March 21, 2019

Robert J. Walling, FCAS, MAAA, CERA

Erich A. Brandt, FCAS, MAAA

Gregory W. Fears Jr., ACAS, MAAA, ARM

Risk Retention Group Benchmarking StudyPublished January 2019

1

• Fellow of Casualty Actuarial Society (FCAS)• CAS Board of Directors 2015-17

• B.S. Secondary Math Education – Miami University 1987

• 2017-19 Captive Power 50• ICCIE Instructor

About the Presenters

Robert J. Walling IIIPrincipal

Pinnacle Actuarial Resources, Inc.

2

• Fellow of the Casualty Actuarial Society

• Graduate of Illinois State University

• 22 years of experience, primarily in commercial lines

• Reserving studies for:• Insurance companies (SAO and financial exams)

• Captive insurance companies

• Self-insured entities

• Extensive experience reviewing industry financial statement data and associated trends

• Experience in workers’ compensation, liability lines, medical professional liability and commercial automobile

About the Presenters

Erich A. BrandtSenior Consulting Actuary

Pinnacle Actuarial Resources, Inc.

3

Gregory W. Fears Jr.Consulting Actuary

Pinnacle Actuarial Resources, Inc.

• Associate of the Casualty Actuarial Society

• Associate in Risk Management (ARM)

• B.A. Mathematics – Carthage College

• 18 years of experience, primarily in

commercial lines

• Reserving studies for:• Insurance companies (SAO and financial exams)

• Captive insurance companies

• Self-insured entities

• Public entities

• Funding recommendations for emerging coverages

• Experience reviewing industry financial

statement data and associated trends

• Risk margin modeling

About the Presenters

4

• Overview

• Data Used

• Intended Use

• RRG Demographics

• Capitalization

• Operating Results

• Trends and Benchmarks

– Premium

– Loss & LAE

Presentation Outline

5

• Risk Retention Group (RRG)

– Risk Retention Act (RRA) of 1986

• “Federal legislation passed in 1986 that authorized the formation of purchasing groups and group self-insurance programs for certain types of liability exposures. According to the Act, members of risk purchasing groups (RPGs) and risk retention groups (RRGs) must be engaged in similar or related businesses or activities.” from www.irmi.com

• RRG Benchmarking Study - Technical Approach

– Using RRG annual statement data pulled from A.M. Best

– Data as of December 31, 2017

– Calendar or accident years 2008 through 2017

Introduction

6

• Income Statement - net income, net underwriting income, policyholder surplus

• Statement of Cash Flows - net investment income

• Statutory Page 14 - direct premium and loss data

• Schedule P – loss and expense data, net earned premiums, one- and two-year loss development values

• Underwriting and Investment Exhibit - net written premiums, investment data

• Insurance Expense Exhibit - premium and loss data, expense data

• A.M. Best General Information - state of domicile, Best's Financial Strength Rating

• Annual Statement Assets Page - asset data

Annual Statement Data Used

7

• Comparison of RRGs to Total U.S. Property & Casualty (P/C) Industry

– Total U.S. P/C Industry (Industry) is all Schedule P lines of business (LOB)

• RRGs are different than the Industry

• Provide trends and benchmarks for RRGs

Intended Use

8

• Number of RRGs

– As of 12/31/17

– “As was”

• Direct written premium (DWP) growth

– Over $3 billion in 2017

• Domiciliary States

– By number of RRGs

– By average RRG DWP

• Line of business mix

– Medical professional liability (MPL)

– Other liability (OL)

– Commercial auto liability (CAL)

RRG Demographics

9

Total RRG Growth – Premium (000s) and Number

0

50

100

150

200

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total RRG Growth

Premium # of RRGs

*Figure III.A

10

Total RRG Growth – Premium (000s) and Number - “as was data”

0

50

100

150

200

250

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total RRG Growth

Premium # of RRGs

11

Number of RRGs and Average Size by Domiciliary State

*Figure III.B.1 & III.B.2

0

10

20

30

40

50

60

70

80

90

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

Ave

rage

RR

G S

ize

by

DW

P (

00

0s)

Co

un

t o

f R

RG

s

Average RRG Size by DWP Count of RRGs

12

RRG 2017 DWP by LOB ($Millions)

