[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
EXAMINING INSURANCE FOR
NONPROFIT ORGANIZATIONS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 28, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-43
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
Subcommittee on Housing and Insurance
SEAN P. DUFFY, Wisconsin, Chairman
DENNIS A. ROSS, Florida, Vice EMANUEL CLEAVER, Missouri, Ranking
Chairman Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
STEVAN PEARCE, New Mexico MICHAEL E. CAPUANO, Massachusetts
BILL POSEY, Florida WM. LACY CLAY, Missouri
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
STEVE STIVERS, Ohio STEPHEN F. LYNCH, Massachusetts
RANDY HULTGREN, Illinois JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DANIEL T. KILDEE, Michigan
LEE M. ZELDIN, New York JOHN K. DELANEY, Maryland
DAVID A. TROTT, Michigan RUBEN KIHUEN, Nevada
THOMAS MacARTHUR, New Jersey
TED BUDD, North Carolina
C O N T E N T S
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Page
Hearing held on:
September 28, 2017........................................... 1
Appendix:
September 28, 2017........................................... 23
WITNESSES
Thursday, September 28, 2017
Cothron, M. Kevin, President and Chief Executive Officer,
Southeast Nonprofit Insurance Programs......................... 8
Davis, Pamela E., Founder, President, and Chief Executive
Officer, Alliance of Nonprofits for Insurance.................. 5
Santos, Tom, Vice President, Federal Affairs, American Insurance
Association.................................................... 7
Webel, Baird, Specialist in Financial Economics, Congressional
Research Service............................................... 3
APPENDIX
Prepared statements:
Cothron, M. Kevin............................................ 24
Davis, Pamela E.............................................. 29
Santos, Tom.................................................. 39
Webel, Baird................................................. 47
Additional Material Submitted for the Record
Duffy, Hon. Sean:
Letter from The Council of Insurance Agents & Brokers, dated
September 26, 2017......................................... 56
Written statement of the Cincinnati Insurance Companies...... 58
Written statement of the Independent Insurance Agents and
Brokers of America......................................... 59
Written statement of the National Association of Insurance
Commissioners.............................................. 65
Hultgren, Hon. Randy:
Written responses to questions for the record submitted to
Tom Santos................................................. 67
Luetkemeyer, Hon. Blaine:
Written statement of the National Association of Mutual
Insurance Companies........................................ 70
EXAMINING INSURANCE FOR
NONPROFIT ORGANIZATIONS
----------
Thursday, September 28, 2017
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:38 a.m., in
room 2128, Rayburn House Office Building, Hon. Sean P. Duffy
[chairman of the subcommittee] presiding.
Members present: Representatives Duffy, Ross, Royce, Posey,
Luetkemeyer, Rothfus, Zeldin, MacArthur, Budd; Cleaver, Beatty,
Kildee, Kihuen, and Gonzalez.
Chairman Duffy. The Subcommittee on Housing and Insurance
will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Also, without objection, members of the full Financial
Services Committee who are not members of this subcommittee may
participate in today's hearing for the purposes of making an
opening statement and asking our witnesses questions.
Today's hearing is entitled, ``Examining Insurance for
Nonprofit Organizations.''
The Chair now recognizes himself for 3 minutes for an
opening statement.
I want to welcome our witnesses. Thank you for being here
today. And I would just note that Mr. Cleaver is on his way. He
is going to participate, and I am sure he is going to want to
ask questions and make an opening statement as well, but
welcome.
Risk retention groups, or RRGs, are liability insurance
companies owned by their members that allow businesses with
similar needs to pool their risk together. They were originally
created to address a distortion in the marketplace when product
liability insurance was largely unavailable.
In the 1980s, Congress expanded the types of liability
insurance RRGs could offer to commercial liability as companies
faced similar issues obtaining commercial liability insurance.
From a regulatory standpoint, RRGs operate under a
different regime than a traditional property and casualty
insurance company. Whereas an insurance company is regulated in
each State they offer an insurance product, RRGs' regulation is
largely handled at the State in which the company is domiciled,
a pretty significant difference.
In the RRG regime, that company can ultimately sell
products in other States without being under the same solvency
regulation requirements as an admitted carrier.
Now, we have had several nonprofit organizations claim that
there is, once again, an availability issue in regard to
property coverage. And so I think we are going to have a
vigorous and lively conversation today about, should we now
change the rules, expanding from liability to property coverage
for nonprofits?
And I know we have a lot of different opinions. The
industry is probably somewhat split. I am sure that this body
is split as well, but this is truly an opportunity for us to
hear from you on your thoughts and opinions and provide advice
and counsel to the Congress on what action, if any, you think
we should take.
So I am looking forward to your testimony and insight. And
again, I want to welcome you to our hearing.
With that, I want to recognize the Vice Chair of the
subcommittee, the gentleman from Florida, Mr. Ross, for 2
minutes.
Mr. Ross. Thank you, Mr. Chairman.
And I thank the witnesses for being here today as well, and
for their testimony.
This subcommittee will discuss an issue that has been of
deep importance to me for some time, and that is the insurance
needs and options available for nonprofit organizations.
I first started working on this subject after hearing
stories from my local Boys and Girls Clubs back in central
Florida who were worried about the lack of commercial insurance
policies that offered the coverage they needed at an affordable
price.
As I dug deeper into the issue, I discovered that it was
not uncommon for many of our community nonprofit organizations
to be underinsured, specifically with regard to property
coverage.
These groups are the lifeblood of their communities. Many
of them dedicate themselves to serving others in the time of
need, organizing volunteers to support a good cause or helping
the most vulnerable members of our society work for a better
future.
Unfortunately, their commitment to charity in their
community comes with a cost. Nonprofits, by the nature of their
very mission, have a unique set of risks, different than almost
any other commercial enterprise. And that unique risk makes
them difficult to insure.
In addition, many nonprofits operate on extremely thin
margins, giving back all they take in and looking to maximize
returns to the people they serve. That, too, contributes to the
nonprofit sector's relative undesirability in the insurance
market.
Today, a significant number of nonprofit organizations have
insurance in the form of liability coverage from a risk
retention group, also known as an RRG. In the mid-1980s,
Congress passed the 1986 amendments to the Liability Risk
Retention Act, which expanded the lines of liability insurance
that RRGs could offer to their member owners.
And today, we will have a chance to discuss my draft
proposal to further expand the lines of insurance an RRG may
offer to include standalone property coverage. I believe that
my proposal is appropriately tailored to address the issue at
hand.
