G6. GAO Flashcards
Describe the intention of the Liability Risk Retention Act (LRRA)
- Provide businesses (especially small businesses) the opportunity to reduce insurance costs
- Promote greater competition among insurers when setting rates
- Elimination of regulation by multiple states designed to facilitate formation and interstate operation of RRGs
Define an Insurance “cooperative”:
Arrangement where members pool funds to spread and assume their own commercial liability risk. Members engaged in businesses and activities with similar or related risks
2 advantages of RRGs during hard markets:
Result in:
- Increased availability of commercial liability insurance
- Reduced premiums
2 parties that can own a RRG:
- Individuals or businesses that are insured by the RRG; or
- Organization that is owned solely by insureds of the RRG
Why are the regulatory requirements for captives less restrictive than for RRGs:
Captives are wholly owned insurance subsidiaries. If fail, only assets of parent at risk
Briefly define “captive”:
Company that self-insures the risks of its owners
Describe the differences between RRG and non-RRG captives.
RRG captives
- States can charter RRGs under regulations for traditional insurers or captives
- Regulatory requirement for captives generally less restrictive
- LRRA provides single-state regulation
Non-RRG captives
- May provide property coverage, which RRGs cannot
- Generally cannot conduct insurance transactions in states other than domiciliary
List 1 difference between a RRG and a Group Captive:
Unlike RRGs, Group Captives do not have to insure similar risks
What powers do regulators in the nondomiciliary states have after the insurer (Traditional or Non-RRG captive) becomes licensed?
- Conduct financial examinations
- Issue an administrative cease and desist order to stop insurer from operating in state
- Withdraw company’s license to sell insurance in the state
Describe the licensing differences between traditional insurers and RRGs
Traditional Insurers and non-RRG Captives
- Subject to licensing requirements and oversight of each nondomiciliary state in which they operate RRGs
- Required only to register with regulator of state in which they intend to sell insurance
- Still expected to comply with other laws (i.e., claim settlement practices, unfair trade) and pay applicable premium and other taxes
2 implications of the fact that RRGs are prohibited from participating in state guaranty funds:
- Will provide strong incentive to establish adequate premiums and reserves
- RRG insureds and their claimants could be exposed to all losses resulting from claims above what RRG can pay
3 requirements that the LRRA sets for the RRG:
- Provide a plan of operation to insurance commissioner of each state in which it plans to do business
- Provide a copy of group’s Annual Statement to insurance commissioner of each state in which it plans to do business
- Submit to financial exam of nondomiciliary state if domiciliary state refuses to do so
Describe the effect on the market of RRGs
- Increase availability and affordability; important for groups with limited access to insurance
- State regulators believe RRGs have filled a void in the market
2 similarities between RRG/ Captive Insurers and to Mutual Fund Companies:
- All are owned by their shareholders and permit shareholders
- All employ the services of a management company to administer operations
Similarities between RRG and Captives
- Self insure risk of owners
- Coverage not affordable in traditional mkts
- Can provide liability coverage
- Regulation not as stringent
- Must be licensed in a domiciliary state
- Use mgmt or TPA
- Minimize cost of insurance
- Subject to solvency reg
- non admitted mkt