3.6 1.1 9.2 1.1 0.7

301.1

1,081.6

1,785.8

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2,000.0

Workers'Compensation

Products Liab Fidelity Boiler &Machinery

Warranty Commercial AutoLiability

Other Liab (Total) MedicalProfessional

Liability

$M

illi

on

s

RRG 2017 DWP by Line of Business

*Figure III.C.1

13

RRG Direct Written Premium (000s) by Risk State

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

Top States by Direct Written Premium

*Figure III.C.2

14

MPL DWP (000s) by State

-

100,000

200,000

300,000

400,000

500,000

600,000

RRG Top 10 States by MPL DWP

*Figure VI.B.3

15

CAL DWP (000s) by State

-

10,000

20,000

30,000

40,000

50,000

60,000

RRG Top 10 States by CAL DWP

*Figure VI.B.6

16

Mono-line RRG Writers

Line of Number % of

Business of RRGs Total

CAL 27 12%

OL 48 21%

MPL 102 45%

Total 226

*Mono-line is defined as: over 90% of DWP in one LOB

17

• Comparison of RRGs to U.S. Property & Casualty (P/C) Industry

– Ratio of net written premium (NWP) to Surplus (S)

• RRGs lower than the Industry

– Risk based capital ratio (RBC)

• Mono-line RRGs roughly 4.0 – 5.0

– Leverage ratios

• RRGs lower than the Industry

RRG Capitalization

18

Net Written Premium to Surplus Ratio

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Written Premium to Surplus Ratio

Total RRG Industry

*Figure IV.A.1

19

Direct Written Premium to Surplus Ratio

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Direct Written Premium to Surplus Ratio

Total RRG Industry

*Figure IV.A.2

20

Mono-line RRG RBC Ratios by Year

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

RBC Ratios by Year

CAL MPL Other

*Figure IV.B

21

Net Leverage Ratio

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Leverage Ratio

Total RRG Industry

*Leverage Ratio = (NWP/Surplus) + (Net Losses + LAE + Unearned Premiums)/Surplus

*Figure IV.C

22

• Comparison of RRGs to Total U.S. P/C Industry

– Net income to NWP ratios

• RRGs are decreasing

– Underwriting vs. investment income

• Cyclical

• By line of business (LOB)

– Accident year (AY) combined ratio

• RRGs higher than the Industry

– Calendar year (CY) combined ratio

• RRGs by LOB

RRGs Overall Operating Results

23

Net Income to Net Written Premium Ratio

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Income to Net Written Premium Ratio

Total RRG Industry

*Figure V.A.2

24

Total U.S. P/C Industry Net Income Breakdown as % of Surplus

*Figure V.B.1

16.54%

2.88%8.20%

8.50% 4.14%7.46%

12.03% 11.63%10.07%

7.41% 5.79%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total U.S. P/C Industry Net Income Breakdown % of Surplus

Net Investment Gain (Loss) Net Underwriting Gain (Loss) Label of Total %

25

Total RRG Net Income Breakdown as % of Surplus

*Figure V.B.2

15.37%16.21% 16.03%

14.63%

12.43%11.82%

9.90%

6.58% 6.22%

4.98%

7.08%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total RRG Net Income Breakdown % of Surplus

Net Investment Gain (Loss) Net Underwriting Gain (Loss) Label of Total %

26

MPL RRGs Net Income Breakdown as % of Surplus

*Figure V.B.4

17.16%

20.14%

18.58% 17.97%

15.23%14.19%

11.26%

9.35%7.81%

5.28%

7.48%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MPL RRG Net Income Breakdown % of Surplus

Net Investment Gain (Loss) Net Underwriting Gain (Loss) Label of Total %

27

CAL RRGs Net Income Breakdown as % of Surplus

*Figure V.B.5

17.64%

11.28%

19.90%

24.60%

6.88%-0.58% -1.24% -23.65% 1.89% -12.33%

-27.40%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

CAL RRG Net Income Breakdown % of Surplus

Net Investment Gain (Loss) Net Underwriting Gain (Loss) Label of Total %

28

Trade Basis Net Combined Ratio - AY

60%

70%

80%

90%

100%

110%

120%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Trade Basis Net Combined Ratio