Importantly, it includes strong consumer protections that
mitigate some traditional concerns surrounding RRG expansion. I
think it is a good compromise that will help fix this very real
problem.
I am glad to have each witness here today to share with us
their experience and expertise and to help this subcommittee
get a better understanding on the issue of the merits and
demerits of the proposal like the Nonprofit Property Protection
Act. We have a great group of witnesses, and I thank them for
being here.
I yield back.
Chairman Duffy. The gentleman yields back.
I now want to take this opportunity to welcome our
witnesses. We have Mr. Baird Webel, a specialist in financial
economics from the Congressional Research Service; Ms. Pamela
Davis, the founder, president, and chief executive officer of
Alliance for Nonprofits for Insurance; and Mr. Santos, the vice
president of Federal Affairs for the American Insurance
Association (AIA).
And for the introduction for Mr. Cothron, I want to
recognize Mr. Ross, who knows Mr. Cothron well.
Mr. Ross. Thank you, Mr. Chairman. It is my distinct honor
to introduce Mr. Kevin Cothron, who has been a longtime friend
of mine. He is the president of Southeast Nonprofit Insurance
Programs. He has over 25 years in the insurance industry.
He created and manages an insurance placement program that
specializes in niche insurance markets of 501(c)(3) nonprofits
throughout the United States. The company performs no direct
sales and works entirely through independent brokers and
agents.
He has been a leader in the nonprofit insurance sector for
many years, and we are very fortunate to have him here today.
Thank you for being here.
Chairman Duffy. Wonderful.
And welcome, Mr. Cothron.
In a moment, the witnesses are all going to be recognized
individually for 5 minutes to give an oral presentation of
their testimony. And without objection, the witnesses' written
statements will be made a part of the record.
Once the witnesses have finished presenting their
testimony, each member of the subcommittee will have 5 minutes
within which to ask each of you questions.
And with that, Mr. Webel, I recognize you now for 5
minutes.
STATEMENT OF BAIRD WEBEL, SPECIALIST IN FINANCIAL ECONOMICS,
CONGRESSIONAL RESEARCH SERVICE
Mr. Webel. Thank you. Mr. Chairman, Ranking Member Cleaver,
and members of the subcommittee, I would like to thank you for
the opportunity to testify today. As the chairman said, my name
is Baird Webel. I am a specialist in financial economics at the
Congressional Research Service.
And just for anybody who is watching and doesn't know this,
CRS' role is to provide objective nonpartisan research and
analysis to Congress. We take no position on the desirability
of any specific policy. Any arguments presented in my written
and oral testimony are for the purposes of informing Congress,
not to advocate for a particular policy outcome.
As the chairman mentioned, risk retention groups were
created by Congress in the 1980s in response to problems in the
liability market. And there are obviously a lot of different
policy options one could have when you have insurance market
problems.
Congress sought to address the supply problems by
essentially simplifying the regulatory structure of the
liability insurance. And in doing so, they put particular
limitations on the risk retention groups that resulted from
this legislation.
Particularly, they can only supply commercial liability
insurance, and I think the ``commercial'' is important because
what the presumption is to some degree is that businesses
purchasing commercial insurance are going to have some measure
of sophistication in the purchase of the insurance.
The risk retention groups have to be owned by the
policyholders. And this, I think, was an attempt to basically
give the owners and the policyholders some skin in the game and
some control over how the risk retention groups were going to
operate, and the policyholders facing similar risks essentially
should at least make the management and the judgment about the
risks of these groups a little easier to manage and to face.
Importantly, the Federal law prevents risk retention groups
from participating in the State guaranty funds, which do
provide some protection in the case of an insolvency, which
means that the RRG policyholders, again by the statute, do not
have this protection.
A number of State laws do still apply to risk retention
groups, notably relating to unfair claims practices,
nondiscrimination, and State premium taxes still apply to these
companies.
In the 30 years since, I think that the experience in
general in the risk retention market has largely followed to
some degree the ups and downs of the rest of the commercial
liability market.
Property casualty insurance tends to move in cycles of hard
markets where insurance gets expensive and difficult to obtain,
frequently followed by softer markets where the insurance gets
a little cheaper and a little easier.
And as you might expect for a sort of niche product like
risk retention groups, they tend to improve during hard markets
when people are looking for these types of insurance.
They grew a lot after they were first created and then sort
of plateaued in the 1990s and grew a little more in the early
2000s, as we saw another hard market. Then for the last 10
years overall, you have seen pretty soft market conditions and,
again, a sort of plateauing of the numbers of risk retention
groups.
They are a reasonably niche product. The overall premium of
risk retention groups compared to property casualty insurance
in general is pretty small, about $3 billion versus compared to
somewhere in the realm of $600 billion for property casualty
overall.
But I think it is important to know that within the niches
where a company can serve, they can still be important, even if
the overall market may be soft. The worldwide capital markets
have seen a lot of liquidity in the last 10 years.
But that doesn't mean that the individual niches where
property casualty insurance is sold necessarily experience the
same market conditions. It is a local product that is sold
under local conditions. And in order to really judge what is
going on you have to look at those particular local conditions.
The people who have looked into the market in general, the
Commerce Department in the 1980s and GAO more recently, have
generally found that risk retention groups have served a
positive role in these sorts of niche markets.
And so that basically concludes what I wanted to say, and I
look forward to answering any questions you may have.
[The prepared statement of Mr. Webel can be found on page
47 of the appendix.]
Chairman Duffy. Thank you, Mr. Webel.
Ms. Davis, you are now recognized for 5 minutes.
STATEMENT OF PAMELA E. DAVIS, FOUNDER, PRESIDENT, AND CHIEF
EXECUTIVE OFFICER, ALLIANCE OF NONPROFITS FOR INSURANCE
Ms. Davis. Thank you. Mr. Chairman, Ranking Member Cleaver,
and members of the subcommittee, thank you for the opportunity
to testify in favor of the Nonprofit Property Protection Act,
which will permit a very small subsection of established risk
retention groups to provide property and auto physical damage
insurance to their members. We have submitted a written
statement for the record.
I am the president, CEO, and founder of Alliance of
Nonprofits for Insurance (ANI), a nonprofit risk retention
group on whose behalf I am testifying today. ANI insures small
and mid-sized community-based nonprofit organizations across
the country, those in our neighborhoods who work with the most
vulnerable among us.
They are homeless shelters and programs for those with
Alzheimer's, victims of abuse, and the developmentally
disabled. They are animal rescue organizations, elder care
services, drug and alcohol rehabilitation centers, school arts
programs. They are foundations raising money for diabetes,
heart disease, and cancer research, among many others.
