RISK RETENTION GROUPS: Frequently Asked Questions

1. What is the Liability Risk Retention Act?
2. How does the Risk Retention Act work?
3. What is a Risk Retention Group (RRG)?
4. Who can be a member?
5. What kinds of insurance coverage do RRGs provide?
6. How many RRGs are there?
7. Who forms RRGs?
8. Is a RRG the same as a Risk Purchasing Group?
9. Who regulates RRGs?
10. What are the advantages and disadvantages?
11. Who manages the industry - Federal or State?

Additional articles on Risk Retention Groups can be found in the News Center.

What is the Liability Risk Retention Act?

In 1981 Congress passed the federal Products Liability Risk Retention Act (LRRA) which permitted for the creation of Risk Retention Groups (not to be confused with Purchasing Groups).  As the name implies, the original act focused on manufacturing operations.

In 1986 the Act was broadened to address any group (homogenous) that wanted to create its own insurance companies to write liability insurance.

The Act was passed because the individual states and the "traditional" insurance market were not addressing the product liability crisis and general liability crisis faced by various industries.  At the time the medical sector, transportation and other professional classes were facing a liability crisis.

Very simply, a Risk Retention Group is an insurance company that is owned by its insureds.  It can take the form of a mutual, reciprocal or stock company.  ProBuilders was formed as a stock company, with each insured owning common stock of the company.

While ProBuilders in many ways acts like a surplus lines carrier, it is neither a surplus lines company nor an admitted company.  The RRG is not subject to any rate or form filings, is not protected by any state guaranty fund and it is not subject to the surplus lines laws of any state.  This means no filings are required with the surplus lines associations of any state, no stampings fees are due and there is no requirement that a producer obtain declinations from admitted carriers. return to top

How does the Risk Retention Act work?

The Act allows groups facing similar liability exposures to own, and obtain coverage from, insurers which are subject to regulation in their “home” state, and a substantially lesser degree of regulation in the other states in which they operate. return to top

What is a Risk Retention Group (RRG)?

A Risk Retention Group (RRG) is a liability insurance company that is owned by its members, all of whom face similar liability exposures. The LRRA allows a group to be domiciled in one state, but able to engage in the business of insurance in all states, subject to certain specific and limited restrictions. Because the LRRA is a federal law, it preempts state regulation, making it much easier for RRGs to operate nationally. Like other insurers, RRGs issue policies to their members and bear risk. RRGs require members to retain ownership in the company. return to top

Who can be a member?

The LRRA requires that members be homogeneous, i.e. engaged in similar businesses or activities that expose them to similar liabilities. RRGs have been established by and provide coverage to hundreds of professional groups, including teachers, lawyers, engineers, hospitals and doctors. return to top

What kinds of insurance coverage do RRGs provide?

The type of insurance coverage permitted is set forth in the LRRA's definition of "liability," which includes all types of third party liability, such as general liability, errors and omissions, directors and officers, medical malpractice, professional liability, products liability, and so forth. The LRRA does not extend to workers compensation, property insurance, or to personal lines insurance, such as homeowners and personal auto insurance coverage. return to top

How many RRGs are there?

There are approximately 226 risk retention groups operating in the United States according to the Risk Retention Reporter. return to top

Who forms RRGs?

RRGs  are often formed by trade and professional associations, which serve as the sponsor for the RRG liability insurance program. return to top

Is a RRG the same as a Risk Purchasing Group?

A risk retention group is an insurance company which issues insurance policies to its members and bears risk. A purchasing group is essentially a group that has banded together for the purpose of purchasing (rather than providing) insurance. return to top

Who regulates RRGs?

Although the LRRA is a federal law, it has no enforcement mechanism of its own and relies wholly on state insurance departments for its implementation. For RRGs, the state in which the RRG is domiciled has primary regulatory authority over the entity. return to top

What are the Advantages and Disadvantages?

As insurance companies owned by their members, some of the key advantages offered by RRGs to their members relate to the control members obtain over their liability programs. This control often translates into more competitive rates, tailored coverage, effective loss control/risk management programs, potential participation by RRG members in favorable loss experience and stability of coverage, notwithstanding insurance market cycles. return to top

Advantages:

• Avoid multiple state filing and licensing requirements.
  
• Stable market established for coverage and rates.
  
• Market residuals eliminated.
  
• No expense for fronting fees.
  

Disadvantages:

• Not permitted to write other lines of business.
  
• No guaranty fund availability for members.
  
• May not allow insureds to comply with proof of financial responsibility laws
  

Who manages the industry - Federal or State?

Over the past 40 years, with few exceptions, Congress has left regulation of the insurance industry to the states, each of which has its own requirements, including licensing laws, "seasoning" requirements, fictitious group laws, restrictions on the ability of insurers to offer to a group special terms regarding rates and coverage, higher tax rates on foreign (out of state) insurers, and countersignature laws.

To help promote the formation and multi-state operation of group liability insurance programs, Congress enacted the Products Liability Risk Retention Act in 1981 and expanded its scope through amendments in 1986. With the advent of the 1986 Risk Retention Act, countersignature and fictitious group laws for entities covered by the Act, which had previously restricted the offering of liability insurance on a “group” basis, were eliminated.

Although RRGs are subject to regulation by their state of domicile, the Act precludes the other states in which RRGs operate from regulating the RRG’s rates, forms, and other facets of their business operations. return to top