Total RRG Industry

*Figure V.C

29

RRG Combined Ratio - CY

50%

75%

100%

125%

150%

175%

200%

225%

2010 2011 2012 2013 2014 2015 2016 2017

Combined Ratio (RRG) - Calendar Year

MPL Other Liab CAL Total

*Figure V.D

30

• Comparison of RRGs to Total U.S. P/C Industry

– Premium growth

• Overall: both RRGs and Industry increasing

• By LOB:

– MPL: RRGs increasing while Industry decreasing

– CAL: both RRGs and Industry increasing, but RRGs more rapidly

– NWP / DWP ratios:

• RRGs lower ratio, retain less risk than the Industry

– Market share: All lines and by LOB (using DWP)

• Overall RRGs market share is increasing

RRG Premium Trends and Benchmarks

31

Total Premium Growth

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2007 - 2008 2008 - 2009 2009 - 2010 2010 - 2011 2011 - 2012 2012 - 2013 2013 - 2014 2014 - 2015 2015 - 2016 2016 - 2017

Total Premium Growth

RRG Industry

*Figure VI.A.1

32

MPL Premium Growth

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2007 - 2008 2008 - 2009 2009 - 2010 2010 - 2011 2011 - 2012 2012 - 2013 2013 - 2014 2014 - 2015 2015 - 2016 2016 - 2017

Medical Professional Liability Premium Growth

RRG Industry

*Figure VI.A.2

33

CAL Premium Growth

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2007 - 2008 2008 - 2009 2009 - 2010 2010 - 2011 2011 - 2012 2012 - 2013 2013 - 2014 2014 - 2015 2015 - 2016 2016 - 2017

Commercial Auto Liability Premium Growth

RRG Industry

*Figure VI.A.5

34

RRG vs. Industry NWP/DWP

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

RRG vs Industry for All Lines

RRG NWP/DWP Industry NWP/DWP

*Figure VI.C.1

35

MPL RRG vs. Industry NWP/DWP

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Medical Professional Liability RRG vs Industry

RRG NWP/DWP Industry NWP/DWP

*Figure VI.C.2

36

CAL RRG vs. Industry NWP/DWP

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Commercial Auto Liability RRG vs Industry

RRG NWP/DWP Industry NWP/DWP

*Figure VI.C.5

37

MPL RRG vs. Industry Market Share

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Medical Professional Liability RRG to Industry Comparison

RRG DWP Industry DWP RRG % of Market by DWP

*Figure VI.D.2

38

CAL RRG vs. Industry Market Share

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Commercial Auto Liability RRG to Industry Comparison

RRG DWP Industry DWP RRG % of Market by DWP

*Figure VI.D.5

39

• Comparison of RRGs to Total U.S. P/C Industry

– AY Loss & LAE ratios: All lines and by LOB

• RRGs increasing while Industry is relatively stable

• MPL increasing for both

– CY Loss & LAE ratios: All lines

• RRGs increasing while Industry is relatively stable

• RRG spike in 2014 related to one RRG merger

– Adverse Development: All lines and by LOB

– Loss Development Patterns

• RRGs have slower loss development than the Industry

RRG Loss and LAE Trends and Benchmarks

40

Total Loss & LAE Net AY Loss Ratio

60%

65%

70%

75%

80%

85%

90%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Loss & LAE Net Loss Ratio

Total RRG Industry

*Figure VII.A.1

41

MPL Loss & LAE Net AY Loss Ratio

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

110.00%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MPL Loss & LAE Net Loss Ratio

Total RRG Industry

*Figure VII.A.3

42

CAL Loss & LAE Net AY Loss Ratio

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

110.00%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

CAL Loss & LAE Net Loss Ratio

Total RRG Industry

*Figure VII.A.4

43

Loss & LAE Net CY Loss Ratio

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Loss & LAE Net Loss Ratio

Total RRG Industry

*Figure VII.B.1

44

CY Net Loss and LAE to NWP

49.3%39.5% 34.5%

26.6%34.8% 36.7%

43.0%

121.2%

69.0%60.4% 56.1%

19.3%

17.8%20.8% 32.5%

27.3% 23.2%

23.9%

27.6%

19.4%23.9%

23.1%

4.0%

3.7% 4.1% 4.0%4.8% 4.8%

4.0%

3.6%

3.4% 4.2%3.8%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Loss and LAE to Net Written Premium

