GAO.Report

The source reading is 58 pages but you only have to know pages 5-7 & 34-38. It isn't very long but it's badly written and frustrating to read. This topic (Regulation of RRGs or Risk Retention Groups) accounts for about 1.5% of the points on the exam on average, but it only appears once out of every 3 exam sittings. Focus on the highlights and the answers to past exam problems. You don't need to spend very long on this reading.

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BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• RRG vs private insurer - understanding the differences and relative merits of each
• managing risk - selecting a risk management option for a given scenario (Ex: small vs large company)
• miscellaneous - purpose of RRGs, financial ratings for RRGs

reference	part (a)	part (b)	part (c)	part (d)
E (2017.Fall #3)	Vaughan.Crisis	GAO.Report
E (2016.Spring #4)	RRG vs private insurer: - advantages of RRG	RRG vs private insurer: - advantages of private
E (2015.Fall #4)	managing risk: - large, stable company	managing risk: - small, new company
E (2014.Fall #4)	purpose of RRGs: - describe	RRG vs private insurer: - small/large company	RRG financial ratings: - reasons for

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In Plain English!

Intro to RRGs

This reading was actually a report for Congress and concerns the implementation of something called the Liability Risk Retention Act or LRRA, but you don't really need to know that. The concept you do need to know is that of a Risk Retention Group or RRG.

Question: what is a Risk Retention Group and what is its purpose

• a RRG is a group of similar businesses that creates its own insurance company to insure its risk (their creation was authorized by Congress)
• the purpose is to increase the affordability and availability of commercial liability insurance (often for companies having difficulty finding coverage in the private market)

Let's look at an exam question:

E (2016.Spring #4)

The answer provides a great summary of the relative merits of private/traditional insurance versus a RRG. The question stated the customer was a hospital but it could have been any entity - the answer would be the same. (Still, it wouldn't hurt to at least mention hospitals in your answer just to show you read the question carefully.) You only had to provide 3 reasons for full credit.

	Private Insurance	Risk Retention Group
advantage 1 - private	property is covered	property is not covered
advantage 2 - private	true risk transfer occurs	risk are pooled within group, not transferred to a 3rd party
advantage 3 - private	guaranty fund protects policyholders in an insolvency	no access to a guaranty fund
advantage 4 - private	more likely to have a financial strength rating	less likely to have a financial strength rating (customers may be wary)
advantage 1 - RRG	more expensive	cheaper (no advertising, commissions)
advantage 2 - RRG	less tailored policies (one size fits all)	more tailored to participants (must all be in the same industry)
advantage 3 - RRG	fewer cross-learning opportunities	opportunity to learn risk management practices from other group participants
advantage 4 - RRG	poor cost control by policyholder is transferred to insurer	RRGs owned by participants → more incentive for cost control

The source reading also discusses another self-insurance option: captive insurers

Question: what is a captive insurer

• a self-insurance structure formed by a single company (pure captive) or group of companies (group captive)

Question: identify some characteristics of a captive

• captives may provide property coverages (unlike RRGs)
• group captives do not need to insure similar risks (unlike RRGs)
• captives enjoy tax benefits

Another little factoid that Alice wanted me to mention is that there are fewer regulatory requirements for RRGs and captives (versus traditional private insurers).

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Selecting a Risk Management Strategy (2015.Fall Q4)

Let's look at another good exam problem:

E (2015.Fall #4)

They briefly describe 2 companies and ask for the best way to manage the insurance risk in each case. You basically have 3 choices:

• private/traditional insurance
• RRG
• captive

(I found the answer in the examiner's report a bit garbled.) Here's the information for the 2 companies:

Company A:

   - large company

   - stable risk

   - dedicated risk manager

   ==> wants to reduce its insurance costs (they also throw in a random piece of information that it has loss carry-forwards from prior tax years)

Company B:

   - new company (2 years old)

   - operates in several states,

   - difficulty in obtaining coverage

   ==> wants to partner with similar companies

Strategy for A:

• The key is that they want to reduce their insurance costs. This is just like if you want to reduce your auto insurance premium. Alice has lots of experience with that! (All her drag-racing arrests in Miami really wrecked her risk-rating.) Anyway, her trick is get a policy with a high deductible. In the case of a large company, you'd call it a high retention. So that's the first option.
• But a large company has another option that Alice doesn't have. A large, stable company can self-insure. This reduces costs because they don't have to support the 3rd party insurer's advertising and commission expenses. Now, they would still likely purchase traditional insurance or reinsurance to protect themselves against a catastrophe, but this policy would have a high attachment point.

Rationale for Strategy A: Don't forget to answer this part of the question!

• The examiner's report lists several answers, but the easiest one for full credit is: (depending on the strategy chosen)

• If A decides on a traditional high-retention policy, they will save money because their premiums will be lower. Since they are large & stable, their data is credible, and their dedicated risk manager can make an informed decision regarding the specific retention point. (They will also not have to pay profit loads for exposures below this retention limit.)
• If A decides to form a captive, they will receive tax benefits associated with captives (that's where the loss carry-forward comes in.) Also, they will not have to pay profit loads to support a traditional insurer's expenses.)

Strategy for B:

• This is obvious! Start or join a RRG. Company B is new and having trouble finding coverage in the private market ==> this is exactly who RRGs are for

Rationale for Strategy B: Don't forget to answer this part of the question!

• The RRG provides needed coverage and permits a company to be domiciled in 1 state but operate in other states. (That last part is important to mention in your answer because that information was provided in the question. It's always good to reference specific pieces of given information versus just giving a generic answer.)

Tip: A good Bloom's Taxonomy question would be to provide information about an entity seeking insurance and ask what risk management strategy would best suit that entity (just like the above question)

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NAIC Accreditation of State Insurance Depts

Here are a few other topics I picked out that you should probably know something about.

Question: what is the NAIC accreditation program for regulation of insurers' financial solvency

• a certification given to state insurance departments that have demonstrated adequate: [Hint: SFO]

Solvency laws (to protect customers)

Financial examination processes

Organizational practices

• applies to traditional insurers & RRGs
• (it is voluntary, but every state is accredited anyway)

Question: do the NAIC accreditation standards require RRGs to file their financial statements using SAP. explain.

• no, but if they don't use SAP they must provide a reconciliation to SAP
• this requirement facilitates:

   - financial strength assessments since diagnostic tools were designed for SAP

   - inter-company comparison (moves RRG financial reporting closer to that of traditional insurers)

Question: do the NAIC accreditation standards require RRGs to be subjected to a RBC analysis

• no, but this is being considered

Question: do the NAIC accreditation standards require RRGs to undergo a risk-focused exam. explain.

• yes, and this is already required of traditional insurers
• a risk-focused exam

   - examines risk areas specific to individual companies (provides a more tailored evaluation)

   - provides a uniform baseline for RRG regulation

Question: identify arguments for and against risk-focused exams

for:

   - a uniform baseline for regulation increases trust in state regulators (benefits RRG industry)

against:

   - imposes an undue regulatory burden since most RRGs are small (not cost effective)

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