80 percent of our member insureds have annual budgets of $1
million or less. These little nonprofits got into the business
of insurance because commercial insurance carriers walked away
from them. They never wanted to be in the insurance business
but were forced into it to be able to serve our communities.
We are successfully insuring these organizations for
difficult risks, such as auto liability and sexual abuse and
employment practices liability. We offer a vast array of free
consulting and educational services, such as employment risk
management and driver training to our members whose small
budgets do not allow them to purchase or provide these
services.
But our future ability to continue to offer assistance to
these organizations is now in danger. Commercial insurers, when
they are willing to offer coverage for these unusual risks
represented by nonprofits, will provide it only as a bundled
package. That is, these small nonprofits must purchase the
liability insurance and the property insurance together as a
package, somewhat like a cable triple play package.
However, by Federal law, as an RRG, ANI is only allowed to
offer liability insurance to our member insureds. Since ANI's
inception, only one insurance company has offered the
standalone property and auto physical damage policies that
small and mid-sized members of ANI need.
Several years ago, that company told us that the program is
too small to be viable in the long term because of the
requirements of filing and reporting in 50 States. And they
advised us to look for other options.
We asked our insurance brokers and agents who work with
nonprofits to find other commercial insurance companies to
provide the standalone property and auto physical damage that
their clients need. They told us in no uncertain terms that
there were no markets available.
Every insurance carrier required that to purchase the
property, the nonprofit would also have to purchase liability
from them at the same time. Hearing that, we engaged Guy
Carpenter to conduct an independent study to see whether there
were insurance department filings that we had overlooked,
because surely there was some other carrier that would provide
this coverage.
Guy Carpenter's research demonstrated that only one other
company has filed the property form that our members need. But
that filing requires that the commercial insurance company sell
the property and liability together as a bundled package. The
property cannot be sold on a standalone basis.
We had exhausted all of our options for market-based
solutions and our future viability without the Nonprofit
Property Protection Act is now in danger.
To address consumer protections, there are provisions
included in the bill that require any RRG authorized to offer
property insurance to: one, have a minimum of $10 million in
threshold capital, although the domicile regulator may require
more; and two, to have a minimum of 10 years' experience
offering liability insurance.
And to make sure the bill will correct only this market
failure and not interfere with an otherwise well-functioning
commercial property market, the bill allows RRGs to offer these
coverages only to their members that are 501(c)(3) nonprofits.
And any single nonprofit may be insured for only up to $50
million in total insured value because it is presumed that
larger nonprofits will have the market clout to be able to
purchase this in the standard marketplace.
In closing, ANI offers important specialized coverages and
risk management services for community-based organizations
serving some of the most vulnerable in our communities. We help
those organizations provide their services safely and
efficiently as possible to make sure that scarce resources are
directed back into our communities.
Standalone property and auto physical damage insurance is
essential for these RRG members, but it is not available from
the commercial marketplace. This bill would allow nonprofits to
solve that problem for themselves without requiring any
government resources so they may continue to do their important
work in our communities. Thank you.
[The prepared statement of Ms. Davis can be found on page
29 of the appendix.]
Chairman Duffy. Thank you, Ms. Davis.
Mr. Santos, you are now recognized for 5 minutes.
STATEMENT OF TOM SANTOS, VICE PRESIDENT, FEDERAL AFFAIRS,
AMERICAN INSURANCE ASSOCIATION
Mr. Santos. Thank you, Mr. Chairman. Chairman Duffy,
Ranking Member Cleaver, members of the subcommittee, thank you
for inviting me to testify at today's hearing.
I am Tom Santos, vice president of Federal Affairs at the
American Insurance Association (AIA), and I am pleased to
provide AIA's perspective on what we believe is the critical
aspect of today's hearing: whether to expand Federal preemption
contained in the Liability Risk Retention Act.
AIA represents approximately 330 of the Nation's leading
insurance companies that provide all lines of property and
casualty insurance to consumers and businesses in the United
States and around the world. AIA members write more than $117
billion annually in U.S. property and casualty premiums and
approximately $225 billion annually in worldwide premiums.
Our members have a strong interest in ensuring a
competitive marketplace where the regulatory approach focuses
on policyholder protection through appropriate financial
standards applied equitably.
We recognize that risk retention groups have played a role
in the commercial liability insurance market for more than 25
years, and we applaud the important work that many nonprofits
do in communities all across the United States.
However, there is no demonstrable national availability
problem in commercial property insurance markets. And
considering that RRGs operate under a substantially different
and less rigorous regulatory regime, AIA opposes further
expansion of the Risk Retention Act to include commercial
property insurance.
Over the years, there have been several proposals to expand
the Risk Retention Act to allow RRGs to offer commercial
property. Most recently, these proposals have focused on not-
for-profit 501(c)(3) organizations.
Proponents that argue for expanding the LRA suggest an
insurance availability problem exists. They also argue that
nonprofit organizations are unable to easily acquire property
coverage from the traditional insurance markets. That is not
the case.
Proponents themselves acknowledge that nonprofits can
secure property coverage in the marketplace. The fact that
nonprofit organizations are able to secure property coverage,
even if combined, is evidence that there is no availability or
market crisis in the commercial market for property insurance.
Today's property insurance marketplace is extremely
competitive, with insurers offering commercial property and
liability products at affordable and appropriate rates. In
fact, property insurers are looking to expand offerings and
enter into new markets, as evidenced by shrinking markets of
last resort for property insurance in some of the toughest
markets in the country.
With regard to insurance for nonprofits, many AIA member
companies have dedicated business operations specifically
designed to meet the needs and address those of nonprofit
entities, giving nonprofits the ability to purchase commercial
property insurance in the private market from a wide selection
of insurers.
Again, simply put, there is no market failure that warrants
the extreme step of expanding the Risk Retention Act's Federal
preemption into commercial property insurance.
AIA has long argued that the most important consumer
protection when it comes to insurance is the ability of the
insurer to pay claims when an insured has a loss.
This is particularly true when faced with a significant
loss from a major event such as a terrorist attack or a large
natural catastrophe. A risk retention group insolvency would
leave policyholders and its impacted community without the
financial support at the very time they need it most. This
impact would be particularly acute for nonprofit organizations
serving the most vulnerable in our communities.
We are not alone in our concerns about RRG insolvency. A
2011 report by the Government Accountability Office noted that
some RRG representatives and State regulators, ``expressed
concerns about whether RRGs would be adequately capitalized to
write commercial property coverage.''
