Risk Retention Group

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21 Aug, 2024

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A risk retention group (RRG) refers to a liability insurance company created and owned by its policy members. It provides coverage unavailable or costly in the traditional market. It aims to offer cost savings through risks and profit-sharing methods, delivering tailored limited liability coverage to policyholders in the US.

Federal and state authorities regulate it. RRGs are generally formed under the Liability Risk Retention Act (LRRA). Businesses having similar insurance need to pool their risks to form RRG. RRG is also an example of a liability insurance company under any one state law. It is useful in specific professional groups like medical, legal, industry-related risks like trucking and manufacturing, and niche coverage necessity.

What is a Risk Retention Group (RRG)?

Risk Retention Group (RRG) is a US-based liability insurance company that offers cost-saving, tailored coverage and options for risk and profit-sharing to policyholders, providing alternative options in the traditional market.
Advantages of RRG include greater control over insurance, while disadvantages involve potential financial difficulties for members.
Policyholders own and control it, whereas shareholders control an insurance company.
Policyholders own and control RRGs. At the same time, a captive is the result of a formation by a single parent company or group of companies and has domiciliary status anywhere in the world.

Risk Retention Group Explained

A risk retention group (RRG) is a liability insurance company providing customized coverage that may be difficult or impossible to acquire through usual insurance companies. Risk Retention Group operates under the US Liability Risk Retention Act with limited power of coverages they may write upon. Their charter has to be approved by the concerned state regulatory body where it holds a license. Generally, RRGs apply for the state's captive insurance code to get greater flexibility. Their structure varies greatly, starting from stock, mutual, or LLC-based companies or as reciprocal insurers. Here, cost savings are not guaranteed and depend on various factors.

Any two members facing the same risks or from a similar industry can come together to form an RRG. They enjoy greater regulatory exemption than traditional insurers as they are established under the Liability Risk Retention Act (LRRA). Hence, they can tailor insurance coverage and risk-sharing practices to their special needs. As a result, they have responsive and highly flexible policies for its policyholders.

Moreover, they have certain implications like cost-effectiveness, control, and transparency but with limited availability, financial instability, and regulatory requirements. Its benefits include members-controlled rates, customized loss control and dividends for offsetting losses, access to reinsurance markets, multiple state presence, and affordable liability coverage rates.

Hence, businesses in niche markets can use it for better-controlled insurance programs and affordable coverage. However, any loss can result in increased monthly premiums for all. RRGs, which provide specialized solutions for neglected areas, give flexibility and competition to the insurance industry. They offer worthwhile alternatives, diversify insurance options, and encourage risk-sharing practices. Furthermore, RRGs' financial stability can be affected by operational statistics and the state of the financial markets, which they mitigate by scouting for better rates in the reinsurance market.

Examples

Let us use a few examples to understand the topic.

Example #1

One of the examples of an RRG is Indigo Risk Retention Group Inc. It is a new risk retention group that provides medical professional liability (MPL) insurance. They have the permission to sell property-casualty insurance products. The eligible group members of Indigo RRG include individual physicians and physician groups. The AM Best, the largest credit rating agency in the world focusing on the insurance industry, has given a Financial Strength Rating of A- (Excellent) to Indigo Risk Retention Group Inc.

Example #2

Suppose ABC Inc. is an RRG established by a group of tech professionals to address the rare challenges of their industry. The common members of the group include professionals and businesses operating in the technology sector. Thus, ABC Inc. focuses on creating tailored liability coverage packages dealing with the risks associated with cybersecurity, errors & omissions (E&O), and other innovative technologies.

Advantages And Disadvantages

It has many pros and cons such as:

Advantages	Disadvantages
More control over the insurance.	Members face financial difficulty.
Policyholders are also the beneficiaries of the profits.	Only liability gets covered under the insurance.
Policies could be tailored to the needs.	If claims get high, it leads to higher premiums.
Exempted from a few mandates of state laws.	Scrutinized by regulators.
Operates from multiple states.	Policies need to be labeled with warnings about unregulated insurance.
Offers steady premiums, increased stability, Professional guidance, access to reinsurance markets, and reliable plus affordable liability coverage.	Other members lead to poor underwriting.
Freedom from multistate filings	Risk of transforming into traditional insurance.
Members control risk management.	Property insurance is not covered.
Insurance premiums are distributed equally among members.	Funds lying in the group are not meant for use by business.

Risk Retention Group vs Insurance Company

Both are in use by businesses, but they differ from each other, as shown below:

Risk retention group	Insurance company
Owned and controlled by policyholders.	Shareholders control it.
Federal law (LRRA) regulates it.	State laws regulate these.
Works only for liability coverage.	A wider range of coverage is offered by it.
Has lower premiums due to lesser overhead and profit consideration.	Has higher premiums due to profit motive and wider coverage.
Members have greater control over claim handling.	Policyholders have almost no control over the claim handling.
Not present in every state.	Commonly available nationwide.
Customized insurance policies.	Generalized and standardized insurance policies.
Tendency to face financial risk.	Get access and help from state insurance guaranty funds.
Property insurance outside its purview.	Can provide property insurance.
Individual businesses handle risk management and receive coverage.	Customers receive coverage from the company.

Risk Retention Group vs Captive

Both captives and risk retention groups (RRGs) are alternative insurance solutions that let firms self-insure but have certain differences, as shown below:

Risk retention group	Captive
Policyholders own and control it.	Formed by a single parent company or group of companies.
Limited to the United States only	Has domiciliary status anywhere in the world.
Federal law regulates it.	Only offers coverage to its parent company or its subsidiaries.
Not present in every state	Subjected to state insurance regulations.
May need access to reinsurance markets.	Possibility to structure it to cover numerous types of risks.
Can tailor an insurance policy.	Writing ability for all property and casualty coverages.
Stable rates are offered through entire liability insurance.	Controlled by traditional or captive insurance laws.
Members share interests and business information.	Has many benefits for small to medium-range companies.
Financial risk may occur.	Its write coverage extends beyond state lines.
Unregulated from state insurance laws	Effectively controls and manages the total cost of liability risks.
Prohibited from providing property insurance.	Reliability on reinsurance
Requires more than two members for its formation.	A single entity can form it.

Frequently Asked Questions (FAQs)

1. Are risk retention groups admitted insurers?

In the conventional sense, RRGs are not admitted insurers. However, to do business under the Liability Risk Retention Act (LRRA), a federal statute, they must hold a license as a liability insurance firm in a single state (the domicile state).

2. Are risk retention groups safe?

Under state and federal legislation, RRGs are subject to financial scrutiny and regulation to maintain compliance and solvency, as their safety depends on several variables. They might not, therefore, be fully protected in the same ways as traditional insurance. They provide companies with greater flexibility over their liability plans, but a big financial risk must be present in the worst-case scenario.

3. How does the federal or state system regulate risk retention groups?

The LRRA is the main federal regulation that applies to RRGs, although the states in which they operate also have regulations they must follow. Every RRG must have a liability insurance business license in one state.