Total Net Losses Total DCC Total A&O

*Figure VII.C.1

45

Total 1 Year Development as % of Prior Year Surplus

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total 1 Yr Dev as % of Prior Year Surplus

RRG Industry

*Figure VII.D.1

46

RRG 1 Yr Dev as % of Prior Year Surplus by LOB

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

RRG 1 Yr Dev as % of Prior Year Surplus by LOB

OL CAL MPL Total

*Figure VII.D.2

47

Comparison of RRG Versus Industry 1 Year Development

1 Year Development ($000's)

Commercial Auto Liability Medical Professional Liability

Year Industry RRGs Top 5 RRGs Year Industry RRGs Top 5 RRGs

2007 (741,883) (9,754) (5,063) 2007 (1,970,305) (78,554) (17,678)

2008 (443,667) (8,562) (822) 2008 (2,308,180) (141,008) (32,465)

2009 (389,670) (12,148) (4,116) 2009 (2,099,842) (111,152) (25,446)

2010 (829,735) (11,362) (5,350) 2010 (2,401,561) (116,091) (15,015)

2011 (324,929) (4,497) (1,113) 2011 (1,963,011) (125,762) (18,159)

2012 541,090 (4,046) (2,540) 2012 (1,834,629) (149,895) (18,899)

2013 708,638 (4,944) (785) 2013 (2,107,626) (103,949) (23,602)

2014 784,252 8,537 5,751 2014 (728,069) 810,479 897,064

2015 1,655,510 7,268 7,013 2015 (1,372,380) (127,580) (37,417)

2016 1,858,619 19,290 21,373 2016 (888,864) (60,420) (23,953)

2017 1,632,406 47,875 42,968 2017 (1,088,260) (151,800) (6,080)

48

CAL RRG 1 Year Development

-10%

0%

10%

20%

30%

40%

50%

60%

(20,000)

-

20,000

40,000

60,000

80,000

100,000

2013 2014 2015 2016 2017

CAL RRGs - 1yr Adverse Development

1yr Development Prior YE Surplus IRIS #11

Calendar Year*Includes SpiritCommercial Auto RRG

CAL RRG 1 Year Development

49

CAL RRG 1 Year Development

-10%

-5%

0%

5%

10%

15%

20%

(10,000)

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2013 2014 2015 2016 2017

CAL RRGs - 1yr Adverse Development

1yr Development Prior YE Surplus IRIS #11

Calendar Year*Excludes SpiritCommercial Auto RRG

CAL RRG 1 Year Development

50

RRG vs. Industry CAL Reported Incurred Loss Development

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

12 24 36 48 60 72 84 96 108 120

Per

cen

t o

f U

ltim

ate

Months of Maturity

RRG vs Industry CAL Reported Incurred Loss Development Factors

RRG Incurred Industry Incurred

CAL RRG 1 Year Development

*Figure VII.E.1

51

RRG vs. Industry CAL Reported Incurred Loss Development

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

12 24 36 48 60 72 84 96 108 120

Per

cen

t o

f U

ltim

ate

Months of Maturity

RRG Incurred Industry Incurred Trucking - Slow Trucking - Medium Trucking - Fast

52

RRG vs. Industry MPL-CM Reported Incurred Loss Development

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

12 24 36 48 60 72 84 96 108 120

Per

cen

t o

f U

ltim

ate

Months of Maturity

RRG vs Industry MPL CM Reported Incurred Loss Development Factors

RRG Incurred Industry Incurred

CAL RRG 1 Year Development

*Figure VII.E.2

53

• Overview

• Data Used

• Intended Use

• RRG Demographics

• Capitalization

• Operating Results

• Trends and Benchmarks

– Premium

– Loss & LAE

Conclusion

54

Questions

55

Join Us for the Next APEX Webinar

56

• We’d like your feedback and suggestions

• Please complete our survey

• For copies of this APEX presentation

• Visit the Resource Knowledge Center at Pinnacleactuaries.com

Final Notes

Commitment Beyond Numbers 57

Thank You for Your Attention

Erich A. Brandt, FCAS, MAAA

rwalling@pinnacleactuaries.com

309.807.2320

Gregory W. Fears Jr., ACAS, MAAA, ARM

gfears@pinnacleactuaries.com

309.807.2316

ebrandt@pinnacleactuaries.com

309.807.2311

Robert J. Walling, FCAS, MAAA, CERA