Further, in looking at property and casualty impairments, a
2015 A.M. Best special report revealed a rise in risk retention
group impairments during the period from 2000 to 2015.
In addition, the National Association of Insurance
Commissioners have noted that RRGs have gone into receivership
at a much higher rate than admitted property and casualty
insurers.
Thus, concerns about capital adequacy and solvency
regulation must be addressed before any expansion of commercial
writing by risk retention groups is even considered.
Again, we see no demonstrable national availability crisis
that would warrant such a significant expansion of the Risk
Retention Act and there are options for risk retention groups
if they wanted to get into the commercial property space. They
could become licensed admitted carriers. There are other
corporate structures of which they could avail themselves.
Thank you for the opportunity to present our views this
morning. We look forward to your questions.
[The prepared statement of Mr. Santos can be found on page
39 of the appendix.]
Chairman Duffy. Thank you, Mr. Santos.
Mr. Cothron, you are now recognized for 5 minutes.
STATEMENT OF M. KEVIN COTHRON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, SOUTHEAST NONPROFIT INSURANCE PROGRAMS
Mr. Cothron. Mr. Chairman, Ranking Member Cleaver,
Congressman Ross, and members of the subcommittee, I would like
to thank you for the opportunity to testify today in support of
the Nonprofit Property Protection Act.
The majority of nonprofits that I work with are small to
mid-sized social service organizations. These nonprofits have
limited funding, but provide invaluable services within their
communities.
I have been in the insurance industry for 25 years and have
worked with 501(c)(3) nonprofits throughout the southeast. The
type of nonprofits that we work with are senior care centers,
foster care and adoption agencies, mental health services,
homeless shelters, and animal rescue groups, among many others.
In my experience we have had an ongoing crisis in trying to
secure property coverage for small to mid-sized 501(c)(3)
nonprofits. The challenge these small to mid-sized nonprofits
have in securing property insurance is they have to rely on
commercial insurance companies, and there are few of these
companies that will insure this type of risk.
And insurance companies that will insure nonprofits
typically only provide the property insurance if they are also
getting the liability insurance, thereby creating what is
called a package program.
The package programs are offered on an all-or-nothing
basis, meaning the nonprofit cannot purchase the property
insurance from the insurance company unless the liability
insurance is also purchased from the same company.
When the insurance carrier offers a package program to a
nonprofit they typically charge more for liability insurance
than what the nonprofit would pay if they were getting the
liability insurance from a risk retention group.
I work extensively with a risk retention group for
nonprofits, but unfortunately, the risk retention group is
prohibited from being able to provide property insurance. In
most States, an insurance company, an insurance mutual captive
or even an insurance trust can provide all lines of commercial
insurance coverage, including property.
Only a risk retention group is restricted to providing only
liability coverage to nonprofits. This is unfair to nonprofits
who prefer to have their coverage and services with a risk
retention group. It also creates an unfair market advantage for
the insurance companies.
It has been my practice in my business to work with
insurance companies, including risk retention groups. I believe
in offering the best possible coverage to clients at a
reasonable cost. I think insurance is more than just a piece of
paper with coverage terms, and that the industry should provide
risk management services to the nonprofits.
It has been my experience with risk retention groups that
they provide insurance with broader, specialized coverages and
services that are tailored to a nonprofit's actual needs.
For example, I know that my clients really appreciate the
risk retention group's loss control services, that will help
them train their employees and volunteer drivers, as well as
providing them with advice on how to navigate complex
employment law and help them avoid claims and litigation.
While I never worked with an RRG or a commercial insurance
company that claims to always offer the lowest price, I have
done many comparisons that demonstrate when a nonprofit is
forced to purchase a package policy on an all-or-nothing basis
from a commercial insurance company, the nonprofit is typically
paying a higher price in annual liability premium in order to
get the property coverage.
Most nonprofits I work with have limited operating funds
and are receiving all or some of their funding from State,
Federal, or local governments. The nonprofit has been entrusted
with the taxpayers' money and should not have to spend an
unnecessary high amount on insurance.
This added undue expense in turn negatively impacts the
amount of services that they can provide to their communities.
By allowing a risk retention group the ability to provide
property insurance, the nonprofit will receive more competitive
pricing from all the insurance options that are available and
still be able to benefit from the specialized coverages and
services they value.
I work with over 100 brokers, and I can state without
hesitation that we need risk retention groups for nonprofits to
be able to provide property to serve the small to mid-sized
nonprofits that choose to be a member of a risk retention group
and benefit from their strong niche focus and loss control
resources.
These RRGs are already providing coverage for the difficult
liability exposures and are presently able to provide multi-
million limits for a van full of children, but they are
prohibited from insuring a dent on the van.
There is no reason risk retention groups should not be able
to provide property and auto physical damage, particularly with
the strong consumer protections that are included in the bill.
I strongly support the Nonprofit Property Protection Act,
and ask that you please pass this bill as soon as possible.
Thank you.
[The prepared statement of Mr. Cothron can be found on page
24 of the appendix.]
Chairman Duffy. I want to thank the witnesses for their
opening statements.
The Chair now recognizes himself for 5 minutes for
questions.
Let us drill into the problem, if there is a problem. So
maybe if I can have everyone answer this question, is there an
agreement that nonprofits cannot exclusively buy property
insurance?
Ms. Davis, what do you think?
Ms. Davis. The qualifier really needs to be the standalone
property and auto physical damage coverage. If a nonprofit
wants to purchase the property, they have to buy it from a
commercial market. And they have to buy it as a bundled package
with the liability together with the property.
But we sell only liability and so the nonprofits can't get
the standalone property.
Chairman Duffy. Mr. Santos, do you agree with that?
Mr. Santos. I don't. I think there are products available
in the marketplace. In fact, previously the proponents have
done a comparison where they have suggested they could purchase
a monoline property coverage and when paired up with the
monoline liability product combined or standalone products,
they were more expensive.
But a combined package produced a product that was both
more economical for the insurer to produce and cheaper for the
insured to purchase.
Chairman Duffy. And quickly, Mr. Cothron and Mr. Webel, do
you want to weigh in on this? Because I think we have to
identify whether there really is a problem.
Mr. Cothron. Yes, there is a problem. The commercial
insurance carriers will only offer it as a package. I have
worked with independent brokers. I don't do direct sales.
I work with independent brokers throughout the southeast,
and there is not a week that goes by that I am not contacted by
a broker searching for a property market that will write a
nonprofit on a monoline basis, and that product is just not
there.
