GAO

Question 1

Define an Insurance “cooperative”:

Answer 1

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

Question 2

Describe the intention of the Liability Risk Retention Act (LRRA)

Answer 2

• 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

Question 3

2 parties that can own a RRG:

Answer 3

• Individuals or businesses that are insured by the RRG; or

- Organization that is owned solely by insureds of the RRG

Question 4

2 advantages of RRGs during hard markets:

Answer 4

Result in:

• Increased availability of commercial liability insurance
• Reduced premiums

Question 5

Briefly define “captive”:

Answer 5

Company that self-insures the risks of its owners

Question 6

Why are the regulatory requirements for captives less restrictive than for RRGs:

Answer 6

Captives are wholly owned insurance subsidiaries. If fail, only assets of parent at risk

Question 7

List 1 difference between a RRG and a Group Captive:

Answer 7

Unlike RRGs, Group Captives do not have to insure similar risks

Question 8

Describe the differences between RRG and non-RRG captives.

Answer 8

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

Question 9

Describe the licensing differences between traditional insurers and RRGs

Answer 9

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

Question 10

What powers do regulators in the nondomiciliary states have after the insurer (Traditional or Non-RRG captive) becomes licensed?

Answer 10

• 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

Question 11

3 requirements that the LRRA sets for the RRG:

Answer 11

1. Provide a plan of operation to insurance commissioner of each state in which it plans to do business
2. Provide a copy of group’s Annual Statement to insurance commissioner of each state in which it plans to do business
3. Submit to financial exam of nondomiciliary state if domiciliary state refuses to do so

Question 12

2 implications of the fact that RRGs are prohibited from participating in state guaranty funds:

Answer 12

1. Will provide strong incentive to establish adequate premiums and reserves
2. RRG insureds and their claimants could be exposed to all losses resulting from claims above what RRG can pay

Question 13

2 similarities between RRG/ Captive Insurers and to Mutual Fund Companies:

Answer 13

1. All are owned by their shareholders and permit shareholders
2. All employ the services of a management company to administer operations

Question 14

Describe the effect on the market of RRGs

Answer 14

1. Increase availability and affordability; important for groups with limited access to insurance
2. State regulators believe RRGs have filled a void in the market