Risk Retention Groups

A Risk Retention Group (RRG) is a member-owned business association that is formed specifically for the purpose of pooling and sharing similar business risks. RRGs must be licensed in at least one state or the District of Columbia, but once licensed are allowed under the federal Liability Risk Retention Act of 1986 (which specifically preempts contrary state laws) to underwrite the insurance risks of its members nationwide, including giving preferential rates, terms and conditions to groups seeking liability insurance coverage.

The members of an RRG must be engaged in the same or similar businesses, at least so far as the liability exposures are concerned. Interestingly, insurance companies are forbidden from being members of an RRG unless all the other members are insurance companies. RRGs are exempt from federal and state securities registration, but must make full disclosures of all their operations to their members.

RRGs are effectively exempt from state law except that the states can still collect premium and surplus taxes, force compliance with unfair claim settlement practices, and follow a few other requirements common to insurance companies. The states may not, however, dictate rates, coverages, forms, methods of operations or investment activities, loss control or claims, etc. RRGs can thus underwrite most types of general liability policies, such as Errors & Omissions and Products Liability insurance, etc., but RRGs are not allowed to underwrite insurance relating to employees, such as workers’ compensation, property insurance, and personal lines insurance such as auto insurance.

A key benefit to the use of RRGs is that, because each policyholder is also a member who participates in profits, each policyholder has substantial incentive to engage in proactive risk management to try to avoid claims, instead of just “let the insurance company take care of it.” The members also can adopt better loss-control and more quickly identify other members whose risk-management is lax, and either assist them in upgrading their risk management or else invite them to take their insurance business elsewhere. Indeed, it is the fact that the members of an RRG know their business better than anybody else that often give the RRG an underwriting edge over insurance companies.

RRGs are commonly used in conjunction with its members’ captive insurance companies. The idea is that the RRGs pool a certain layer of risk, and then each member’s captive reinsures the RRG for the remaining layers. Captives are also used to reinsurance the particular risks of the members who own the captives. This arrangement is often necessary since the member’s captive insurance company for cost and asset protection reasons is probably domiciled outside the United States, and is not admitted to underwrite business in the states where the RRG is operating. When used in this fashion, the RRG effectively becomes, quite legally, the fronting company for the members’ captives.

For example, assume that Members A, B, and C form a Risk Retention Group to offer products liability insurance coverage of up to $1 million for each of the members. Historically, the losses of each member have averaged about $50,000 per year. Members A, B, and C each also have captive insurance companies, and their captives reinsure the RRG for their own annual claims exceeding $100,000 per member. Thus, the members have pooled their risks for their first $100,000 losses each per member, and have accepted the risks of losses exceeding this amount. Members B and C now need not worry if Member A has losses of $1 million in a given year, since their exposure as to Member A’s liability is capped at $100,000 by the reinsurance policy given by Member A’s captive.

Federal Risk Retention Group Statute, 15 U.S.C. § 3902