Chairman Duffy. Mr. Webel?
Mr. Webel. I would say from what I have seen that there is
probably not a problem at a national level, but that it is
entirely possible that you might see some individual niche
problems.
Chairman Duffy. Did you also want an expansion to auto,
too, Ms. Davis?
Ms. Davis. The answer is yes. This is auto physical damage.
We actually--
Chairman Duffy. So is it fair to say that you can actually
buy auto insurance that is unbundled?
Ms. Davis. We write auto liability insurance and other
carriers write the liability. It is the auto physical damage
that we are not allowed to write as a risk retention group. So
just to clarify, we presently now insure plenty of vans that
carry kids and insure that up to $10 million. But if that van
is in an accident, we are not allowed to fix a dent in the
bumper.
Chairman Duffy. Okay.
Mr. Santos, do you agree with that?
Mr. Santos. Again, there may be individual instances in
particular communities, but it is not a national problem. I
think one of the questions is, if they are covering the
liability, is that vehicle not insured for property damage or
are they purchasing it from someplace else?
Chairman Duffy. Okay. So we are not going to get an
agreement on whether or not we have a problem. I expected that.
But if we want to have an expansion, why don't we just have
the risk retention groups become insurance companies and become
licensed in each of our States that they want to do business?
What is the problem with walking down that path instead of
expanding this exclusion?
Mr. Santos, do you see a problem with that?
Mr. Santos. In fact, that is what we think companies should
do. I would highlight also they may not need to go as far as to
become an admitted licensed carrier in every State in which
they operate, although that would certainly provide the most
rigorous consumer protection and the most rigorous solvency
oversight.
There are other avenues that they could do without this
sort of broad Federal preemption that the Risk Retention Act
provides.
Chairman Duffy. Mr. Cothron?
Mr. Cothron. There is no practical purpose to becoming an
insurance company. The purpose behind that would be if they
want to insure numerous types of businesses. But a risk
retention group specializes in a unique niche market.
So if you only want to do 501(c)(3)s, which is all a risk--
this bill pertains to nonprofits, and an insurance company
won't do just nonprofits.
Chairman Duffy. But this is is just--it is pretty fair to
say that when in the business of insurance, all kinds of
insurers can come in and say, I have a really specific niche
market, therefore, I shouldn't be subject to State laws, and I
shouldn't be licensed in a certain State because I am a certain
niche market. Everyone could make that argument, right?
Mr. Cothron. The risk retention groups are subject to laws.
They are regulated.
Chairman Duffy. In each State?
Mr. Cothron. Ms. Davis would be better able to answer that
question, but there are State laws that apply in each and every
State.
Chairman Duffy. I know that, but not all the laws in regard
to insurance. Some of the laws I believe do. Let me just--my
time is almost up. If I can quickly just ask, a risk retention
group doesn't have access to the State guaranty fund, is that
correct, if that risk retention group becomes insolvent?
Mr. Webel?
Mr. Webel. Yes, that is correct, by Federal statute.
Chairman Duffy. Ms. Davis?
Ms. Davis. I would just--
Chairman Duffy. Do you agree?
Ms. Davis. I would just like to add that there are lots of
different forms of insurance providers, and we really need that
innovation. There are many types of insurance that are not
subject to guaranty funds. It is certainly not just risk
retention groups.
So this is really an innovative solution that Congress has
put forward because we have member nonprofits in 50 States, so
we have to cover the whole country with very, very small
premiums.
And there is very little difference now in the regulation
of risk retention groups and traditional insurance companies
because the NAIC has done wonderful work to make sure there is
uniformity in that.
Chairman Duffy. Thank you, Ms. Davis. My time has expired.
I now recognize the gentleman from Missouri, Mr. Cleaver,
the ranking member of the subcommittee, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
In my real life I am a United Methodist Pastor, and we have
to deal with this issue all over the country with the United
Methodist Church. In fact, I live in the United Methodist
building across the street. And this is something that is not
some issue that there is not a lot of interest in. We are
interested.
I have been on this committee for 13 years. A few months
before the economic collapse in 2008, the insurance rating
companies sat at that same table and told us that the economy
was essentially healthy, that the corporate community, based on
their investigations and surveys, showed that everything was
solid just a few months before the collapse.
And I am always skeptical of them now, but as it relates to
the RRGs, there is no rating. There is no examination of
solvency, no financial ratings from the rating agencies. Does
that disturb you? Anybody?
Ms. Davis. I would like to address that. Actually, there
are many regulations that apply to risk retention groups, and
they are very, very significant regulations that are very much
like the traditional insurance companies.
And the NAIC has done a tremendous amount of work over 30
years to make sure that the regulation of risk retention groups
is very, very similar now to traditional.
Mr. Cleaver. Financial rating agencies?
Ms. Davis. Let me speak to that. We actually are rated as
an A.M. Best A-rated insurance company. So yes, the premier
rating service for insurance companies rates us as A-rated
excellent. So that is very important to us and we are very
proud of that.
Mr. Cleaver. Who does the rating?
Ms. Davis. It is A.M. Best. It is the most prominent rating
agency for insurance companies, and our financial rating with
them is an ``A.''
Mr. Cleaver. Yours, then?
Ms. Davis. Yes.
Mr. Cleaver. Anyone else? Everybody embraces the--
Mr. Cothron. In the bill itself there is a lot of structure
in there regarding capital, financial security of an RRG
itself. And again, this is pertaining just to 501(c)(3)s. It is
not making it available to all risk retention groups within the
marketplace, but those that specifically deal with 501(c)(3)
nonprofits.
Mr. Santos. Mr. Cleaver, just an additional comment? I
think the A.M. Best ratings are important, but I think it is
important to remember that we are trying to determine what the
right public policy solution here is.
So any number of companies may have a good rating from A.M.
Best, either a risk retention group or a traditional property
company. The fundamental question is, should we be expanding
the Risk Retention Act?
One point I would want to clarify is while the NAIC does
have some solvency regulation in the State of domicile for the
risk retention group, they are not subject to those capital
solvency requirements in every State in which they operate.
Mr. Cleaver. Do you agree that the RRGs are subject to less
stringent State regulatory schemes?
Ms. Davis. May I comment on that?
Mr. Cleaver. Would you? Go ahead.
Ms. Davis. I would like to say that statement was true 30
years ago, but the NAIC has done a tremendous amount, as I say,
of work. And now, for example, we must submit our financials to
all States in which we operate every year, the annual
statement.
