assets 

available relative to the amount of premiums written. According to the 

NAIC’s Financial Analysis Handbook–Property/Casualty Edition and other 

general benchmarking guidelines from NAIC officials, the net written 

Certain Indicators Suggest 

the RRG Industry 

Generally Has Remained 

Profitable 
 

Page 11 GAO-12-16 Risk Retention Groups 

premium-to-surplus ratios for property/casualty insurers in general would 

receive regulatory scrutiny for excessive leverage risk concerns for ratios 

greater than 250 to 300 percent, depending on the particular line of 

insurance.26 If an insurer’s ratio exceeds this range, a state regulator may 

conduct additional analyses of the insurer’s financial solvency. According 

to NAIC officials, there is not an established benchmark for an acceptable 

premium-to-surplus ratio for the RRG industry. An analysis of NAIC data 

shows that on average, the industry’s net written premium to policyholder 

surplus declined from 2004 to 2010, indicating that the financial strength 

of the industry during this time period has likely either improved or 

remained stable (see fig. 3).27

 

26Net written premiums are written premium less deductions for commissions and ceded 

reinsurance. 

27In some states, RRGs are allowed to use letters of credit as assets, which in some 

cases can result in a varied interpretation of the financial condition of an RRG based on 

the accounting principle used for financial reporting. Information on select differences 

between accounting principles as they relate to financial reporting for RRGs are available 

in appendix III of GAO-05-536. 
 

Page 12 GAO-12-16 Risk Retention Groups 

Figure 3: RRG Industry Average Net Written Premium, as a Percentage of 

Policyholder Surplus, 2004–2010 

Note: Analysis includes RRGs with positive net written premiums. RRGs with negative and zero 

written premiums are excluded. The average annual ratios are unweighted averages, that is, we 

computed ratios for individual RRGs and used these to determine an average ratio for all RRGs. 

Another indicator of financial strength is return on policyholder surplus, or 

return on equity (ROE).28 ROE is generally calculated as the ratio of net 

income to equity, or in the case of insurers, policyholder surplus. From 

2004 to 2010, the average ROE in the RRG industry fluctuated, with a 

high of 13.4 percent in 2008 and a low of 5.1 percent in 2010 (see fig. 4). 

While no clear trend was visible over the 7-year period we analyzed, the 

average ROE for each year generally indicated profitability for the RRG 

industry. 

 

28ROE is expressed as a percent of the mean of prior and current year-end policyholder 

surplus. This ratio measures a company’s overall after-tax profitability from underwriting 

and investment activity. 
 

Page 13 GAO-12-16 Risk Retention Groups 

Figure 4: RRG Average Return on Equity, 2004–2010 

Note: Analysis includes RRGs with positive net written premiums. RRGs with negative and zero 

written premiums or without ROE data as provided by NAIC are excluded. The average annual ratios 

are unweighted averages, that is, we computed ratios for individual RRGs and used these to 

determine an average ratio for all RRGs. 

The combined ratio is another measure of an insurer’s financial strength 

and profitability.29 This ratio shows the claims and related expenses 

incurred by an insurer as a percentage of the premiums earned. 

According to NAIC officials, a combined ratio of less than 100 indicates 

an underwriting profit (gain)—that is, premiums collected were higher 

than the claims paid and related expenses—while a combined ratio above 

100 can be an indicator of an unprofitable insurer that could be in a 

hazardous financial condition. An analysis of NAIC data shows that the 

average combined ratio for RRGs that filed financial statements ranged 

from a high of 92.6 percent in 2005 to a low of 88 percent in 2008 (see 

fig. 5). The average combined ratio in 2010 was 90.2. 

 

29Two ratios, the loss ratio and the expense ratio, constitute the combined ratio. The loss 

ratio is calculated by dividing incurred losses plus loss adjustment expense by earned 

premiums. The expense ratio is calculated by dividing all other expenses by either written 

or earned premiums. 
 

Page 14 GAO-12-16 Risk Retention Groups 

Figure 5: RRG Industry Average Combined Ratio, 2004–2010 

Note: The combined ratio for each year is based on the number of RRGs that filed financial 

statements with NAIC. According to NAIC officials, RRG financial statements generally are filed using 

GAAP or modified GAAP and are reconciled to SAP. NAIC calculates the ratios using the data from 

financial statements as filed by the insurers. NAIC’s formulas and benchmarks for financial ratios are 

based on SAP. 

Also based on NAIC data, the percentage of RRGs with a combined ratio 

above 100 fluctuated from 2006 to 2010 (see fig. 6). For example, 36 

percent of the RRGs writing premiums in 2006 had a combined ratio 

above 100. These percentages increased from 2007 to 2009, with a high 

of 43 percent in 2009, and decreased to about 37 percent in 2010. 

Together, these data indicate that while most RRGs appear to have been 

profitable in any one year, a sizeable but relatively stable percentage in 

each year could have experienced some financial challenges. 
 

Page 15 GAO-12-16 Risk Retention Groups 

Figure 6: Number of RRGs, and Percentage of Total RRGs with Combined Ratios 

above 100, 2006–2010 

Note: The percentage is based on the total number of active RRGs each year with positive net 

premiums written. 

Although the reported financial condition of RRGs appeared favorable in 

most years since 2004, according to NAIC officials, the recent financial 

crisis also affected the RRG industry. Capital sources for RRGs became 

more constrained as banks became more stressed and tightened their 

lending practices, prompting concern by state regulators about the financial 

condition of some RRGs. Industry participants with whom we spoke said 

that some RRGs may have found the experience especially challenging, 

particularly in instances in which the RRGs were in part capitalized by 

letters of credit from financial institutions adversely affected by the recent 
 

Page 16 GAO-12-16 Risk Retention Groups 

financial crisis.30 An NAIC official said that similar to the rest of the 

insurance industry, RRGs have earned less income on their investments. 

In addition, one insurance regulator said that some RRGs had invested in 

the real estate market, and the resulting devaluation of these assets 

affected their balance sheets, particularly those of smaller RRGs. 

In 2004 and 2010, most RRGs were concentrated on health care-related 

lines of business. According to data from the Risk Retention Reporter, in 

both years the top four business lines for RRGs in terms of gross 

premiums were (1) health care; (2) professional services; (3) government 

and institutions; and (4) property development (see fig. 7).31

 

30For an RRG, a letter of credit is a document issued by a financial institution on behalf of 

a beneficiary (for example, the insurance commissioner) stating the amount of credit the 

customer has available, and that the institution will honor drafts up to the amount written 

by the customer. An irrevocable letter of credit could not be canceled or amended without 

the beneficiary’s approval. 

31Gross premiums are the premiums paid by the original insureds. 

The Total Number of RRGs 

Increased Since 2004, with 

Most Growth Occurring in 

Health Care-Related RRGs 
 

Page 17 GAO-12-16 Risk Retention Groups 

Figure 7: Percentage of Overall RRG Gross Premiums by Business Line, 2004 and 2010 

Note: Percentages are rounded to the nearest whole number. In 2010, the actual percentage for the 

financial business line was 3.6 percent and for transportation, 3.8 percent. 

The majority of RRGs licensed in 2004 and 2010 offered health carerelated insurance (see fig. 8). According to our analysis of data from the 

Risk Retention Reporter, 148 of the 153 health care-related RRGs (97 

percent) wrote medical malpractice coverage in 2010. The medical 

malpractice industry generally has been characterized as volatile because 

of the risks associated with providing this line of insurance. Health care 

providers sought alternative sources of insurance after some of the 

largest medical malpractice insurance providers exited the market 

because of declining profits, partly caused by market instability and high 

and unpredictable losses—factors that contribute to the high risk of 

providing medical malpractice insurance.32

 

32GAO, Medical Malpractice Insurance: Multiple Factors Have Contributed to Increased 

Premium Rates, GAO-03-702 (Washington, D.C.: Jun. 27, 2003). 
 

Page 18 GAO-12-16 Risk Retention Groups 

Figure 8: RRGs Licensed by Business Line, 1991, 1996, 2001, 2004, and 2010a

a

Data for 1991, 1996, 2001, and 2004 are as reported in GAO-05-536. Data for 2010 are as of April 

2010. 

b

For each year, we show only the business lines with the highest number of RRGs. RRGs that were 

not in these business lines are included in the “All other RRGs” category. 

According to an RRG industry representative, although the overall liability 

insurance market currently is soft—which may be described as a period 

during which premiums are low, capital and competition are high, and 

demand for RRGs is lower—the RRG industry has continued to grow, 

especially in the area of medical malpractice coverage. Nine of the 13 

state insurance regulators we interviewed affirmed that the majority of 

RRGs domiciled or operating in their states provide insurance for various 

health care-related lines, such as medical malpractice and liability 

insurance for nursing homes. 
 

Page 19 GAO-12-16 Risk Retention Groups 

Although they conducted business nationwide, similar to what we 

reported in 2005 more than 80 percent of active RRGs in 2010 were 

domiciled in five states and the District of Columbia.33 Based on an 

analysis of data from NAIC, the states with the most domiciled RRGs as 

of 2010 were Vermont, South Carolina, the District of Columbia, Nevada, 

Arizona, and Hawaii (see fig. 9). Montana, which was not one of the 

leading domiciliary states when we reported in 2005, accounted for about 

16 percent of the increase of domiciled RRGs in 2010. As of 2010, 24 

states had domiciled RRGs. 

