ALIRT predicts continued growth for Risk Retention Groups

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Risk Retention Groups (RRGs) have struggled to turn an underwriting profit amid strong growth over the past decade, however favourable 2022 financial results may represent a turning point, according to a recent report by ALIRT Insurance Research.

The bespoke nature of the market has historically led to widely varied financial outcomes for individual RRGs, which should invite additional oversight by insurance distributors and regulators, the researcher noted.

RRGs represent a small but important sector of the overall US property and casualty (P&C) insurance industry, especially as an alternative source of liability products for smaller businesses.

While writing less than 1% of overall industry direct premium in 2022, these insurers continue to address niche market needs as commercial insurance rates remain elevated and more traditional carriers tighten terms and conditions and/or exit certain lines of business and/or geographies altogether.

The RRG market has grown rapidly over the past decade and a half, a period which coincided with continued strong pricing in its core MPL sector as well as an industry-wide hard market over the past five years.

Additionally, the emergence of the Covid-19 pandemic in 2020 created an insurance availability crisis of sorts for certain types of healthcare facilities.

According to ALIRT’s report, despite the market’s struggle to turn an underwriting profit amid this growth, it is hoped that it will be able to achieve a second consecutive year of positive underwriting results.

“An outcome that will likely hinge on continued overall strong premium growth as well as a prolonging of positive trends in the sector’s key MPL line of business,” said ALIRT.

“Additionally, equity markets have risen to start the year but remain volatile, and it is entirely possibly that market performance could once again trend downward amid recession fears, adversely impacting capitalization metrics.”

The recent turmoil in the banking sector – triggered by the failure of three large US banks and Credit Suisse in Europe – adds to this concern, the researcher also pointed out.

It stated: “With RRGs having sizeable unaffiliated stock exposures, any RRGs with overweight exposures to the banking sector could experience net capital losses given the recent poor market performance of this sector, especially regional banks.

“Q1 2023 statutory financial results (when released in late May 2023) will highlight which RRGs were impacted the most by this recent market volatility.”

Amid this volatile operating environment, ALIRT stated that RRGs are on solid footing in terms of capitalization and with higher interest rates continuing so far in 2023, they should benefit from improved investment returns over time.

Additionally, earnings could further benefit from a continued hard market (albeit with signs of easing) in commercial lines, though possibly offset by persistently high inflation and potentially elevated legal costs as the industry continues to work through a Covid-induced backlog in court cases.

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