In the legislative history, RRGs were described as essentially insurance “cooperatives,” whose members pool funds to spread and assume all or a portion of their own commercial liability risk exposure—and who are engaged in businesses and activities with similar or related risks. Specifically, RRGs may be owned only by individuals or businesses that are insured by the RRG or by an organization that is owned solely by insureds of the RRG. In the legislative history, Congress expressed the view that RRGs had the potential to increase the availability of commercial liability insurance for businesses and reduce liability premiums, at least when insurance is difficult to obtain (during hard markets) because members would set rates more closely tied to their own claims experience. In addition, LRRA was intended to provide businesses, especially small ones, an opportunity to reduce insurance costs and promote greater competition among insurers when they set insurance rates. Because RRGs are owned by insureds that may have business assets at risk should the RRG be unable to pay claims, they would have greater incentives to practice effective risk management both in their own businesses and the RRG. The elimination of duplicative and sometimes contradictory regulation by multiple states was designed to facilitate the formation and interstate operation of RRGs. “The (regulatory) framework established by LRRA attempts to strike a balance between the RRGs’ need to be free of unjustified requirements and the public’s need for protection from insolvencies.” RRGs are not the only form of self-insurance companies; “captive insurance companies” (captives) also self-insure the risks of their owners. States can charter RRGs under regulations intended for traditional insurers or for captive insurers. Non-RRG captives largely exist solely 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 are composed of several companies, but group captives, unlike RRGs, do not have to insure similar risks. Further, captives may provide property coverage, which RRGs may not. Regulatory requirements for captives generally are less restrictive than those for traditional insurance companies because, for example, many pure captives are wholly owned insurance subsidiaries of a single business or organization. If a pure captive failed, only the assets of the parent would be at risk. Finally, unlike captive RRGs, other captive insurers generally cannot conduct insurance transactions in any state except their domiciliary state, unless they become licensed in that other state (just as a traditional company would) and subject to that state’s regulatory oversight. In contrast to the single-state regulation that LRRA provides for RRGs, traditional insurers, as well as other non-RRG captive insurers, are subject to the licensing requirements and oversight of each nondomiciliary state in which they operate. The licensing process allows states to determine if an insurer domiciled in another state meets the nondomiciliary state’s regulatory requirements before granting the insurer permission to operate in its 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. However, most state regulators will not even license an insurance company domiciled in another state to operate in their state unless the company has been in operation for several years. As reflected in each state’s “seasoning requirements,” an insurance company must have successfully operated in its state of domicile for anywhere from 1 to 5 years before qualifying to receive a license from another state. RRGs, in contrast, are required only to register with the regulator of the state in which they intend to sell insurance and provide copies of certain documents originally provided to domiciliary regulators. Although RRGs receive regulatory relief under LRRA, they still are expected to comply with certain other laws administered by the states in which they operate, but are not chartered (nondomiciliary states), and are required to pay applicable premium and other taxes imposed by nondomiciliary states. In addition to registering with other states, LRRA also imposes other requirements that offer protections or safeguards to RRG members: LRRA requires each RRG to (1) provide a plan of operation to the insurance commissioner of each state in which it plans to do business prior to offering insurance in that state, (2) provide a copy of the group’s annual financial statement to the insurance commissioner of each state in which it is doing business, 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. 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. In conjunction with the regulatory relief Congress granted to RRGs, it prohibited RRGs from participating in state guaranty funds, believing that this restriction would provide RRG members a strong incentive to establish adequate premiums and reserves. All states have established guaranty funds, funded by insurance companies, to pay the claims of policyholders in the event that an insurance company fails. Without guaranty fund protection, in the event an RRG becomes insolvent, RRG insureds and their claimants could be exposed to all losses resulting from claims that exceed the ability of the RRG to pay. Finally, in terms of structure, RRG and captive insurance companies bear a certain resemblance to mutual fund companies. For example, RRGs, captive insurance companies, and mutual fund companies employ the services of a management company to administer their operations. RRGs and captive insurers generally hire “captive management” companies to administer company operations, such as day-to-day operational decisions, financial reporting, liaison with state insurance departments, or locating sources of reinsurance. Similarly, a typical mutual fund has no employees but is created and operated by another party, the adviser, which contracts with the fund, for a fee, to administer operations. For example, the adviser would be responsible for selecting and managing the mutual fund’s portfolio. However, Congress recognized that the external management of mutual funds by investment advisers creates an inherent conflict between the adviser’s duties to the fund shareholders and the adviser’s interests in maximizing its own profits, a situation that could adversely affect fund shareholders. One way in which Congress addressed this conflict is the regulatory scheme established by the Investment Company Act of 1940, which includes certain safeguards to protect the interests of fund shareholders. For example, a fund’s board of directors must contain a certain percentage of independent directors—directors without any significant relationship to the advisers. RRGs have had a small but important effect on increasing the availability and affordability of commercial liability insurance, specifically for groups that have had limited access to liability insurance. According to NAIC estimates, in 2003 RRGs sold just over 1 percent of all commercial liability insurance in the United States. However, many state regulators, even those who had reservations about the regulatory oversight of RRGs, believe RRGs have filled a void in the market. Regulators from the six leading domiciliary states also observed that RRGs were important to certain groups that could not find affordable coverage from a traditional insurance company and offered RRG insureds other benefits such as tailored coverage. Furthermore, RRGs, while tending to be relatively small in size compared with traditional insurers, serve a wide variety of organizations and businesses, although the majority served the healthcare industry. Difficulties in finding affordable commercial liability insurance prompted the creation of more RRGs from 2002 through 2004 than in the previous 15 years. Three-quarters of the RRGs formed in this period responded to a recent shortage of, and high prices for, medical malpractice insurance. However, studies have characterized the medical malpractice industry as volatile because of the risks associated with providing this line of insurance. RRGs have constituted a very small part of the commercial liability market. According to NAIC estimates, in 2003 a total of 115 RRGs sold 1.17 percent of all commercial liability insurance in the United States. This accounted for about $1.8 billion of a total of $150 billion in gross premiums for all commercial liability lines of insurance. We are focusing on 2003 market share to match the time frame of our other financial analyses of gross premiums. While RRGs’ share of the commercial liability market was quite small, market share and the overall amount of business RRGs wrote increased since 2002. For example, RRG market share increased from 0.89 percent in 2002 to 1.46 percent in 2004. However, in terms of commercial liability gross premiums, the increase in the amount of business written by RRGs is more noticeable. The amount of business that RRGs collectively wrote about doubled, from $1.2 billion in 2002 to $2.3 billion in 2004. During this same period, the amount of commercial liability written by traditional insurers increased by about 21 percent, from $129 billion to $156 billion. In addition, RRGs increased their presence in the market for medical malpractice insurance. From 2002 through 2004, the amount of medical malpractice written by RRGs increased from $497 million to $1.1 billion, which increased their share of the medical malpractice market from 4.04 percent to 7.27 percent.