Figure 9: Number of Active RRGs Domiciled by State, 2004 and 2010 

Note: U.S. territories (American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the Virgin 

Islands) and Canada are excluded. 

 

33According to NAIC, “active” includes RRGs writing insurance premiums, formed but not 

yet writing insurance premiums, under receivership, or in liquidation. “Inactive” RRGs were 

excluded. 

Although Most RRGs Are 

Domiciled in One of a Few 

States, They Wrote the 

Majority of Business 

Outside Their State of 

Domicile 
 

Page 20 GAO-12-16 Risk Retention Groups 

RRGs may decide to domicile in a particular state for one or more 

reasons. First, RRGs are more likely to domicile in a state that permits 

their formation as a captive, which may not be one of the states in which 

the RRGs write the majority of their business. Some states allow RRGs to 

be chartered as captives because they only provide coverage to their 

owners and do not sell insurance to the public. Further, regulatory 

requirements for captive insurers generally are less restrictive than those 

for traditional insurers. According to the Risk Retention Reporter, about 

20 states charter and regulate RRGs under captive legislation.34 Second, 

according to NAIC officials with whom we spoke, states that allow RRGs 

to operate under captive laws often have less stringent financial 

requirements. NAIC officials also said that RRGs tend to gravitate to 

states that have lower capitalization requirements and in which the 

regulators are looking to promote the RRG industry as a source of 

revenue for the state. Finally, according to 9 of 13 state insurance 

regulators we interviewed, in addition to lower minimum capital and 

surplus requirements, RRGs may choose to domicile in certain states 

because of the state’s expertise with regulating RRGs and knowledge of 

the industry. 

Evidence from our interviews and survey of state insurance regulators 

also suggests that lower capitalization requirements were a factor in 

RRGs choosing to domicile in those states. For example, in our interviews 

with insurance regulators representing 8 of the top 10 domiciliary states, 4 

regulators reported that the minimum amount of capital required to 

domicile in their state was $500,000, 3 regulators reported a minimum 

requirement of $1 million, and 1 regulator reported $400,000. However, 

six of the regulators also reported that additional capital could be 

required.35 Our interviews and state regulator survey also indicated that 

two domiciliary states reduced their minimum capital and surplus 

requirement since our 2005 report. For example, one domiciliary state’s 

minimum capital requirement decreased from $500,000 to $400,000, 

while another state’s decreased from $700,000 to $500,000. While RRGs 

tend to domicile in a few states, they operate and write business in all 50 

 

34According to the Risk Retention Reporter, the laws of three states are silent about 

whether RRGs can form under captive legislation. 

35According to these domiciliary state regulators, regardless of the statutory minimum 

required, regulators may require an increased minimum capital amount based on factors 

such as an assessment of the RRG’s proposed business plan—including the volume of 

premiums written and the types of coverage offered. 
 

Page 21 GAO-12-16 Risk Retention Groups 

states and the District of Columbia (see fig. 10). Collectively, between 

2004 and 2010, the number of operating RRGs increased by about 50 

percent. 

Figure 10: Number of Operating RRGs by State, 2004 and 2010 

Note: RRGs that operate on a multistate basis are counted more than once. 

NAIC data also show that more than half of the RRGs in both 2004 and 

2010 wrote premiums in two or fewer states, and two-thirds of the RRGs 

wrote premiums in fewer than 10 states in both years. Of all the direct 

premiums written by RRGs, about 97 percent and 95 percent were written 

outside the state of domicile in 2004 and 2010, respectively (see fig. 11). 

The nondomiciliary states in which RRGs wrote most of their business in 

2004 were Pennsylvania ($308 million), New York ($226 million), 

California ($210 million) and Massachusetts ($114 million). In 2010, 

RRGs again wrote the majority of their business in these states: $369 

million in Pennsylvania, $366 million in New York, $230 million in 

California, and $172 million in Massachusetts. In 2005, we noted that, 

according to NAIC, 73 of 115 RRGs active in 2003 (63 percent) did not 

write any business in their state of domicile. According to data from NAIC, 
 

Page 22 GAO-12-16 Risk Retention Groups 

168 of the 249 RRGs active in 2010 (67 percent) did not write any 

business in their state of domicile.36

Figure 11: Percentage of Premiums RRGs Wrote in Nondomiciliary States (Shown by Domiciliary State), 2004 and 2010 

Nondomiciliary state insurance regulators we interviewed expressed 

concerns about the amount of RRG business in their states and their 

limited authority to regulate RRGs providing coverage to their state’s 

insureds. In our 2005 report, some nondomiciliary regulators expressed 

concerns that domiciliary states were lowering their regulatory standards 

to attract RRGs for economic development purposes. Similarly, NAIC 

officials we interviewed said that when RRGs write the majority of their 

business outside their state of domicile, the domiciliary state regulator 

 

36In 2010, 19 of the 249 active RRGs did not write any premiums. 
 

Page 23 GAO-12-16 Risk Retention Groups 

does not have “skin in the game” and cannot protect insureds who might 

be affected if an RRG became insolvent. According to an NAIC official, 

these states may allow actions that RRGs find favorable, but that are not 

in the best interest of the insureds. 

Based on our interviews and survey of state insurance regulators, RRG 

industry participants had different views about the effects RRGs have had 

on the availability and, to a lesser extent, the affordability of commercial 

liability insurance. RRG representatives with whom we spoke generally 

believed that RRGs have increased the availability of such insurance. 

According to industry participants, RRGs have been providing coverage in 

niche markets in which consumers otherwise might not be able to obtain 

insurance (that is, from traditional insurers). However, one insurance 

regulator with whom we spoke said that commercial liability insurance has 

been readily available through traditional insurers, and therefore 

questioned the need for mechanisms such as RRGs to obtain this type of 

insurance. Our survey of state insurance regulators further suggests that 

regulators generally had different views than RRG representatives about 

the impact of RRGs on availability. In our survey, 17 out of the 49 state 

insurance regulators who responded (35 percent) said that RRGs have 

expanded the availability of commercial liability insurance for groups that 

would otherwise have difficulty obtaining coverage. Conversely, 8 of the 

regulators (16 percent) responded that RRGs have not expanded 

availability, while 24 regulators (49 percent) did not have an opinion.37

Industry participants were unsure of the impact of RRGs on the 

affordability of commercial liability insurance. Some industry participants 

with whom we spoke said that RRGs would not continue to exist if their 

rates were not affordable. Other industry participants said that it was 

difficult for them to assess the impact of RRGs on affordability, but 

acknowledged that RRGs played a role in the insurance market. NAIC 

officials with whom we spoke said that the affordability of rates offered by 

RRGs has not been determined, as RRGs are not required to file their 

premium rates with nondomiciliary state regulators. Therefore, an 

analysis has not been conducted to compare RRG rates to those of 

 

37One state did not respond to this survey as state employees were furloughed for a part 

of the period in which this survey was open. Another state insurance regulator did not 

completely respond to all survey questions, therefore this regulator’s responses were 

omitted from our analyses. 

Industry Participants’ 

Views Differed on the 

Impact of RRGs on the 

Availability and 

Affordability of 

Commercial Liability 

Insurance 
 

Page 24 GAO-12-16 Risk Retention Groups 

traditional insurers. In addition, an actuarial expert with whom we spoke 

said that the rates and language included in each policy written by 

traditional commercial insurers and by RRGs would need to be obtained 

to make a true comparison, because this information differs among 

insurers and among RRGs. In our survey, 13 of 48 respondents (27 

percent) said that RRGs have improved affordability of commercial 

liability insurance for groups that would otherwise have difficulty obtaining 

coverage. Nine regulators (19 percent) responded that RRGs have not 

improved affordability while 27 regulators (54 percent) did not have an 

opinion. 

Apart from the submission of required documentation, LRRA does not 

provide for a specific process for RRGs to register to conduct business in 

nondomiciliary states. States and RRGs have disagreed on issues 

relating to registration such as the level of documentation required and 

review and approval processes. 

Interpretations about what documentation can be required vary by state. 

Based on our analysis of interview and survey responses, some RRG 

industry representatives and state insurance regulators interpreted 

LRRA’s failure to mention registration as an indication that submission of 

the specified documents in LRRA is all that can be required by a 

nondomiciliary state before allowing an RRG to operate in that state. 

Others interpreted LRRA’s silence on registration in nondomiciliary states 

to mean that states can impose their own requirements. Responses to 

our survey of state insurance regulators indicate that states have varying 

registration requirements and practices, but respondents generally 

reported that RRGs must submit required documentation as outlined in 

LRRA. However, regulators also provided information on additional 

information and documentation their states required to fulfill individual 

state registration processes. For example, a few states will accept NAIC’s 

Varying 

Interpretations of 

LRRA Result in 

Different Regulatory 

Treatment of RRGs 

across States 

State Insurance Regulators 

and RRGs Have Differed 

on Registration Processes 

and Requirements LRRA 

Allows in Nondomiciliary 

States 
 

Page 25 GAO-12-16 Risk Retention Groups 

uniform application form, while another state requires a state-specific 

registration form. An RRG representative with whom we spoke said that 

using NAIC’s uniform application form instead of state-specific forms 

would simplify the registration process and make it more beneficial to 

RRGs. 

