Business owners have many options when it comes to protecting their assets from liability. Commercial general liability insurance policies and specialized coverages are available, but these do not always meet the specific needs of certain business entities. In order to address coverage shortfalls, the U.S. Congress passed legislation allowing for the creation of an entirely new captive insurance category, that of the risk retention group, or RRG. In this guide, we will introduce the concept of RRGs and present their benefits for business owners in helping to manage the risks inherent in business operations.
What is a Risk Retention Group?
Established in 1981 by Congress, a risk retention group (RRG) is a type of self-insurance plan that is designed to both assume risks and spread those risks for the commercial liability exposures of the group’s members. In 1986, Congress revisited RRGs, creating the Liability Risk Retention Act (LRRA) that expanded available insurance coverages under these group plans. RRGs were developed in response to staggering costs associated with product liability lawsuits in the 1970s, leaving many businesses unable to defend themselves against such legal claims. Insurers drove up premium prices as a result, making liability insurance protection virtually unobtainable for certain manufacturers, particularly smaller operations.
Since the passage of the LRRA, risk retention groups have grown from a small handful to 200 or more groups across the country. Together, these RRGs bring in over $3 billion in annual premiums. Under an RRG, members of the group may be able to obtain coverage for all liability exposures, including general and professional liability, errors and omissions, medical malpractice, and product liability, among many others. It is important to note that property insurance is not a coverage option under the regulations in the LRRA, nor is workers’ compensation insurance.
How Does a Risk Retention Group Form?
To create a risk retention group, members must be engaged in similar businesses and activities; in other words, they must share common liability exposures as they do business. Creating an RRG is a relatively straightforward process, with the RRG having to satisfy the insurance licensing requirements in only one U.S. state or the District of Columbia. Once those single-state licensing requirements are met, the RRG may operate nationwide without having to meet other states’ requirements except under certain limited conditions. The RRG must also submit a feasibility study in their domicile state as well as annual financial statements in every state where the RRG will do business.
What are the Benefits of a Risk Retention Group?
There are many significant benefits to the formation and maintenance of an RRG, particularly in providing comprehensive liability insurance to members at a fraction of the prices of commercial insurance markets. RRGs are flexible, addressing the specific needs of policyholder-members; as a group self-insurance option, RRGs can be tailored to meet specific group risks and exposures. Because RRGs are owned by the members of the group, this allows for profits to be retained by the policyholders.
Other advantages of RRGs include:
- Exemption from state laws – Because RRGs are allowed by the federal LRRA, state laws generally do not apply regarding the formation and operation of this self-insurance plan. This eliminates substantial regulatory compliance issues, with the group having to only satisfy the regulations in its domiciled state rather than having to apply a patchwork of different state regulations where it does business.
- Improved loss control – Because members of an RRG own the group, they tend to be more receptive in implementing risk management strategies to reduce losses and annual premiums. It is in their vested interest to reduce risks.
- Improved coverage options – Members of an RRG share similar risks and business operations, and because of this, each member may be difficult and expensive to insure on the open insurance market. RRGs allow for highly-customized liability coverage, meeting the specific needs of the group in ways that the traditional insurance market cannot.
Business owners are always in search of ways to reduce overhead costs while protecting from the risks inherent in their operations. Risk retention groups are a popular and tailored self-insurance option, helping to protect against liability exposures without the excessive premium costs of traditional commercial insurance plans.
About Caitlin Morgan
Caitlin Morgan specializes in insuring assisted living facilities and nursing homes and can assist you in providing insurance and risk management services for this niche market. Give us a call to learn more about our programs at 317.575.4440.