Article

Risk Retention Groups

A Risk Retention Group (RRG) is a unique type of insurance entity in the United States, created under the federal Liability Risk Retention Act (LRRA) of 1986. RRGs are designed to provide liability insurance to their members, who must be engaged in similar or related business activities, thus sharing common liability exposures. Here is a detailed overview of RRGs and their use:

Definition and Structure

• Formation and Regulation: RRGs must be chartered as liability insurance companies under the laws of at least one state, known as the domicile state. Once licensed in their domicile state, RRGs can operate in multiple states without needing separate licenses for each state, although they must register in each state where they do business.
• Ownership and Membership: RRGs are owned by their policyholders, who must also be the insured parties. This mutual ownership structure ensures that the interests of the insured and the insurer are aligned.
• Types of Coverage: RRGs can only provide liability insurance, which includes various forms of third-party liability coverage such as general liability, professional liability, and product liability. They are not permitted to offer property insurance or workers' compensation insurance.

Benefits of RRGs

• Program Control: Members have significant control over the insurance program, including underwriting, claims management, and risk management practices. This control can lead to more tailored and effective risk management strategies.
• Cost Efficiency: RRGs often provide liability coverage at more stable and potentially lower rates compared to traditional insurance markets. Members can benefit from dividends if the group's loss experience is favorable.
• Access to Reinsurance: RRGs can access reinsurance markets to spread risk and obtain coverage for large claims, which can enhance their financial stability and capacity to cover significant liabilities.
• Multi-State Operations: The ability to operate across state lines without needing multiple licenses simplifies compliance and expands the market reach of RRGs.

Use Cases and Industries

RRGs are particularly useful for industries and groups facing significant or unique liability exposures that may be difficult or expensive to insure through traditional insurance markets. Common industries utilizing RRGs include:

• Healthcare: Medical professionals and healthcare facilities often form RRGs to manage malpractice liability.
• Transportation: Companies in the transportation sector use RRGs to cover auto liability and other related risks.
• Professional Services: Legal professionals, consultants, and other service providers form RRGs to cover professional liability.
• Government and Institutions: Public entities and educational institutions use RRGs for various liability coverages.

Challenges and Considerations

• Limited to Liability Insurance: RRGs cannot provide property insurance or workers' compensation, which limits their scope compared to traditional insurers.
• Regulatory Compliance: While RRGs benefit from reduced regulatory burdens, they must still comply with specific state and federal requirements, including financial solvency standards and anti-fraud measures.
• No Guaranty Fund Protection: RRGs are not covered by state guaranty funds, which means that policyholders may not have recourse to these funds in the event of the RRG's insolvency.

In summary, Risk Retention Groups offer a flexible and cost-effective solution for businesses with similar liability exposures to self-insure and manage their risks collectively. They provide significant benefits in terms of control, cost stability, and access to reinsurance, making them an attractive option for many industries facing challenging liability insurance markets. However, their limited scope and regulatory requirements must be carefully considered when forming and operating an RRG. Have additional questions regarding RRG's or other ways to finance your risk?

Contact C.I. for an unbiased recommendation to help you make an informed decision when deciding your risk financing strategy.