An RRG representative said that one state requires a listing of all other 

states in which the RRG is registering and the status of the registration in 

each state; copies of any condition or contingencies placed on the RRG 

by its domiciliary state; copies of requirements or restrictions placed on 

RRG members; copies of soliciting and marketing materials including 

membership and subscription agreements; and projected premiums for 

the next 3 years for the state in which the RRG is applying as well as 

nationwide, among other requirements. According to another RRG 

representative, one nondomiciliary state requires specific forms for 

biographical affidavits of officers and directors, including Social Security 

numbers. In documentation from state insurance regulators that we 

received from an RRG industry association, as a part of the registration 

process one state required the name, physical address and mailing 

address of all agents or brokers for the RRG, and a copy of each 

examination of the RRG, among other requirements. Representatives 

from the RRG industry maintain that state regulatory practices such as 

registration requirements beyond what is specified in LRRA “encroached” 

on LRRA’s partial preemption of state insurance laws. 

RRG representatives said that there is a fear among RRGs that repeated 

objections to states’ requests for information will lead to RRGs being 

targeted by state insurance offices. They also feared that providing 

information would lead to more onerous requests. However, one state 

insurance regulator with whom we spoke said that the additional 

document requests were intended to provide the regulators with 

necessary information to understand the operations of the RRGs 

providing coverage in their states. Further, the regulator stated that 

information requested is often the same information provided to the 

domiciliary state regulator and that domiciliary regulators may be slow to 

send the information or sometimes may not provide it. Two state 

insurance regulators said that sometimes the information requested is 

subject to a confidentiality agreement between the state and the RRG, 

which makes it challenging for regulators to share information. To 

alleviate this issue, one state insurance regulator suggested developing a 

mechanism that would allow for a central repository of RRG financial data 

for information-sharing purposes. 
 

Page 26 GAO-12-16 Risk Retention Groups 

States and RRGs also have disagreed about registration and approval 

processes. While some states require certain information in order to 

approve RRGs’ registrations, RRG representatives with whom we spoke 

said that LRRA does not require RRGs to go through a regulatory review 

and approval process by state regulators to conduct business in 

nondomiciliary states. In 2009, the Risk Retention Reporter surveyed 

captive managers representing 260 RRGs to determine whether 

nondomiciliary states were “encroaching” on LRRA preemptions.38 In the 

2009 survey, 44 percent of RRGs responded that states made operation 

contingent upon regulatory review and approval, while 56 percent found 

that states did not. Also in the 2009 survey, 47 percent of respondents 

said they were subject to “impermissible” requests for information, while 

53 percent said that they were not subject to such requests. 

RRG representatives with whom we spoke said that even after completing 

the registration process for some nondomiciliary states, the RRG still may 

not be recognized as registered, or such recognition may take several 

years. For example, according to an RRG representative with whom we 

spoke, an RRG sent a letter to a nondomiciliary state in May 2006 with 

notification of its intent to do business. The RRG did not receive a letter 

approving its registration until April 2008. Another RRG representative said 

that an RRG filed the documents required by LRRA to register in about 40 

states. About one-third of the states responded affirmatively to the 

submissions for this RRG without any further questions. Another one-third 

of states responded to the RRG with additional questions before allowing 

the RRG to conduct business in those states. The remaining states did not 

respond to the RRG’s registration filings. 

Some states have mandatory waiting periods before a traditional insurer, 

domiciled RRG, or nondomiciled RRG can begin writing business in their 

state. In our survey of state insurance regulators, 3 of 49 states reported 

having such a waiting period. However, the waiting period can be longer for 

traditional insurers and domiciled RRGs than for nondomiciled RRGs. For 

example, one state reported that its mandatory waiting period for traditional 

insurers and domiciled RRGs was 90 to 120 days, and 15 to 30 days for 

nondomiciled RRGs. Another state did not have a minimum or maximum 

waiting period, but traditional insurers and domiciled RRGs could not write 

 

38“Special Report: Impact on Risk Retention Groups of State Encroachment of Liability 

Risk Retention Act Preemptions,” Risk Retention Reporter (January 2009). The response 

rate for this survey was 45 percent, representing 118 RRGs. 
 

Page 27 GAO-12-16 Risk Retention Groups 

business until their state issued a license, and the waiting period for 

nondomiciled RRGs to begin writing business in the state was 60 days. A 

third state reported no waiting period for traditional insurers and domiciled 

RRGs and a waiting period of 30 to 60 days for nondomiciled RRGs. 

NAIC has not taken a position on the legality or utility of different state 

approaches to the interpretation of LRRA or state regulation of RRG 

activities. NAIC published its Risk Retention and Purchasing Group 

Handbook in 1999 to provide guidance to domiciliary states that have 

adopted NAIC’s Model Risk Retention Act.39 The purpose of the 

handbook is to present advisory information on issues that have arisen or 

can be expected to arise when regulating RRGs under LRRA. For 

example, while the handbook provides information on the notice and 

registration process for nondomiciliary states, it does not take a position 

on different state approaches. 

As a result of state regulators’ varying interpretations of LRRA, 

registration requirements may differ across states. As previously noted, 

some RRGs believe that some states have registration requirements that 

go beyond what is allowed under LRRA, and in some cases, these 

requirements have caused delays in an RRG’s ability to begin operating 

in those states. Conversely, some state regulators believe such 

requirements are necessary as well as allowable under LRRA. These 

differing interpretations have resulted in an environment of uncertainty for 

both RRGs and regulators and, according to RRGs, are a potential 

regulatory burden not intended by LRRA. 

LRRA allows nondomiciliary states to require RRGs to pay premium and 

other taxes but does not explicitly state whether nondomiciliary insurance 

regulators can or cannot charge fees. The silence of LRRA on fees has 

prompted state insurance regulators and RRG representatives to interpret 

the law differently. Both domiciliary and nondomiciliary state insurance 

regulators routinely charge RRGs one-time registration fees, annual 

 

39NAIC’s model laws are designed to create a national standard by providing guidance to 

states on implementing laws that affect the insurance industry. The Model Risk Retention 

Act, developed in 2002, aims to present a model for state regulation of the formation and 

operation of RRGs and purchasing groups (any group of persons with similar or related 

liability risks who form an organization for the purpose of purchasing commercial liability 

insurance). 

State Insurance Regulators 

and RRGs Differ on Their 

Interpretation of Fees 

Allowed under LRRA 
 

Page 28 GAO-12-16 Risk Retention Groups 

renewal fees, and filing fees. Based on our survey of state insurance 

regulators, the amount of fees charged varies across states and may 

differ based on whether the RRG is domiciled in the state. Among the 

respondents, most reported that they charged RRGs (domiciled and 

nondomiciled) initial and annual fees to operate in their state. Specifically, 

among the 37 states identifying specific fees charged to insurers, most 

reported that they charged RRGs with some of the same types of fees 

applicable to traditional property/casualty insurers. 

In addition, the responses indicated that premium taxes—which LRRA 

specifically authorizes—vary across states and in some cases have a 

complex structure. For example, premium tax rates may be different for 

domiciled or nondomiciled RRGs or for traditional property/casualty 

insurers. In addition, a few states reported incremental tax rates based on 

the volume of premiums written by the RRG. Further, some states 

implement a “retaliatory” premium tax rate—meaning a state taxes out-ofstate insurance companies operating in its jurisdiction in the same way 

that the state’s own insurance companies are taxed by other states. 

A majority of RRG representatives with whom we spoke said that varying 

fees other than premium taxes that nondomiciliary states charged RRGs 

were expensive and a financial burden and were also inconsistent with 

LRRA. For example, one RRG representative said that the insurer, which 

operates in 50 states and the District of Columbia with total national 

premiums of $124 million, paid in excess of $500,000 in combined state fees 

to conduct business outside its domiciliary state. A smaller RRG that wrote 

premiums of about $1 million said it paid $6,000 to $7,000 in additional fees. 

Three RRG representatives said that their RRGs often “pay fees under 

protest,” while other RRG representatives said that they often paid the fees 

because paying was less expensive than litigation against the states. 

RRGs have challenged requirements established by nondomiciliary states 

that RRGs believe are preempted, and therefore not permitted, by LRRA. 

For example, in National Risk Retention Association v. Brown, a U.S. 

district court found that LRRA does not authorize a nondomiciliary state to 

require RRGs domiciled in another state to pay annual, application, or 

policy form review fees as part of registration or examination 

requirements before being allowed to do business in that state.40

 

40927 F. Supp. 195 (M.D. La. 1996), aff’d, 114 F.3d 1183 (5th Cir. 1997). 
 

Page 29 GAO-12-16 Risk Retention Groups 

However, the court did not hold that all fees nondomiciliary states 

charged necessarily were prohibited but that the types of fees charged in 

that case were broader than those allowed by the registration and 

examination requirements enumerated in LRRA. In Attorneys’ Liability 

Assurance Society, Inc. v. Fitzgerald the court also addressed the issue 

of fees.41 In that case, a state statute required nondomiciled RRGs to pay 

a fee of a certain percentage of their business written in that state. The 

court held that such a fee was not permitted, as LRRA permits only taxes 

by nondomiciliary states, and such a fee was not considered a tax. The 

fee in this case was to be used for regulatory purposes only, and 

therefore was considered an impermissible attempt to regulate an RRG 

by a nondomiciliary state. 

