[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

                              ----------                              
                                                                   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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