That’s NOT the Spirit

regulationThe big news at the CICA conference in Tucson (other than my travails in getting home) was the placement of Nevada-based Spirit Commercial Auto Risk Retention Group (RRG) into permanent receivership and how it might impact the alternative risk transfer market. A story broken by Christopher Diemel of the Risk Retention Reporter examined the problems of Spirit dating back to 2013, where there were clear warning signs that the company was not living up to its obligations. On February 27, 2019, the Eighth Judicial District Court of Nevada entered its permanent injunction and order appointing the Nevada commissioner of insurance as permanent receiver of Spirit Commercial Auto Risk Retention Group, Inc.

Chris’s report outlined developments at Spirit in 2018 including an auditor’s letter alleging material misstatements, the restatement of the company’s 2017 annual statement, and a loss portfolio transfer deal in excess of $100 million.  However, it was the response (or lack thereof) by Nevada regulators that is most troubling to me – and a warning to the industry as a whole.

The concern that the NAIC might again put RRGs under the microscope is real, however, the industry overall is solid. By all measures, captive insurance companies, including RRGs, have far better metrics than traditional insurance companies.  A 2018 report by rating agency Demotech revealed that RRGs remained financially stable, as cash, assets, and liabilities all increased since 2017 Q2. According to Demotech, the results suggest RRGs are adequately capitalized and are able to remain solvent if faced with adverse economic conditions or increased losses.

The Spirit case is a prime example of the differing levels of regulation by states. Chris’s report provided examples of RRGs that ran into trouble but were quickly and efficiently handled by state regulators in other domiciles. I don’t know what exactly happened in Nevada, but to me the issue isn’t rogue captives or RRGs, or less than scrupulous service providers. It is state regulators failing to do the right thing – and that’s not good for any of us.

Thank you all very much, and I look forward to hearing from you!

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