As a result of differing interpretations of LRRA, fee structures vary across 

states. While some RRGs believe some of these fees go beyond what is 

allowed by LRRA, state regulators believe these fees are permissible. 

While the impact on RRGs of fees charged in some states is not clear, 

several RRG industry participants with whom we spoke said that fees 

may be more challenging for smaller RRGs and RRGs operating in 

multiple states. In addition, this variation of fees across states also 

contributes to the uncertainty under which RRGs and state regulators 

operate. 

LRRA allows RRGs to provide commercial liability insurance and provides 

a general definition of liability.42 However, beyond its general definition, 

LRRA is silent on the specific types of liability insurance that RRGs can 

provide, which has resulted in differences of interpretation by RRGs and 

state insurance regulators about the types of liability coverage permitted 

under LRRA. In our survey of state insurance regulators, 6 of 49 regulators 

responded that they had between one and five differences of interpretation 

 

41174 F. Supp. 2d 619 (W.D. Mich. 2001). 

42According to LRRA, “liability – (A) means legal liability for damages (including costs of 

defense, legal costs and fees, and other claims expenses) because of injuries to other 

persons, damage to their property, or other damage or loss to such other persons 

resulting from or arising out of – (i) any business (whether profit or nonprofit), trade, 

product, services (including professional services), premises, or operations, or (ii) any 

activity of any state or local government, or any agency or political subdivision thereof; 

and (B) does not include personal risk liability and an employer’s liability with respect to its 

employees other than legal liability under the Federal Employers’ Liability Act.” 15 U.S.C. 

§ 3901(a)(2). 

Regulators, RRGs, and 

Courts Also Differed on 

the Types of Coverage That 

RRGs Can Offer and What 

Constitutes Discrimination 

as Prohibited by LRRA 
 

Page 30 GAO-12-16 Risk Retention Groups 

with other state insurance regulators about the definition of commercial 

liability insurance in the last 24 months. One regulator reported more than 

10 differences. In our interviews, five regulators said they believed that 

insurance lines such as contractual liability (for example, vehicle service or 

builder warranties) and stop-loss coverage were not permitted under 

LRRA.43 In some cases, nondomiciliary state insurance regulators have not 

allowed RRGs to provide insurance in their state that they believe does not 

fit the definition of liability under LRRA. For example, one nondomiciliary 

state regulator said it denied the registration of an RRG that planned to 

offer contractual liability insurance. In addition, an RRG representative 

reported its registration application was denied in five states because 

regulators did not believe contractual liability coverage fell within the 

definition of liability in LRRA. Further, one domiciliary state insurance 

regulator we interviewed said the state believed contractual liability 

coverage was permitted under LRRA; however, the state generally did not 

allow this coverage to be offered in the state to “avoid the politics of the 

issue.” This regulator, along with three other regulators with whom we 

spoke, said that the RRG industry needed a clearer definition of contractual 

liability or the types of coverage permissible under LRRA. Differences in 

interpretation of the types of coverage permitted under LRRA have led to 

litigation between states and RRGs. 

States and federal courts also have differed in their interpretations. For 

example, in Auto Dealers RRG v. Steve Poizner, an RRG provided stoploss insurance that covered liability by its members, employees of 

California automobile dealers that maintained self-funded employee 

benefit plans.44 The California insurance office issued a cease-and-desist 

order because it believed that the RRG was providing health insurance, 

not liability insurance as defined by LRRA. The RRG challenged the 

California insurance office’s cease-and-desist order in federal court, and 

the court issued a preliminary injunction blocking the cease-and-desist 

order. However, the court never decided the case on its merits—that is, 

the court never decided whether the RRG was issuing valid liability 

insurance policies—because the RRG decided to stop pursuing the case 

and instead stopped issuing policies in California. In Attorneys’ Liability 

 

43Contractual liability insurance covers liability of the insured that is assumed in a contract 

under specified conditions. Stop-loss refers to any provision in a policy designed to end an 

insurer’s losses at a given point. 

44No. Civ. 07-2660 FCD KJM (E.D. Cal., Mar. 7, 2008). 
 

Page 31 GAO-12-16 Risk Retention Groups 

Assurance Society, Inc. v. Fitzgerald (discussed previously), the court 

held that LRRA permitted an RRG to cover liability by its members for 

wrongful employment practices.45 The court held that while RRGs 

specifically were not to cover workers’ compensation, the types of 

coverage provided by the RRG at issue in the case were permissible 

under the broad scope of LRRA. 

Federal courts have rendered varying decisions relating to what is 

considered prohibited discrimination per LRRA’s state financial 

responsibility requirements. These financial responsibility requirements 

consist of state or local provisions that establish conditions for obtaining a 

license or undertaking certain activities. For example, many states require 

that anyone registering a motor vehicle demonstrate proof of financial 

responsibility (show that the owner of the vehicle has financial means 

sufficient to compensate any injured persons). State laws may provide 

that financial responsibility can be shown by coverage in a liability 

insurance policy by an insurer that is regulated by the state and protected 

by the state’s guaranty fund. LRRA does not preempt state authority to 

apply financial responsibility standards as long as those standards do not 

discriminate against RRGs within the meaning of LRRA.46 For example, in 

National Warranty Insurance Company RRG v. Greenfield, the U.S. Court 

of Appeals for the Ninth Circuit held that LRRA preempted provisions of 

the Oregon Service Contract Act that required automobile dealers to 

obtain liability insurance from an insurer that was a member of the 

Oregon Insurance Guaranty Association.47 Because RRGs do not 

participate in state guaranty associations, the Oregon law effectively 

excluded RRGs from providing liability insurance to automobile dealers. 

Thus, the court held that Oregon could not exclude coverage from all 

RRGs because that would discriminate against RRGs. However, Oregon 

could exclude coverage from a particular RRG if it could show that the 

RRG was financially unsound or otherwise dangerous to those who relied 

on insurance purchased pursuant to the Oregon Service Contract Act. In 

another case, Charter Risk Retention Group Insurance Company v. 

Rolka, a U.S. district court noted similarly that discrimination against 

RRGs as a whole is prohibited under LRRA.48 However, state laws 

 

45174 F. Supp.2d 619. 

4615 U.S.C. §§ 3902(a)(4), 3905(d). 

47214 F.3d 1073 (9th Cir. 2000). 

48796 F. Supp. 154, 159 (M.D. Pa. 1992). 
 

Page 32 GAO-12-16 Risk Retention Groups 

relating specifically to financial responsibility requirements could be valid, 

if they caused a particular RRG to be excluded if it lacked acceptable 

evidence of financial responsibility for a state license or permit, as long as 

they did not discriminate against RRGs as a whole.49

Other courts have interpreted the provisions of LRRA prohibiting 

discrimination against RRGs differently. In Ophthamalic Mutual Insurance 

Company v. Musser, the U.S. Court of Appeals for the Seventh Circuit 

affirmed a district court decision that LRRA does not preempt a Wisconsin 

requirement that health providers offer proof of financial responsibility to 

do business in the state by obtaining professional liability insurance 

coverage from insurers authorized to do business in Wisconsin, although 

it effectively excludes nondomiciliary RRGs from operating in that state.50

The court found that the challenged statute neither impermissibly 

regulated RRGs nor was intended to discriminate against them, and 

therefore is not preempted by LRRA. The court concluded that the 

Wisconsin requirement fit within the saving clause of LRRA providing that 

states are not bound by LRRA when crafting statutes concerning financial 

responsibility, as long as the statutes were not intended to discriminate 

against RRGs. Similarly, in Mears Transport Group v. State, the U.S. 

Court of Appeals for the Eleventh Circuit held that LRRA did not preempt 

a Florida law requiring owners or operators of for-hire passenger 

transportation vehicles to provide evidence of financial responsibility by 

having a motor vehicle liability policy issued by an insurer that is a 

member of the Florida Insurance Guaranty Association.51 Although RRGs 

effectively are disallowed from doing business in Florida under this law, 

as they are not permitted to be members of guaranty associations under 

LRRA, the court held that the Florida law does not single out RRGs for 

exclusion, as RRGs are one of many types of insurance carriers ineligible 

for membership in the guaranty association. Therefore, the court held that 

the Florida law was not intended to be discriminatory. Since the Florida 

law is “precisely the type of state financial responsibility law that 

 

49Id. at 159 n.6. The court did not decide this case on the merits, but denied the 

defendant’s motion to dismiss on the grounds that the case did not involve a federal 

question, by holding that the case involved interpretation of a federal law, LRRA, which 

was a federal question. 

50143 F.3d 1062, 1070 (7th Cir. 1998). 

5134 F.3d 1013 (11th Cir. 1994). 
 

Page 33 GAO-12-16 Risk Retention Groups 

Congress expressly exempted from the preemption provisions of LRRA,” 

according to the court, it is allowed and not preempted by LRRA.52

Different interpretations of the types of coverage permitted under LRRA 

have resulted in the inability of some RRGs to provide coverage in certain 

states. And, in cases in which RRGs choose to pursue legal action when 

states deny their ability to provide that coverage, the RRGs may incur 

substantial legal fees. As previously noted, different interpretations by 

federal courts on issues such as permissible coverage types and what 

constitutes discrimination under LRRA can further contribute to an 

uncertain regulatory environment for RRGs and state insurance 

regulators. 