We are subject to the same examinations, the risk focus
examinations that every other insurance company is. We are
required to comply with the same investment regulations, the
same annual annual audit requirements, the same actuarial
opinion.
And I do want to point out that we have quite a bit of
control by the other States that we are not domiciled in. For
example, if a State in which we are not domiciled does not
think that we are doing a good job, they have the ability to
ask our State regulator to do an examination.
And if our State regulator does not do that, then the other
State has the opportunity to do the financial examination
themselves. And if they don't like what they find in that
examination, they can actually go to court and have us shut
down.
So there are a lot of protections that are offered to the
non-domicile States through the Risk Retention Act. And it has
been very well-thought out and I think it is quite strong
regulation for the type of entity we are where we can insure
only one type of organization, and we can only do one sort of
coverage.
It is a very, very limited ability to write this just for
501(c)(3) nonprofits. So we are very, very different than a
traditional insurance company.
And I think the way we are regulated reflects that
different sort of company. It allows innovation to have a
different sort of regulation. Not less strict, just different.
Mr. Cleaver. I am out of time, so thank you very much.
Mr. Ross [presiding]. Thank you.
I will now recognize myself for 5 minutes.
Ms. Davis, it has been well over 30 years since the Risk
Retention Act was amended to allow for liability. Obviously,
this is not a new concept. Obviously, there was a need 30 years
ago.
Today, we are here because we are seeing a market need that
is stressing the resources of our nonprofits. Could you further
explain under the proposed Nonprofit Property Protection Act,
the additional consumer protections?
Because I think what we are trying to do--look, we are not
trying to take over a market. We believe in them. There is
probably nobody more in favor of free market insurance than I
am in this Congress.
And yet, I also do have a compassionate side of me that
realizes that nonprofits use their resources, that are so
limited, to serve their clients.
For example, let us take Goodwill. Their risk is a very
homogeneous risk. It is a greater risk because of the clientele
they serve.
We have seen this in workers' compensation in the State of
Florida where we had to go after and being able to allow
legislatively for the creation of groups to sell workers'
compensation because the commercial market didn't want to take
that risk.
And now we are saying, okay, but we are going to let you
take the liability risk in the open market if you take the
property risk. Where do your resources go?
So my question to you is, to make sure that we are not
looking at trying to expand the markets or that we put RRGs
into the insurance business, which they are not, what
protections are we offering that would make sure not only for
consumers but also for the market so that we could alleviate--
as you pointed out, Guy Carpenter has shown you can't find a
monoline product out there?
That is evidence. That is pretty strong. Guy Carpenter is a
pretty well-known organization that brokers insurance. So how
can you alleviate some of the concerns of my colleagues that
this is just not an expansion into an insurance market for the
sake of profit?
Ms. Davis. Thank you very much. Those are really good
comments. I will remind you that, again, we are a nonprofit-
owned company so there is no one gaining from this bill except
for the thousands of nonprofits that are our members. So there
is no individual to gain any profit from this.
Also, we can only insure this very narrow niche, and I
would remind you also--
Mr. Ross. And you have to have solvency.
Ms. Davis. Yes.
Mr. Ross. You have to have--
Ms. Davis. Yes. And that is in the protections in the
bill--$10 million of minimum capital that is required before
you can write property--10 years of writing the more difficult
liability insurance, which before you can write property, and
then it is still limited to only 501(c)(3) nonprofits that have
demonstrated that there is a market need.
And we don't want to disrupt the otherwise functioning
market where there is coverage. And so again, you have rightly
limited this to $50 million total insured value so that only
nonprofits that are small and mid-sized can benefit from this
bill.
So there are a lot of really well-thought-out restrictions
in this bill that you have put in, I think, because you have
listened.
Mr. Ross. Mr. Cothron, we, being Floridians, have just seen
another devastating storm season that is not yet over in our
State. We saw in 2004 what happened to the property market.
We saw that there was an expansion of a State-run property
insurer that private markets ran. They did rate filings for
increases in rates, and it had an adverse effect, not only on
commercial insurance but also on nonprofits.
What do you anticipate is going to be the state of the
property market in the State of Florida following this storm
season? And would it not be in the best interest of these
nonprofits, again, who have very stressed resources, to be able
to have an opportunity to find property insurance through an
RRG?
Mr. Cothron. First of all, the market had been pretty soft
for years because we hadn't had that many--
Mr. Ross. That is why I asked that, yes.
Mr. Cothron. --natural catastrophes. Correct. On the heels
of two hurricanes this year, the market is going to get very
what we call a hard market. The insurance companies are going
to draw a much stricter line on who they won't insure and what
type of business they won't insure.
Mr. Ross. Why don't they want to insure nonprofits?
Mr. Cothron. Because they will insure a nonprofit if they
have large enough insured values. I have met with a lot of
property carriers. I cannot find one on a monoline basis who
will insure a nonprofit unless their total insured value is
$100 million or more. Now, these small nonprofits in a
community that is working out of a donated house, provide a--
Mr. Ross. So my Alliance for Independence nonprofit back
home that has 70-some clientele that they serve doesn't have
that type. So what do they do?
Mr. Cothron. They either end up underinsured in the
marketplace or they are forced into these package policies
where they are paying a lot more for insurance than they would
have to if the availability was there with a risk retention
group.
Mr. Ross. Thank you. I see my time has expired.
I recognize the gentlelady from Ohio, Mrs. Beatty.
Mrs. Beatty. Thank you very much, Mr. Chairman and to our
ranking member.
First, let me thank the panel for being here today. My
question centers around one of the biggest concerns with
expanding the Liability Risk Retention Act is that the risk
retention groups do not have access to State guaranty funds.
And we have been hearing a lot this morning about floods
and hurricanes and so with the rising frequency of the
wildfires in the northwest, the earthquakes, the flash floods
and the hurricanes, coupled with the fact that any one of these
storms has the ability to force insurance companies into
solvency, what happens to the consumers if their risk retention
group goes insolvent and they do not have access to the State
guaranty funds?
Mr. Webel. Basically in that kind of situation the assets
that are left in the risk retention group would be used to pay
off policies to the extent that there are assets in the risk
retention group. And if there are insufficient assets to pay
off the policies, then some of the policies would end up being
unpaid.
Mrs. Beatty. Is this a valid concern and would limiting the
ability of the risk retention groups with at least $10 million
in capital or surplus to be allowed to offer property insurance
be enough to mitigate these concerns?
