What is a Risk Retention Group (RRG) and How Does it Differ from Traditional Insurance Companies?
When exploring the world of captive insurance, you may come across a unique business entity known as a Risk Retention Group (RRG). In this blog post, we’ll break down what an RRG is, its purpose, and the key distinctions between RRGs and conventional insurers.
What is a Risk Retention Group (RRG)?
A Risk Retention Group (RRG) is a liability insurance company owned by its members, who are businesses or organizations from the same industry or facing similar risks.
Created under the Liability Risk Retention Act of 1986 (“LRRA”) 15 U.S.C. § 3901 ET. SEQ., RRGs were developed to address the challenges businesses, organizations, and governmental units face in obtaining affordable liability insurance.
RRGs operate under a federal mandate that allows them to provide insurance across state lines with streamlined regulatory oversight compared to traditional insurance companies.
RRGs are licensed and regulated by one state, called the domiciliary state, and can do business in every state by filing registrations in those states. This is unlike traditional insurers, which must be licensed in every state where they do business.
This structure is especially beneficial for companies and organizations that are underserved by the traditional insurance industry and unable to get the coverages they need. The RRG structure allows for more tailored coverages and long term consistency through hard and soft markets.
RRGs only sell their policies of liability insurance to their members, not to the public.
Key Features of an RRG
Member-owned: RRGs are established by and for their members, meaning the policy holders are also the owners of the group.
Liability insurance: RRGs can only offer liability insurance, such as general liability, professional liability, malpractice liability, and product liability insurance.
Industry-specific: The members of an RRG must be engaged in similar or related businesses or activities in respect to liability. For example, a group of medical professionals could belong to one RRG, while a group of schools would belong to a different RRG.
Domiciliary regulation: RRGs are regulated by one state, the state in which they are licensed (the domicile state), but they can operate in multiple states by filing a simple registration.
How Does a Risk Retention Group Differ from Traditional Insurance Companies?
While RRGs and traditional insurance companies both provide liability coverage, there are several key differences between the two.
1. Regulation
RRGs: Operate under the LRRA and are licensed and regulated by their state of domicile. This allows them to provide coverage across multiple states without having to meet individual state licensing requirements for each state.
Traditional Insurance Companies: Must be licensed in each state in which they operate, meaning they must adhere to state-specific licensing laws, which can vary widely.
2. Ownership Structure
RRGs: Owned by their members, who are also the policyholders. The profits generated by the group are either reinvested in the group or returned to the members in the form of dividends.
Traditional Insurance Companies: Owned by shareholders or private owners, with the goal of maximizing profits for the non policyholder company owners.
3. Focus of Coverage
RRGs: Specialize in providing liability insurance for the members’ related business or activities. This allows them to tailor their policies and underwriting to the specific needs and risks of their members and satisfy the liability needs for a niche market.
Traditional Insurance Companies: Offer a wide variety of insurance products, including liability, property, health, and life insurance, covering a broader range of risks. Traditional insurance companies are focused on coverage that makes sense for the masses and the policy forms used are not tailored for niche needs.
4. Focus on Risk Management
RRGs: Focus on managing risk and helping all members manage their risk.
Traditional Insurance Companies: Focuses on each insureds’ latest losses.
5. Long-Term Viability
RRGs: Exist to ensure the long-term viability of liability insurance through hard and soft markets.
Traditional Insurance Companies: Focus on maximizing profits during both hard and soft markets without any long-term commitment to the insureds.
Captive Insurance vs. Risk Retention Groups
Risk Retention Groups (RRGs) are a type of captive insurance. Both RRGs and non-RRG captive insurance companies are fully owned and controlled by the policyholders they insure, with the primary goal to cover the specific risks of their owners. The key differences between RRGs compared to non-RRG captive companies concern types of coverage and regulation.
Non-RRG Captive Insurance Companies: Can write more than just liability insurance. Non-RRG Captive insurance companies must be licensed in every state in which they do business.
RRGs: Exclusively provide liability coverage. Made possible through LRRA, RRGs are enabled under a unique federal statute not available to other types of insurers. As such, RRGs are licensed and regulated in one state and can do business in every state by filing registrations in those states.
Why Choose a Risk Retention Group?
For businesses or organizations from the same industry or facing similar risks, creating or joining an RRG can provide a solution to getting the customized, long-term liability coverage that they need if it is overlooked and underserved by traditional insurance.
Because RRGs are owned and operated by its policyholders, RRGs take the time to understand the risks in their businesses and activities and then craft their policies and underwriting to help best manage those risks.
RRG members benefit from coverage designed for:
Long-term viability with stable pricing through both hard and soft markets.
Availability of liability coverage designed for a business’ unique risks and needs.
Helping all of the companies in the group to remain insurable by managing their risk.
Conclusion
Risk Retention Groups (RRGs) provide a valuable alternative to traditional insurance companies for businesses and organizations engaged in similar or related business activities who seek niche, long-term liability coverage.
The National Risk Retention Association (NRRA) is a nonprofit organization and community for education, resources, and business relating to Risk Retention Groups (RRGs) and Risk Purchasing Groups (RPGs). NRRA is led by the country’s most knowledgeable individuals in risk retention and risk purchasing group operations, compliance, and insurance. NRRA advocates for the risk retention industry and provides support for RRGs, RPGs and the companies that do business with them. Schedule a one-on-one meeting with NRRA’s Executive Director to learn more about how NRRA and how we can assist you.