Because LRRA does not comprehensively address the capitalization or 

solvency requirements of RRGs, states can develop their own statutory 

minimum capital and surplus requirements for RRGs domiciled in their 

state. According to some state insurance regulators with whom we spoke, 

these requirements are based on the type of insurance coverage offered, 

the volume of business the RRG intends to write, and other factors. Two 

nondomiciliary state insurance regulators with whom we spoke indicated 

concerns about the capitalization and solvency of RRGs operating in their 

states, and two regulators support increasing the minimum capital 

requirement. In addition, some states allow RRGs, unlike traditional 

insurers, to meet and maintain their minimum capital and surplus 

requirements in the form of an irrevocable letter of credit rather than cash. 

Data from NAIC show that as of June 2010, 62 RRGs were capitalized 

with letters of credit. 

Although RRGs write most of their business outside their state of 

domicile, nondomiciliary state insurance regulators must rely on 

domiciliary regulators to establish minimum capitalization and solvency 

requirements for their domiciled RRGs—and ensure that the 

requirements are commensurate with the type of coverage provided and 

the volume of premiums written. Some RRG representatives with whom 

we spoke believed that there is a lack of confidence in the RRG 

regulatory environment or that some states prefer their own authority to 

regulate RRGs writing business in their state. Two state insurance 

 

52Id. at 1016. 

State Insurance Regulators 

Have Expressed Concerns 

about the Capitalization 

and Solvency of Some 

RRGs 
 

Page 34 GAO-12-16 Risk Retention Groups 

regulators and four RRG representatives said they believed that some of 

these issues will be resolved through NAIC’s efforts to develop uniform, 

baseline standards for the regulation of RRGs. 

Our 2005 report found that the wide variance in solvency regulation 

among domiciliary states, along with the growth of the RRG industry, 

increased the potential for future solvency risks. In response to 

recommendations from our 2005 report to provide a more uniform 

regulatory environment for RRGs, NAIC revised its accreditation 

standards to include standards for the way in which states regulate RRG 

solvency.53 These new standards went into effect on January 1, 2011. 

NAIC also began to address our recommendations to develop corporate 

governance standards concerning ownership and operational issues 

within RRGs. Initial discussions in 2005 led to the development of draft 

corporate governance standards by 2007, and later in 2010 NAIC working 

groups initiated steps toward integrating these standards into the RRG 

oversight process. In addition, NAIC has started the process to integrate 

corporate governance standards into its accreditation standards, so that 

states would be required to review RRG’s corporate governance 

standards to be accredited. The groups’ discussions were open to 

 

53NAIC’s accreditation standards are minimum standards that state regulators must meet 

to remain accredited with NAIC. NAIC’s full accreditation review of a state’s solvency 

regulation of multistate insurance companies occurs once every 5 years and includes the 

examination of (1) the state’s relevant laws and regulations, (2) the financial analyses and 

examinations conducted by the insurance department, and (3) the department’s 

organizational and personnel practices. 

NAIC Actions Address 

Some Regulatory 

Concerns, While 

Recent Federal and 

State Proposals May 

Affect Future RRG 

Operations 

Revised Accreditation 

Standards Address Some 

Regulatory Concerns with 

RRGs’ Financial Solvency 

Practices 
 

Page 35 GAO-12-16 Risk Retention Groups 

interested parties, including RRG representatives. For instance, the 

National Risk Retention Association (NRRA), told us it actively 

participated in NAIC working groups. The revisions to the financial 

accreditation standards for state insurance departments’ oversight of 

domiciled RRGs more closely align the standards applied to the oversight 

of RRGs with those that are applied to traditional insurers. The revisions 

affect key areas of RRGs’ financial solvency oversight, including revising 

accounting requirements for annual financial reporting and making 

financial examinations risk-focused. 

Among the recent revisions to NAIC’s accreditation standards is a new 

requirement that applies to RRGs that do not file their annual financial 

statements using SAP: these statements must contain a reconciliation to 

SAP, effective January 1, 2011. According to NAIC, in 2010, 72 RRGs 

reported filing their financial statement using SAP and 177 reported using 

another accounting principle such as GAAP. The reconciliation is 

designed to indicate to regulators how the accounting principles used in 

financial statements result in figures different from those that SAP would 

have produced. RRGs can include this reconciliation in the footnotes to 

the financial statement. This new standard aims to address some of the 

challenges identified in our 2005 report that arose from the use of 

different accounting principles, such as difficulties in assessing the 

financial condition of RRGs reported by some nondomiciliary state 

insurance regulators more accustomed to SAP. The new standards also 

move financial reporting requirements for RRGs closer to those of 

traditional insurers.54 Our survey responses from state insurance 

regulators showed that 32 state regulators reported requiring SAP for 

financial reporting, 14 reported requiring GAAP or a modified version of 

GAAP and 3 reported a choice of accounting principles within their 

requirements.55

Financial reporting practices for RRGs still vary and the choice of 

accounting method can produce different conclusions about a company’s 

 

54Statutory accounting principles were established and promulgated by NAIC for the 

insurance industry. 

55A total of 49 states responded to the survey. 

Financial Reporting 

Requirements for RRGs Made 

More Similar to Those for 

Traditional Insurers 
 

Page 36 GAO-12-16 Risk Retention Groups 

financial strength.56 NAIC analysts continue to report that allowing 

financial statements using different accounting principles, even when 

reconciled to SAP in the footnotes, diminishes the usefulness of their 

underlying data and analysis tools because the tools were designed 

around data extracted from financial statements based on SAP. 

Statements filed using other accounting principles can produce distorted 

results when looked at through traditional computerized analysis tools. As 

a result, NAIC must then revise the analyses to produce information 

useful to state regulators, which requires more staff resources. In prior 

reports we have noted that NAIC’s solvency analysis is an important 

supplement to the overall solvency monitoring performed by states and 

can help states focus their examination resources on potentially troubled 

companies, including flagging financial ratios that are outside the usual 

range for additional regulatory attention.57 Further, the choice of 

accounting method can have important repercussions for certain RRGs. 

For example, representatives of two RRGs with whom we spoke reported 

letters of credit to be critical for some RRGs to meet minimum 

capitalization requirements; and as a result, they often preferred to file 

their financial statements using GAAP where letters of credit can, in some 

states, improve the RRG’s appearance of financial solvency. 

The revised accreditation standards also require all RRGs to have riskfocused examinations in an effort to implement more uniform baseline 

standards for RRG regulation, applicable to all financial examinations of 

RRGs commencing on or after January 1, 2011. Risk-focused 

examinations emphasize reviews of higher-risk areas and tend to be 

more specialized and tailored to individual companies. Risk-focused 

examinations are already a regulatory requirement for traditional insurers. 

Nondomiciliary states have the right to review the results of these 

examinations for RRGs. 

 

56The differences in the two sets of accounting principles reflect the different purposes for 

which each was developed and each produces a different, and not necessarily 

comparable, financial picture of a business. SAP generally meets the needs of insurance 

regulators, the primary users of insurance financial statements, and stresses the 

measurement of an insurer’s ability to pay claims and remain solvent in order to protect 

owner/insureds. However, GAAP provides guidance that businesses follow in preparing 

their general purpose financial statements that provide users, such as investors and 

creditors, with useful information that allows them to assess a business’s ongoing financial 

performance. 

57GAO, Insurance Regulation: The NAIC Accreditation Program Can Be Improved, 

GAO-01-948 (Washington, D.C.: Aug. 31, 2001). 

Risk-Focused Examinations 

Already Required of Traditional 

Insurers, Now Required for 

RRGs 
 

Page 37 GAO-12-16 Risk Retention Groups 

Three representatives of RRGs with whom we spoke supported the move 

to risk-focused examinations because they believed more uniform 

regulatory activities among domiciliary states would result in more trust 

among state regulators and ultimately would benefit the RRG industry. 

However, six representatives also acknowledged some potential 

challenges in implementing risk-focused examinations for some RRGs, 

particularly the smaller ones. For example, they said it could increase 

financial costs and regulatory burden for these RRGs because state 

regulators might need to hire more specialized auditors for more detailed 

reviews, and pass on the associated costs to the RRGs in the form of 

examination fees. NRRA also expressed its concern about the efficiency 

and effectiveness of risk-focused examinations for small liability insurance 

companies, which compose the majority of RRGs. NRRA characterized 

the impact on small RRGs as excessively expensive without yielding 

commensurate benefit, and held that implementing risk-focused 

examinations for small RRGs would run counter to the intent of LRRA. In 

its letter to NAIC, NRRA questioned the cost-effectiveness of the more 

rigorous examinations for certain RRGs based on characteristics such as 

the RRG’s size, its impact in nondomiciliary states, and the structure of its 

membership. 

Four state insurance regulators with whom we spoke also said that 

requiring risk-focused examinations might not be an efficient use of 

resources, particularly for small RRGs that represent the majority of the 

RRG population. Three state insurance departments we interviewed 

reported having already implemented risk-focused examinations for their 

domiciled RRGs. Based on its experience conducting risk-focused 

examinations, one domiciliary state regulator recommended that criteria 

be used to determine the efficiency and effectiveness of applying a riskfocused examination to an RRG. For example, the regulator 

recommended that risk-focused examinations should be required for 

RRGs with more than $10 million in direct written premiums, owned and 

operated by a group of shareholders with unrestricted membership, and 

registered to operate in at least 15 states. Alternatively, the regulator 

suggested leaving it at the discretion of the domiciliary state regulator to 

decide whether the risk-focused approach would be the most efficient 

approach to oversee a particular RRG. 

