The Transportation sector continues to drive new risk retention group formations. Of the eight new risk retention group formations thus far in 2020, five are Transportation risk retention groups. This suggests there is a need for commercial auto liability coverage, much as there was a need for medical professional lines of coverage in the years following the passage of 1986 Liability Risk Retention Act.
What’s unclear is whether risk retention groups are as well positioned to meet the needs of the Transportation sector as they were at meeting the needs of the Healthcare sector and other lines of professional liability.
Historically risk retention groups serving the Transportation sector have performed worse than RRGs serving other business sectors. Transportation RRGs have an insolvency rate more than twice that of RRGs collectively. However, there are established avenues of success for Transportation RRGs that can be used as a template moving forward.
The last two years have been marked by the insolvencies of Spirit Commercial Auto Risk Retention Group (Spirit) in 2019 and Global Hawk Risk Retention Group (Global Hawk) in 2020. In each of these cases, the managing general agents (MGAs) at each RRG allegedly defrauded their respective RRGs of tens of millions of dollars. For more information on Spirit and Global Hawk RRG, see the November 2020 Risk Retention Reporter.
MGAs may be drawn to the Transportation sector due to the need for coverage. With many truckers looking for coverage, an MGA can churn members through the risk retention group, generating revenue via fees.
In the case of Spirit, there was a suite of service providers–claims management, captive management, premium financing–under the same umbrella extracting revenue via fees from the risk retention group.
With a financial incentive to write larger volumes of business, MGAs may not prioritize the health of the risk retention group. In such instances the underwriting, and the health of the RRG, may take a hit.
Issues at Spirit and Global Hawk ran deeper than poor underwriting. In the case of Global Hawk particularly, which had been active since 2004, there appears to have been a shift at the MGA, Global Century Insurance Brokers (GCIB), from generating revenue by running a legitimate insurance company to alleged self-enrichment at the cost of the risk retention group membership and potentially the general public.
Risk retention groups cannot participate in guarantee funds. The assets of the RRG are all there is to pay claims, the consequences of which were touched on by Vermont Insurance Commissioner Michael Pieciak in the November issue.
“What’s alleged here is rather egregious. It’s blatant. It’s brazen. It obviously put the company and its members at risk” said Pieciak. “But, it also has the potential of putting the general public at risk if there were claims that couldn’t be paid. So, while it’s egregious financial fraud, it potentially has a real life implication for those that are injured. We’re going to try to do everything we can to make sure that doesn’t happen.”
The alleged sudden shift at GCIB from a legitimate venture to one committing “egregious” fraud may have been difficult to catch. The MGA, with many of the same members of senior management, had been on the level for more than a decade.
In the case of Spirit, the enterprise was allegedly led by Thomas Mulligan. Mulligan was also involved with Federal Motor Carriers RRG, a Delaware-domiciled RRG liquidated in 2011. Spirit was formed in 2012.
Mulligan was later involved in the formation of a third risk retention group, County Hall Risk Retention Group, formed in North Carolina in 2016. With insurance being a state-based system, there appears to be room for individuals like Mulligan to shop around for a domicile without the domicile being aware of past behavior.
MGAs and Transportation RRGs
This doesn’t mean MGA-driven risk retention groups can’t be successful. However, the MGA model may not be the best fit for Transportation risk retention groups. In the November issue Deputy Commissioner of Captive Insurance at the State of Vermont David Provost said that a committed, core membership is a key component of a successful risk retention group.
The incentives of an MGA, namely moving business through the RRG, do not always align with the cultivation of a strong core membership. The MGA may also not see the value in developing programs that increase member retention. The MGA-driven RRG lives or dies on the underwriting prowess of the MGA.
And in a sector as volatile as trucking even skilled underwriters can hit rough patches. This is as true for traditional carriers as it is for risk retention groups. However, the smaller size of many risk retention groups leaves them more vulnerable to financial insolvency from a bad batch of claims.
The volatility in the Transportation space makes a core membership that is, as Provost said, “willing to pay [themselves] enough to pay the claims” even more essential.
How Transportation RRGs Can be Successful
In the November issue, Provost mentioned two examples of successful Transportation RRGs. The first example was when a groups of small trucking companies came together to form an RRG. The second example was OOIDA RRG.
American Trucking and Transportation RRG (ATTIC RRG) is a strong template for the first example. Like many other carriers serving the Transportation sector, ATTIC RRG hit a rough patch, reporting negative net income of $5.7 million in 2017 that cut into surplus. As a result, ATTIC RRGs surplus levels dipped into the mandatory control level under RBC guidelines.
Many Transportation risk retention groups focus on smaller trucking fleets or individual owner-operators, as was the case with Global Hawk RRG. Such a large, diffuse membership can lead to minimal RRG buy-in from any one member.
In contrast, ATTIC RRG had at the time a membership of nine trucking companies, each with a fleet of around 750 trucks. As a result, each individual member had a vested interest in the success of the risk retention group. Working with Montana regulators, ATTIC was able to enact a plan to collect the capital required to get ATTIC RRG back to a strong financial position.
For more information on ATTIC RRG, see the profile in the April 2019 issue of the Risk Retention Reporter.
OOIDA and Member Retention
OOIDA RRG provides coverage to thousands of truckers with a focus on individual owner-operators. Some of OOIDA RRG’s success comes from its association with the Owner-Operator Independent Drivers Association (OOIDA).
The insurance coverage offered by OOIDA RRG is part of a suite of services OOIDA offers to its membership. OOIDA produces a magazine and radio program, Land Line magazine and Land Line Now respectively, geared towards owner-operators. OOIDA also lobbies for truckers rights in Washington, D.C. and writes White Papers on the trucking industry.
The OOIDA slogan of “One Voice for Truckers Everywhere” is brought to life in the range of services the organization provides to its membership. Although the OOIDA RRG membership is diffuse, the buy-in from each member is enhanced by the range of other services offered. OOIDA RRG has successfully met the needs of its membership for nearly 25 years.
There appears to be a need for commercial auto coverage. Risk retention groups can meet that need if they find ways to cultivate an engaged membership. A membership that believes in the risk retention group. A membership that is willing to pay what is needed to keep the risk retention group in a strong financial position.