Mr. Webel. Again, I think it certainly is a concern. It is
real that they do not participate in the guaranty funds. The
thing is, in one sense commercial policies--the guaranty funds
limits are compared to some commercial policies relatively low.
So it is entirely possible that in the higher level
commercial insurance the guaranty fund protection isn't going
to do that much in the end. If you have a $1 million or a $2
million claim and the limit is $300,000, you are looking at
possible losses on that anyway.
Any solvency regulation that is going to stop a company
from going insolvent is certainly going to help. But no
solvency regulation is going to completely stop the possibility
of a company going insolvent.
Ms. Davis. Could I comment on that?
Mrs. Beatty. Yes, please.
Ms. Davis. Thank you. I would like to point out that we
already are authorized to insure and we insure organizations
for their own liability up to $10 million.
So we don't have a guaranty fund at this point, but we
certainly have much higher limits already on the liability side
that we have done it very responsibly and we will continue to
do so through reinsurance and other risk spreading.
But also I would like to point out that many types of
insurance companies are not part of the guaranty fund, that we
are not unusual in that way.
In fact, we have offered to be part of the guaranty fund
with this bill, and we would be happy to do so, but it has been
the insurance companies that have opposed our being part of the
guaranty fund. But we would like to have that privilege if we
could.
And I will also point out that adding property to the
liability that we now insure will actually lower our risk
because it allows us to hold different types of risk and
actually brings us a lower cost of risk and will make us less
risky rather than more risky by being able to add the property
to the liability.
Mrs. Beatty. Does anyone else want to comment before my
time runs out?
Mr. Cothron. One quick comment? Also, when we look at risk
that, whether it is an insurance company or a risk retention
group retains, none of them that I am aware of bear 100 percent
of the risk. They all insure risk to a certain level and then
they purchase reinsurance behind that.
So once a claim expense gets to a certain level, the cost
is then borne by the reinsurance carrier that is behind it. So
all of the companies out there and all of the RRGs that I am
aware of lay off their risk to reinsurance carriers for that
sole purpose.
Mrs. Beatty. Okay. We are not going to leave you out, so--
Mr. Santos. Yes, thank you. I think there is an important
distinction here. One is admitted carriers are subject to the
solvency and capital requirements of every State in which they
operate. So in the example you gave of a large catastrophe or
an event, you may have concentration of risk there.
And State regulatory agencies, they weigh the capital
requirements of that insurer in the State in which those
properties are insured. And then the capital requirements are
set based on their risk profile.
So putting a number in the Federal statute and then
allowing that entity to write risks all across the country, we
think presents a considerable problem and puts policyholders at
risk in the type of events that you just outlined.
Mrs. Beatty. Okay.
Thank you, Mr. Chairman, and I yield back.
Mr. Ross. Thank you.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman, and I also ask
for unanimous consent that the statement from the National
Association of Mutual Insurance Companies be entered into the
record.
Mr. Ross. Without objection, it is so ordered.
Mr. Luetkemeyer. Thank you.
This is kind of an interesting hearing this morning. I am
always willing to listen to situations where we can improve the
situation and allow more private sector competition, more
choices for consumers, but along the way we need to find and
make sure we have a problem.
The NAMIC letter that I have here this morning indicates
that they don't feel that there is a problem. So, if we have
insurance companies that want to expand, that is fine, but I
guess it goes back to the structure of the RRGs.
They can become insurance companies, can you not, Ms.
Davis? Can't you become an insurance company and then fall
underneath all of the other things so that you can expand
services?
Ms. Davis. We would not be able to do that. It is not
financially possible because recall we are very different in
our structure because we--
Mr. Luetkemeyer. Yes, I understand that, but that is like
it is the same situation we have with a lot of other entities,
whether banks and credit unions and you wind up with the farm
credit services versus banks.
You have a lot of entities that started out with a very
narrow purview, a narrow band of where they are supposed to be
operating and suddenly they want to get beyond that, which is
fine.
But once they get beyond that, they need to become the
entity that they are competing against. And so my concern is
that if you want to become an insurance company, become an
insurance company and fall under the rules and regulations to
be capitalized in the same way. Do you have reinsurance?
Ms. Davis. Yes, of course we have reinsurance. And in fact,
if we were able to insure the property, we would reinsure it as
well. We insure property in California. We are authorized in a
risk pool in California, and we have been doing the property
risk there. And we actually--
Mr. Luetkemeyer. So in California, you sell liability and
property already?
Ms. Davis. Yes, we do. And through a different entity, not
through the risk retention group. But my point there was that
we actually reinsure this risk in excess of $100,000. We are
just trying to make this efficient for nonprofits. We are not
trying to take on all this risk ourselves.
We only take on risk on the property up to $100,000, and
all the rest of the risk is back in the commercial insurance
market. So we are really just trying to make an efficient
solution, something that our nonprofit members need.
We are not trying to do more than we can. We are very well-
capitalized. We are very aware our work is that we need to
protect these nonprofits.
Mr. Luetkemeyer. I am not against you, but I am also
concerned that when you start getting into a different area,
you have to behave differently. Your company has to be
structured differently. That is just the way it works.
Life insurance companies are completely different than
property and casualty companies. They are structured
differently. They are capitalized differently. They are
reinsured differently.
What you are asking us to do today is to allow you to
retain your RRG status and expand to become something
completely different and still be that same entity. Nobody else
does that.
It is very difficult to get past this and I am trying to
get my head wrapped around this, but when you have the ability
to change your structure so that you can do this, which you
don't want to do apparently, but yet you can do it, I am a
little on the reluctant side to go along with this. So--
Ms. Davis. Sir, I think--
Mr. Luetkemeyer. --educate me.
Ms. Davis. Excuse me. I think we are just trying to get the
right regulation, keeping in mind that we are--
Mr. Luetkemeyer. And the regulation is a whole other part
of this, but structure is what I am concerned about. You have
to be structured differently.
Now, Mr. Santos, you have stated a number of times that
there are plenty of companies out there that will allow or that
will do what the RRGs are wanting to expand and get into.
Can you name two or three? I am not trying to promote their
names, but they act like there is nobody out there. Can you
give me two or three names of folks who can do this?
Mr. Santos. I am reluctant to identify any particular
company, but, as you well know, Mr. Luetkemeyer, there are
approximately 2,500 companies, property insurance companies
across the country.
I do know that there are some who offer a wide range of
products for not-for-profit entities, providing all forms of
nonprofit services, whether it be teen shelters or diabetes or
cancer associations and the like, so they go from large to
small.