According to NAIC officials, the possibility of exempting certain types of 

RRGs from the risk-focused examination requirement was considered in 

working groups. However, they also expressed concern about whether 

alternative examinations would qualify as full-scope examinations in 

accordance with NAIC’s guidance on examinations as outlined in the 
 

Page 38 GAO-12-16 Risk Retention Groups 

Financial Condition Examiners Handbook. The guidance requires RRGs 

to undergo full-scope examinations at least once every 5 years, or in 

accordance with the respective state law if it requires more frequent 

examinations.58 NAIC decided that the risk-focused examination process 

was flexible enough to allow examiners to tailor examinations to fit the 

unique characteristics of RRGs. 

NAIC’s risk-based capital (RBC) system was created to provide a capital 

adequacy standard for traditional insurers that creates a financial safety 

net, is uniform among the states, and provides regulatory authority for 

timely action. The RBC formulas can be technical and involve a number 

of components. Each of the primary insurance types—such as 

property/casualty, life or health—has a separate RBC formula that 

emphasizes the material risks common for that particular insurance type. 

Regulatory actions may be triggered by the RBC calculation for an 

insurer, and actions may include requiring the insurance company to 

issue comprehensive financial plans, issue corrective orders, or authorize 

the take-over of the insurer.59

NAIC officials said that they are pursuing the use of RBC calculations in 

the oversight of RRGs as part of the accreditation process. While 

regulators may voluntarily include RBC calculations in the financial 

examinations of RRGs, these calculations are not specifically required. 

According to NAIC officials, it is expected that RBC will be incorporated 

into the accreditation standards. If incorporated into the accreditation 

standards, regulators would be expected to incorporate RBC calculations 

into their broader financial analyses to determine whether any actions 

 

58The Risk Retention Group (E) Task Force formed the RRGs and Risk-Focused 

Examinations Subgroup in 2010 to consider possible exemptions to the risk-focused 

examination process for RRGs. 

59A completed RBC calculation of a company is considered confidential and not available 

to the public. 

RRG Oversight Could be 

Affected by Future 

Developments with NAIC 

and Federal Legislation 

NAIC Plans to Incorporate 

Risk-Based Capital Analyses 

into RRG Oversight, as Already 

Done for Traditional Insurers 
 

Page 39 GAO-12-16 Risk Retention Groups 

would be necessary, although, unlike traditional insurers, the RBC 

calculations for RRGs do not automatically trigger regulatory actions. 

While five RRG representatives we interviewed generally supported 

NAIC’s revisions to the accreditation standards in the RRG industry, three 

representatives expressed some concern about how meaningful an RBC 

analysis would be as a requirement in RRG oversight. For example, they 

said that the use of RBC for small RRGs, which tend to use GAAP 

accounting and rely more heavily on letters of credit to meet their 

capitalization requirements, might not be useful. Five state insurance 

regulators we interviewed were also unsure of the usefulness of 

incorporating RBC calculations into the accreditation standards, 

particularly in situations in which otherwise healthy RRGs could fare 

poorly when RBC calculations were applied. An actuarial expert we 

interviewed also expressed concern that an RBC requirement could lead 

to an overemphasis on the RBC figures for regulators and undue 

pressure on otherwise sound RRGs to increase capital. According to an 

NAIC working group analysis, an RBC formula using figures based on 

GAAP could result in different numbers compared with RBC calculations 

using figures based on SAP, potentially changing the picture of that 

RRG’s financial condition. However, the working group also said that 

using figures determined under GAAP might not unreasonably alter the 

RBC conclusions for most RRGs and still could be meaningful. 

In response to our 2005 recommendations to establish minimum 

corporate governance standards for the RRG industry, NAIC developed 

such standards for RRGs but has not yet implemented them with a model 

act or through their accreditation standards. NAIC officials reported that 

they expect these corporate governance standards to be incorporated 

into the Model Risk Retention Act by the end of 2011. Further, the officials 

said that in 2012 they will consider adopting corporate governance 

standards as part of the accreditation standards. 

An RRG is often operated by a management company or another service 

provider that generally supplies key services. However, the potential for 

abuse arises if the interests of a management company are not aligned 

with the interests of the RRG insureds to achieve long-term solvency and 

obtain self-insurance at an affordable price. In our 2005 report, we found 

behavior suggesting that management companies and affiliated service 

providers promoted their own interests at the expense of the RRG 

insureds in 10 of the 16 cases of RRG failures we examined. LRRA 

includes no provisions for governance controls that could help mitigate 

the risk to RRG insureds from potential abuses by other interests, such as 

NAIC Has Developed Corporate 

Governance Standards for 

RRGs, but Has Not 

Implemented Them 
 

Page 40 GAO-12-16 Risk Retention Groups 

their management companies, should these companies choose not to 

operate in the best interest of RRG insureds. 

In response to GAO’s recommendations, NAIC’s working groups have 

included corporate governance standards as part of their efforts to 

develop uniform baseline standards for RRGs. NAIC first adopted 

corporate governance standards for RRGs in June 2007 as a separate 

stand-alone guidance that was not incorporated into the accreditation 

standards. As of October 2011, the revisions to the Model Risk Retention 

Act that include corporate governance standards had been reviewed, but 

not yet approved, by the NAIC member states. As of November 2011 

these revisions were approved and NAIC had adopted corporate 

governance standards into the Model Risk Retention Act. However, 

corporate governance standards are not yet a part of the accreditation 

standards and NAIC officials said that they will not begin discussions on 

adopting these standards into the accreditation requirements until 2012. 

Three state insurance regulators with whom we spoke expressed support 

for corporate governance standards as a requirement for RRGs because 

they felt it would improve transparency of the management of RRGs. 

While five regulators generally did not think implementing corporate 

governance standards would be burdensome for RRGs, one regulator did 

expect that some RRGs, depending on their size, could find the 

implementation of some standards, such as the requirement for an audit 

committee, to be a challenge. Representatives of two large RRGs with 

whom we spoke supported corporate governance standards as good 

business practice. However, four representatives of RRGs also 

expressed concern about the cost of implementing these standards for 

smaller RRGs, particularly those without their own internal counsel. 

Recent federal legislative proposals to amend LRRA, if passed, would 

offer new options to RRGs.60 One proposed change would expand the 

type of insurance RRGs may provide to include commercial property 

coverage. RRG representatives with whom we spoke generally favored 

amending LRRA to allow RRGs to provide commercial property insurance 

coverage. For example, one representative said the differences in the risk 

 

60For example, the Risk Retention Modernization Act of 2011 (H.R. 2126, 112th Cong. 

(2011)) was introduced in the U.S. House of Representatives in June 2011, and a similar 

bill, The Risk Retention Modernization Act of 2010 (H.R.4802, 111th Cong. (2010)), was 

introduced in the 111th Congress in the prior year. 

Some Legislative Proposals 

Would Allow RRGs to Insure 

Commercial Property and 

Provide for Federal Arbitration 

and Governance Standards 
 

Page 41 GAO-12-16 Risk Retention Groups 

profile between commercial property coverage and commercial liability 

coverage is a potential opportunity to manage their risks more 

strategically. 

In addition, six RRG representatives we interviewed felt that allowing 

coverage of commercial property insurance constituted a removal of 

restrictions on providing insurance products that could be a natural 

extension of their core line of business. For example, an RRG that offers 

professional liability coverage to dentists currently cannot underwrite 

coverage for dental equipment. Similarly, one representative of an RRG 

offering commercial liability insurance products to the construction 

business said that the RRG could not offer property insurance related to 

the same homes constructed under their insurance coverage. Another 

RRG representative said their clients would like the option to bundle their 

property coverage with a wide range of specialized insurance products 

they purchase from the RRG for both convenience and costeffectiveness. Eight RRG representatives we interviewed were concerned 

that some RRGs entering the commercial property market might not have 

adequate capital to cover the potentially severe losses that are a part of 

that line of coverage. Four RRG representatives also said that they would 

expect the domiciliary state regulator to review any changes to an RRG’s 

business plan to ensure that it had an appropriate capital base for its 

underwriting coverage and risk profile. 

Ten regulators with whom we spoke expressed concerns about RRGs 

entering the commercial property insurance market because of the 

potential risks to owner/insureds and consumers. For example, six 

regulators expressed concern that if an RRG was unable to pay the 

potentially severe losses associated with some lines of property 

insurance, the RRG members could be at financial risk. RRGs cannot 

participate in state guaranty funds that otherwise could help pay losses in 

such cases. In our survey of state insurance regulators, we asked 

whether they thought LRRA should be amended to enable RRGs to 

provide commercial property insurance. Among the responses, 32 

regulators did not think LRRA should be so amended while 5 thought 

LRRA should be amended to allow RRGs to provide property insurance.61

Three of the five regulators that favored amending LRRA in this way were 

from the 10 states with the highest RRG gross premiums in 2010. 

 

61Twelve respondents had “no opinion.” 
 

