Everything old is new again

The problem of making liability insurance available and affordable isn’t new. Congress dealt with a similar problem more than 40 years ago.

“Back in the 1970s, there was a crisis about unavailability of liability insurance for companies that were engaged in the business of manufacturing,” said Joe Deems, executive director of the National Risk Retention Association. “There had been a proliferation of huge runaway verdicts that had taken place in product liability during the ’70s.”

As a result, many insurance companies stopped offering manufacturers coverage.

“This led the Congress to pass what was called the Product Liability Risk Retention Act of 1981,” Deems said.

That law, Deems said, “proved so successful that in 1986 they adopted the Liability Risk Retention Act, the LRRA, which opened the door to the formation of risk retention groups for all kinds of liability.”

The idea is simple. All insurance companies pool payments by a large number of people or companies to cover a specific type of risk on the theory that only part of the participants in that pool will need the money, who the insurance company then pays.

Deems says risk retention groups work the same way, but for a very specific audience.

“It’s a whole bunch of people in the same business or profession who pool their money, create their own insurance company to insure themselves against liability losses,” he said.

Deems said they’ve been started by manufacturers, lawyers, doctors – and small-business truckers. OOIDA started its risk retention group for members of the Association in 1995 and continues to operate it today.

Managing risk

Like all insurance companies, risk retention groups have to have a certain amount of money in reserve. The size of that reserve is based on the amount of money they cover with their policies.

Risk retention groups keep premiums lower than they would be otherwise while maintaining that required reserve, in part using risk management.

“Risk management is the scientific process of identifying the things that cause accidents and the steps that are taken to avoid those accidents and the steps that are taken after accidents to properly reconstruct what happened and use those to prevent future accidents,” Deems said.

Deems contends that no one knows better, in any particular industry, what causes the events insurance covers – and therefore what it takes to avoid them – than the people in that industry.

However, a significant increase in liability requirements would negate the effect of that risk management because of the large increase in required reserve. Risk retention groups would be able to insure fewer people and at a higher cost. Availability and affordability would be set by the new limits, not the insurance providers or the risk management they perform.

Deems says that could artificially create the situation that led to the creation of risk retention groups in the first place.

“Our four Democrats and one Republican who authored this letter have virtually no background or business experience in insurance itself,” he said. “But they have, in fact, stumbled into how and why risk retention groups were formed to begin with. It doesn’t take a rocket scientist to figure it out that when coverage becomes unavailable or unaffordable, the cost of doing business is hurt.”

The safety angle

What’s more, Deems says that situation could also have the opposite of one of its intended effects. Higher liability requirements would, he contends, reduce safety – not increase it, as supporters of higher limits claim. That is because truckers would likely be insured by larger companies that would lump them into a risk pool with unrelated businesses, eliminating the careful risk management that risk retention groups provide.

Ultimately, Deems says that the safety of the public should be the primary concern.

“If more companies out there would have an opportunity to truly underwrite and do their own risk management based on their own member’s needs and resources, you would find that those companies’ loss experience would be dramatically affected in a positive way, and members of the public would be better served.” LL