Mr. Luetkemeyer. Okay.
Mr. Santos. They do that. We can get you a list--
Mr. Luetkemeyer. I guess I would go back to my original
point. I am not against what you are trying to do, but there is
a difference in the coverages you are trying to offer compared
to what you are offering now.
And that means the structure of your entity has to change
to be able to accommodate that. You can't be the same thing you
are today if you are going to change what you do tomorrow.
With that, Mr. Chairman, I yield back.
Mr. Ross. The gentleman yields back. We are having votes.
What we are going to do is we are going to take one more round
of questions from the gentleman from Pennsylvania, and then we
are going to recess.
We probably will not be back after votes, so I will ask
that those Members who do have questions, if you would submit
them for the record and we will see to it that our panel gets
them.
And with that, I will recognize the gentleman from
Pennsylvania, Mr. Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Mr. Webel, you wrote in your testimony that the total
premium volume for the 236 RRGs currently operating is about $3
billion. How does this compare to the overall market for
liability insurance?
Mr. Webel. I don't know that I have the figure for
liability in front of me. As I said, it is relatively small
compared to the overall property casualty, but I--
Mr. Rothfus. We will follow up with you and see if you can
get that data for us.
Mr. Webel. Absolutely.
Mr. Rothfus. Do you know whether there is a significant
difference in the premiums that nonprofits are paying for
liability insurance from RRGs versus the admitted property
casualty insurers?
Mr. Webel. I haven't seen the figures, but just from
regulation, the costs of regulation for an RRG are going to be
less because it is a single State regulation. And that
essentially is the whole point of the RRG structure.
If you didn't have lower costs because of this regulation,
essentially the entire RRG construct from the Congress there
wouldn't be any point.
Mr. Rothfus. Is the RRG market share growing or shrinking
right now?
Mr. Webel. I think that it has been--the numbers have been
shrinking of individual RRGs. The premium has been relatively
flat, growing a little bit for the past 5 to 10 years.
Mr. Rothfus. You framed this issue in your testimony as a
question of availability versus reliability. You also
referenced the same A.M. Best report as Mr. Santos, which
highlights a significant trend of RRG impairments over the
years.
Clearly, expanding the scope of business that RRGs can
engage in would broaden availability. Do you have any research
on whether it would harm the reliability of these firms?
Mr. Webel. I think that the reliability to some degree can
go either way because I think it is true that as you broaden a
risk pool, you can make an insurance company more stable
because they are covering differential risks that are unlikely
to both sort of come due at the same time. So in that way,
expanding it might improve your liability because you are no
longer a monoline structure.
But a lot of it does come down to the regulation of the
individual States that are overseeing the RRGs and each of
those individual States making sure that as an RRG entered the
property market, they are adequately capitalized to do so.
Mr. Rothfus. This conversation we have been having this
morning--by the way, all of you did really well with the
testimony, so thank you for giving us some good background on
this issue.
But Ms. Davis, do many RRGs convert to admitted insurance
companies?
Ms. Davis. I am not aware that this happens very often.
They have to be very, very large to make that even a financial
possibility as the other individual, Mr. Webel, said. This is
why the Risk Retention Act was created, because if you have
members, a very small number of members in all 50 States, you
need to have the structure that risk retention groups make
available.
I would like to point out that I believe the receiverships
increasing with risk retention groups, a lot of those are
voluntary where they just don't see the need for the particular
risk retention group anymore.
I didn't want that to be implied to be because they are in
financial trouble. I believe in many cases they have just put
themselves into liquidation.
Mr. Rothfus. Thank you.
Mr. Chairman, I yield the balance of my time to the
gentleman from New Jersey.
Mr. MacArthur. I thank the gentleman.
Mr. Webel, if a State wanted to do what the nonprofits are
asking, and that is retain the risk on auto physical damage and
property, could States allow that or does Federal law currently
preempt?
Mr. Webel. Federal law preempts in the sense of a risk
retention group may only under the Federal law write liability
insurance. If a State--there is nothing stopping a State from
recognizing another insurance company coming into their State
without requiring a license.
So if a State sort of wanted to create what would be a
similar structure as an RRG in terms of a recognition of
another State's regulation without requiring a license, a State
could do that.
Mr. MacArthur. Yes. I would just like to point out from my
perspective that when risk retention groups were created, there
was a public policy interest in the Federal Government being
involved. Liability claims involve other people who are damaged
if there are not adequate resources, adequate capital to pay
those claims.
This is fundamentally different. These are organizations
who are talking about their own losses. They are the only ones
who lose if they are not adequately insured. That is true.
There is no real public policy interest.
I get why Congress is sort of forced to consider this, but
it is really odd to me that the United States Congress is
trying to figure out how nonprofits retain or transfer risk.
And it seems to me we would do well to find a way to put this
back to the States.
If States want to allow it, I am fine with it. If States
want to impose capital requirements, I am fine with that, too.
But this to me is fundamentally different than liability
claims, and I just think that we need to find a way to put this
back where it belongs.
States adequately govern insurance matters, and I just
think this is--I get why we are here. But this is an odd place
for us to have to be to tell nonprofits whether to retain risk
or transfer it or how to transfer it. If you lose your
property, you have lost your own property, nobody else's.
And with that, I yield back. Thank you.
Mr. Ross. Thank you. The gentleman yields back.
Before we adjourn, I have been asked to ask Ms. Davis to
clarify a statement in her opening that, ``the best rating of A
excellent and see that we have thrived, even though we have
been handed the most difficult of these risks, such as sexual
abuse and professional liability with no ability to balance
these long-tail lines with short-tail property.'' Could you
clarify that just a little bit?
Ms. Davis. Yes, absolutely. Risk retention groups have been
put in the position of holding a whole portfolio of stocks and
not being allowed to hold bonds. We have been forced to do the
most difficult of these risks.
Sexual abuse and auto risks are extremely difficult to do.
We took it on because the insurance industry wouldn't do it.
And I can tell you that actually being able to offer the
property would actually lower our risk because then we would
have a balanced portfolio, and nonprofits would be able to
benefit from having the property and the liability together.
Mr. Ross. Balanced against the long tail, I guess, is the--
Ms. Davis. Absolutely, very much. It's unlikely that both
things are going to have difficulty at the same time, and this
would greatly help us to balance that risk.
Mr. Ross. Thank you.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And with that, this hearing stands adjourned. Thank you all
for being here.
[Whereupon, at 10:38 a.m., the hearing was adjourned.]
A P P E N D I X
September 28, 2017
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