Page 42 GAO-12-16 Risk Retention Groups 

The proposed legislation also would grant authority to a federal entity, 

such as the recently created Federal Insurance Office in the Department 

of the Treasury, to oversee state compliance with the regulatory 

preemptions in LRRA. For example, the office would resolve 

disagreements about whether LRRA preempts any regulatory actions by 

a state.62 Among the state insurance regulators we surveyed, 29 said that 

the federal government should not have a primary role in arbitrating 

disputes between state regulators and RRGs, while 6 said that the federal 

government should have a primary role.63 We also asked regulators which 

department or agency they thought should have this authority if the 

federal government were to arbitrate disputes between states and RRGs. 

Twenty-nine regulators responded with no opinion, while 13 regulators 

indicated their preference for the Federal Insurance Office and 6 

regulators indicated other agencies including the Department of 

Commerce.64

Another proposed change would have the Federal Insurance Office issue 

corporate governance standards for RRGs that would preempt any 

corporate governance standards under state laws.65 Five state regulators 

with whom we spoke also favored developing an arbitration mechanism, 

while five regulators did not think corporate governance standards would 

be burdensome for RRGs to implement. While seven RRG 

representatives we interviewed generally supported establishing a federal 

arbitration mechanism as a more efficient and cost-effective way of 

resolving disputes, four representatives also expressed concern about 

potential encroachment into state regulatory activities by a federal entity. 

 

62If passed, the Risk Retention Modernization Act of 2011 (H.R. 2126, 112th Cong. 

(2011)) would designate the Federal Insurance Office as a federal arbitrator. 

63Fourteen respondents stated “no opinion.” 

64One respondent did not provide a response to the question. 

65If passed, the Risk Retention Modernization Act of 2011 (H.R. 2126, 112th Cong. 

(2011)) also would establish such a requirement for the Federal Insurance Office to set 

corporate governance standards for RRGs. 
 

Page 43 GAO-12-16 Risk Retention Groups 

In establishing the Liability Risk Retention Act, Congress allowed RRGs 

to provide commercial liability insurance to RRG members and 

established a lead-state regulatory framework. While constituting a small 

portion of the total liability insurance market, the amount of premiums 

written by RRGs increased from 2004 to 2010 and the financial condition 

of the RRG industry generally has remained profitable during this same 

period. Based on our analysis, RRGs appear to have maintained a 

relatively consistent presence in the market, primarily providing coverage 

in niche markets such as medical professional liability insurance and 

other health care-related insurance lines. 

RRGs have continued to domicile in one of a few states but write most of 

their business in other states, highlighting the importance of LRRA’s 

provisions governing the rights and actions available to regulators in 

nondomiciliary states as well as the types of coverage allowed under 

LRRA. However, states have interpreted these provisions differently, due 

in part to LRRA’s silence on certain issues such as registration 

requirements, fees, and the types of insurance coverage RRGs can write, 

sometimes resulting in litigation between state insurance regulators and 

RRGs. In addition, some federal courts to which these disputes have 

been brought also have interpreted LRRA differently. As a result, RRGs 

and state insurance regulators have continued to operate in an 

environment with some uncertainty, potentially affecting RRGs’ 

operations as well as the ability of state regulators to take actions 

deemed necessary to protect insureds in their states. 

To establish a more consistent regulatory environment for the members 

of RRGs and their claimants, our previous report recommended the 

development of broad-based, uniform, baseline standards for the 

regulation of RRGs. NAIC has made progress addressing these 

concerns, including requiring accredited states to implement risk-focused 

examinations and risk-based capital analyses, as well as developing 

corporate governance standards for the RRG industry. Further, NAIC has 

made efforts to more closely align the accreditation standards for RRGs 

with those of traditional insurance companies. Because some of these 

standards only recently were implemented or have not yet been 

implemented, it is too early to evaluate their effect on the RRG industry 

and its regulation. 

Conclusions 
 

Page 44 GAO-12-16 Risk Retention Groups 

To reduce the varying interpretations of LRRA, which have led to 

uncertainty and disagreements among RRGs and state insurance 

regulators, and at the same time continue to facilitate the formation and 

efficient operation of RRGs, Congress should consider clarifying certain 

LRRA provisions. For example, clarifying whether (1) RRG registration 

requirements beyond those currently specified in LRRA are permitted in 

nondomiciliary states and (2) fees in addition to premium and other taxes 

could be charged to RRGs by nondomiciliary states in which they 

operate. Congress also should consider providing a more specific 

definition of the types of insurance coverage permitted under LRRA. 

We requested comments on a draft of this report from the National 

Association of Insurance Commissioners. NAIC provided written 

comments, which are reproduced in full in appendix II. NAIC also 

provided technical comments, which we incorporated as appropriate. 

NAIC agreed that Congress should consider the merits of clarifying 

certain aspects of LRRA, in particular by providing more specific 

definitions of the type of insurance coverage permitted under the LRRA. 

NAIC further recommended that the definition of “commercial liability 

insurance” be included for consideration since disagreements concerning 

the scope of this definition have led to disputes between the states and 

RRGs that, without further clarification, may continue. NAIC also provided 

several additional comments. 

 NAIC provided clarification regarding the status of their Risk Based 

Capital Models (RBC) and corporate governance standards as it 

relates to NAIC’s accreditation standards for RRGs, which we 

incorporated into the draft. 

 NAIC expressed concern with the methodology we used to calculate 

the annual average ratios in figures 3 and 4, and suggested we either 

use an alternate methodology or more clearly describe the one we 

used. We added a more detailed description of our methodology to 

each of the figures. 

 NAIC clarified that when analyzing the ratio of premiums to 

policyholder surplus, whether or not a state allows a letter of credit as 

an admitted asset can change the results of such an analysis. We 

agree and added an explanatory footnote. 

Matter for 

Congressional 

Consideration 

Agency Comments 

and Our Evaluation 
 

Page 45 GAO-12-16 Risk Retention Groups 

As agreed with your offices, unless you publicly release its contents 

earlier, we plan no further distribution of this report until 30 days from its 

date of issue. At that time, we will send copies of this report to the 

Chairman and Ranking Member of the Senate Committee on Banking, 

Housing and Urban Affairs; the Chairman and Ranking Member of the 

House Financial Services Committee; the Ranking Member of the 

Subcommittee on Oversight and Investigations, House Financial 

Services; and to the Chief Executive Officer of NAIC. In addition, the 

report will be available at no charge on the GAO website at 

http://www.gao.gov. 

If you or your staff members have any questions about this report, please 

contact me at (202) 512-7022 or cackleya@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found 

on the last page of this report. GAO staff who made key contributions to 

this report are listed in appendix III. 

Alicia Puente Cackley 

Director, Financial Markets and 

 Community Investment 
Appendix I: Objectives, Scope, and 

Methodology 

Page 46 GAO-12-16 Risk Retention Groups 

Our objectives were to (1) describe changes in the financial condition of 

the risk retention group (RRG) industry from 2004–2010; (2) examine the 

regulatory treatment of RRGs across domiciliary and nondomiciliary 

states; and (3) examine changes to federal and state regulatory practices 

regarding RRGs since 2004. 

To determine the extent to which the financial condition of the RRG 

industry has changed since 2004, we examined previous GAO reports, 

various financial indicators from data provided by the National Association 

of Insurance Commissioners (NAIC) and the Risk Retention Reporter, a 

trade journal and data source for the industry. We interviewed 

representatives of two industry associations on their members’ regulatory 

experiences operating in domiciliary and nondomiciliary states. We 

reviewed correspondence from state insurance regulators to RRG 

representatives about topics such as registration processes and fees 

charged to RRGs. NAIC officials calculated the overall market share of 

RRGs in the commercial liability insurance market for each year during 

2004–2010 and the overall market share of RRGs in the medical 

professional liability line for 2007–2010 only. We examined the amount of 

premiums written by RRGs and traditional property/casualty insurers for 

commercial liability insurance in all 50 states, the District of Columbia, the 

U.S. territories (American Samoa, Guam, Northern Mariana Islands, 

Puerto Rico, and the Virgin Islands), and Canada. To ensure data were 

comparable, we limited our analysis to commercial liability lines of 

insurance that RRGs are allowed write. We examined and analyzed RRG 

industry data on financial indicators of profitability and ability to pay 

claims, such as policyholder surplus, return on equity and combined ratio 

for 2004–2010. To determine the number of RRGs domiciled in and 

operating by state, and the percentage of direct written premiums written 

outside the state of domicile, we analyzed information provided by NAIC. 

To assess the reliability of NAIC data we received, we (1) performed 

electronic testing for obvious errors in accuracy and completeness; and 

(2) worked with agency officials to identify any data concerns. When we 

found discrepancies, such as data that were inconsistent, we notified 

agency officials and worked with these officials to correct the 

discrepancies before conducting our analysis. We determined that the 

data were sufficiently reliable for the purposes of our report. 

To compare the concentration of RRGs by business area, we used data 

from 2004 and 2010 from the Risk Retention Reporter. We also obtained 

data from this source for the number of RRGs licensed by business area. 

Data from the Risk Retention Reporter were as of April 2010. We did not 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology 

Page 47 GAO-12-16 Risk Retention Groups 

attempt to verify these data, but did interview officials of the Risk 

Retention Reporter to discuss their data collection methods. We 

determined that the data were sufficiently reliable for the purposes of our 

report. 

