Today, insurance agents can place challenging risks with RRGs as well as traditional markets. These entities often look and behave like traditional insurance companies but there are differences that make placing business with them significantly riskier.
Regulation: Traditional insurance companies must meet regulatory requirements in all states in which they do business. For the most part, RRGs are only required to follow regulatory requirements in the state where they are domiciled even if they operate in other states as well.
Naturally, many RRGs choose to be domiciled in the states with the least regulations. This creates a host of opportunities for abuse.
The Government Accountability Office stated its concern over this situation in 2005. According to its report, “Some regulators, including those from New York, California, and Texas are states where RRGs collectively wrote about 26 percent of all their business but did not domicile expressed concerns that domiciliary states were lowering their regulatory standards to attract RRGs to domicile in their states for economic development purposes.”
State Guaranty Fund: Every state has an insolvency guaranty fund that will pay outstanding claims in the event an insurance company files for bankruptcy ensuring its customers do not get left exposed. RRGs are not covered by this fund, and as a result some states require that RRGs inform customers of this in twelve-point font, on their application forms, certificates, and policy documents. Unfortunately not all of them follow this procedure, leaving the customer with little to no recourse when an RRG goes bankrupt.
Financial Stability: The only sure way to assess an RRG’s financials is to look at its balance sheets, and that’s easier said than done. Most RRGs will release only P&L documents that do not give a full picture of their financial performance. These reports can be difficult and confusing to those who aren’t familiar with the information on these reports.
It’s not unusual for the industry to speak of RRGs as though they were just another type of insurance company, but in fact, the nature of RRGs does make them less financially viable than traditional markets.
Often, RRGs attract customers by charging premiums significantly lower than those charged for comparable programs offered by traditional insurance companies. Traditional carriers don’t just set their rates arbitrarily, premiums are based on years of accumulated data (Loss history) and careful calibration of risk. When RRGs set their premiums significantly below market rates, they set themselves up for bankruptcy.
Another reason RRGs are less financial stable involves the nature of the organizations themselves. RRG’s are designed as a vehicle for businesses and individuals in specific industries to band together and insure themselves. Most RRG’s only offer specific types of coverage to customers in a single industry. Traditional insurance carriers are much more diverse, making them more stable and less subject to fluctuations in various insurance sectors.