Overall, we used interviews, a Web-based survey, and analysis of the 

Liability Risk Retention Act of 1986 (LRRA) with other available 

documentation to determine potential inconsistencies in the regulatory 

treatment and regulatory environment of RRGs in domiciliary and 

nondomiciliary states. We reviewed and analyzed LRRA and its 

legislative history. To determine states’ rules and regulations for RRGs 

domiciled or operating in those states, we designed and administered a 

Web-based survey of state insurance regulators in all 50 states and the 

District of Columbia. Specifically, the survey asked about each state’s 

(1) requirements for RRGs domiciled in state; (2) role as a host 

(nondomiciliary) state regulator for RRGs operating in state; (3) applicable 

fees, taxes, and registration requirements; (4) regulatory experiences 

such as conducting examinations of, taking administrative actions 

against, and filing civil or criminal lawsuits against RRGs; and (5) opinions 

on LRRA. A copy of the questionnaire and results are available in the esupplement to this report, GAO-12-17SP. The Web-based survey was 

administered from May 19, 2011, through July 25, 2011. Respondents 

were sent an e-mail invitation to complete the survey on a GAO Web 

server using a unique username and password. Throughout the data 

collection period, nonrespondents received reminder e-mails and 

telephone calls. The final response rate was 49 out of 51 states including 

the District of Columbia (96 percent).1

The practical difficulties of conducting any survey may introduce 

nonsampling errors, such as difficulties interpreting a particular question, 

which can introduce unwanted variability into the survey results. We took 

steps to minimize nonsampling errors by pretesting the questionnaire 

over the telephone in March and April 2011 with four state insurance 

regulators (in both domiciliary and nondomiciliary states) and with NAIC 

officials. We conducted pretests to make sure that the questions were 

clear and unbiased, the data and information were readily obtainable, and 

 

1

According to officials from the state of Minnesota, the state did not respond to this survey 

because state employees were furloughed for a part of the period in which this survey was 

open. Maryland did not completely respond to all survey questions, therefore this 

regulator’s responses were omitted from our analyses. 
Appendix I: Objectives, Scope, and 

Methodology 

Page 48 GAO-12-16 Risk Retention Groups 

the questionnaire did not place an undue burden on respondents. We 

made appropriate revisions to the content and format of the questionnaire 

after the pretests. After the data were collected, we identified unanswered 

questions and inconsistencies in some responses. We conducted followup with the specific states by e-mail and telephone to obtain responses to 

unanswered survey questions and confirm the accuracy of responses to 

several key questions, including applicable fees, premium tax rates, 

waiting periods, and regulatory actions. We received a 100 percent 

response rate to our follow-up questions and response confirmations. 

While many of the questions on the 2004 and 2011 surveys are similar, 

slight differences in wording or question format could result in slightly 

different responses between the two surveys.2

 All data analysis programs 

used for this report were independently verified for accuracy. Due to the 

wide variety of responses to some of our open-ended questions, 

preparing statistics and summary presentation of findings to these 

questions was not possible in some cases. Therefore, in some cases we 

provided qualitative explanations with examples of responses we 

received. 

To obtain the information and opinions on the regulatory treatment of 

RRGs across domiciliary and nondomiciliary states, we interviewed 13 

regulators from domiciliary and nondomiciliary states representing a 

nonstatistical sample of states selected for RRG business activity and 

perceived differences in their regulatory treatment of RRGs. The nine 

domiciliary states—Delaware, Florida, Hawaii, Illinois, Montana, Nevada, 

South Carolina, Vermont, and the District of Columbia—included eight 

that were among the top 10 states that domiciled the highest number of 

RRGs or had the highest amounts of written premiums as of December 

31, 2010.3

 For states that do not have domiciled RRGs, we identified and 

selected those in which RRGs were writing the highest amounts of total 

premiums as of year-end 2010. Those four states were California, 

Massachusetts, New York and Pennsylvania. Views of other domiciliary 

and nondomiciliary insurance regulators were obtained through our Web-

 

2

Information on the methodology and results of the 2004 questionnaire is available in 

appendixes I and II of the previous report, GAO-05-536. 

3

The eight states that placed among the top 10 domiciliary states with the highest 

amounts of RRGs or direct written premiums as of year-end 2010 were: Delaware, Hawaii, 

Illinois, Montana, Nevada, South Carolina, Vermont, and the District of Columbia. 
Appendix I: Objectives, Scope, and 

Methodology 

Page 49 GAO-12-16 Risk Retention Groups 

based survey. To obtain comparable data, the same topics were included 

in the Web-based survey and in interviews with domiciliary and 

nondomiciliary state insurance regulators. 

We also obtained information and opinions on the regulatory treatment of 

RRGs across states from RRG representatives. First, we conducted two 

discussion groups at the 2011 annual conference for a captive industry 

association. We coordinated with the industry association to determine 

which conference participants had specific knowledge of and were 

representatives of the RRG industry. To determine which individuals to 

select to participate in our discussion groups, we developed an invitation 

letter that the industry association e-mailed to the identified RRG industry 

representatives. The letter also included a questionnaire to aid in 

identifying the organization name, title, and industry type of the RRG 

representative. We received 10 completed questionnaires from 

conference registrants expressing interest in participating in the 

discussion groups.4

 Based on the information provided in the 

questionnaire, we assembled discussion group volunteers into two 

groups: (1) RRG owner/insureds and (2) captive/RRG managers. For 

conference attendees who did not respond to the questionnaire by the 

deadline in the invitation but wanted to participate, we provided blank 

questionnaires at the registration table and before the discussion groups. 

Those who met the criteria for either group were allowed to participate in 

the discussion groups. We excluded individuals from industry 

associations whom we previously interviewed and state insurance 

regulatory agencies, as their views were captured in the GAOadministered Web survey. Second, we selected a non-statistical sample 

of 11 RRGs that operate on a multistate basis and represent a variety of 

business areas, insurance products, domiciliary states, and a range of 

direct written premiums to obtain their perspectives on the regulatory 

treatment of RRGs across domiciliary and nondomiciliary states. We 

excluded RRGs that we previously interviewed and RRGs that domiciled 

and operated only in their domiciliary state. We are not able to generalize 

results from this sample to the entire RRG industry. To obtain comparable 

 

4

One respondent was a domiciliary state regulator, and therefore was excluded from the 

focus groups. A separate interview was scheduled to obtain the views of this regulator. In 

addition, one representative of a captive management company that provides service to 

RRGs could not attend the discussion group and was interviewed by telephone at a later 

date. 
Appendix I: Objectives, Scope, and 

Methodology 

Page 50 GAO-12-16 Risk Retention Groups 

data, we covered the same topics in these interviews as in the discussion 

groups noted above. 

To determine the extent to which state and federal regulatory practices 

affecting RRGs have changed since 2004, we reviewed regulations, 

guidance, and legislative and regulatory proposals and interviewed 

stakeholders. More specifically, we reviewed NAIC literature and 

guidance to state insurance departments about RRG oversight. We also 

interviewed NAIC officials about efforts to address recommendations from 

our 2005 report, including revisions to NAIC’s state accreditation process 

and progress with developing and implementing corporate governance 

standards for RRGs. We attended NAIC working group meetings 

concerning implementation of accreditation standards and approval of 

updates to the RRG Handbook and corporate governance standards for 

RRGs. We also obtained information about RRGs’ regulatory 

environment and views on the potential impact of NAIC’s changes to the 

accreditation standards from the 13 select domiciliary and nondomiciliary 

state insurance regulators mentioned above. In addition, we obtained 

information on any changes to state regulations affecting RRGs since 

2004 through our Web-based survey of regulators. We interviewed an 

actuarial expert about the revisions to the accreditation standards. 

Furthermore, we obtained views from representatives of RRGs on their 

primary challenges and NAIC’s efforts to establish broad based uniform 

standards for the oversight of RRGs. More specifically, we spoke with the 

discussion group participants and representatives from 11 select RRGs 

mentioned in the previous paragraph. The criteria for selection of these 

RRGs are described above. We excluded those RRGs we already 

interviewed and RRGs that domiciled and operated in only their home 

state. We are not able to generalize results from this sample to the entire 

RRG industry. We also reviewed documentation we received from RRG 

representatives related to their regulatory experiences and the expected 

impact of the revised accreditation standards. Finally, we reviewed key 

legislation concerning RRGs that had been introduced at the federal and 

state level since 2004 to identify recent changes in laws and regulations 

affecting RRGs. 

We conducted this performance audit from October 2010 to December 

2011 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 
Appendix II: Comments from the National 

Association of Insurance Commissioners 

Page 51 GAO-12-16 Risk Retention Groups 

Appendix II: Comments from the National 

Association of Insurance Commissioners 
Appendix II: Comments from the National 

Association of Insurance Commissioners 

Page 52 GAO-12-16 Risk Retention Groups 
Appendix III: GAO Contact and Staff 

Acknowledgments 

Page 53 GAO-12-16 Risk Retention Groups 

Alicia Puente Cackley, (202) 512-7022 or cackleya@gao.gov

In addition to the individual named above, Patrick A. Ward, Assistant 

Director; Susan Baker ;William Chatlos; Shamiah Kerney; Jill Lacey; May 

Lee; Marc Molino; Patricia Moye; Daniel Newman; Jasminee Persaud; 

and Barbara Roesmann also made major contributions to this report. 

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Staff 

Acknowledgments 

(250569)
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