Risk Retention Groups
What are they and how do they work?
Risk Retention may bridge the gap for those suffering high liability costs.
If you’re finding reasonably priced liability insurance difficult to obtain, you may be both frustrated and concerned. That’s where Risk Retention Groups come in.
What are Risk Retention Groups?
Risk Retention Groups were founded in order to provide a marketplace solution for businesses who were having trouble getting insurance coverage. They differ from traditional insurance companies in that they need not obtain a license to operate in any state other than the one in which they are chartered. Since these are member-owned mutual companies, they can either be licensed as a standard mutual insurer or a captive insurer, meaning that they are wholly owned and controlled by those they insure.
What are the advantages and disadvantages of Risk Retention Groups?
Risk retention groups can be advantageous to members in several ways:
- • While policyholders must put up the finances to cover claims, they also retain all profits, rather than insurance companies.
- • Renewals won’t result in unexpected premium increases or decreases.
- • If your business is licensed in more than one state, you won’t need to get multiple insurance licenses.
- • Built-in flexibility means your policy can more closely meet your needs.
- • Severe losses are limited by the presence of reinsurance, which limits risk.
However, you should be aware of some of the disadvantages:
- • If one business suffers a loss, it may raise premiums throughout the rest of the group.
- • If a risk retention group fails, businesses may lose their funds regardless of whether they are involved in a given claim.
- • Property insurance is not offered.
- • Compliance issues may arise if home states cannot monitor group activity in other states.
- • Businesses may have trouble getting their hands on the funds they’ve invested in groups.
- • Lacking a certified insurance rating may make it difficult to prove you as a business are financially responsible.
- • You as a business may not wish to share your information with others.
First legislated in 1981, Risk Retention Groups were initially limited to covering completed operations risks and product liability. The concept was later expanded in 1986 when the country was in the middle of an insurance crisis blocking many businesses from getting liability coverage—the Liability Risk Retention Act was passed to give buyers greater marketplace control.
This act created two groups:
Risk Retention, a member-owned conglomerate that must be based in a specific state.
Purchasing, a cluster of buyers joining forces to purchase liability coverage from an insurance firm.
While both groups mandate that members be involved in similar professional activities, the major difference is that risk retention members are responsible for issuing policies and thereby taking on risk. Meanwhile, purchasing groups buy their coverage from an insurance firm, which takes on the risk itself. Additionally, members of Risk Retention Groups finance their company, while purchasing members need not do this. Finally, the groups are regulated differently under state and federal law.
How do Risk Retention Groups differ from traditional insurance?
While Risk Retention Groups work in ways that are reminiscent of traditional insurance firms, consumers need to be aware of the differences between the two. These include:
Ownership: While regular insurance companies are independently owned and operated, Risk Retention Groups are created and controlled by businesses. In turn, those businesses receive coverage and are empowered to handle their individual risk management issues.
Regulatory oversight: Typical insurance policyholders are covered by a suite of legal protections, but members of Risk Retention Groups do not enjoy the same security. Other than the laws of the state in which it is based, Risk Retention Groups are exempt from all laws, rules, regulations, or orders that would control their activities.
Financial responsibility: Owners of Risk Retention Groups must provide sufficient funds to cover losses and are required to provide its home state with written evidence of financial history, insurance coverages, and underwriting processes, among other information, in order to get a license.
Risk Retention Groups exist to address the difficulty some businesses may encounter when it comes to getting liability insurance. While they are advantageous in that they provide a marketplace solution for these businesses, particularly in times when insurance is either challenging to afford or simply hard to find, keep in mind that they are still subject to certain state regulations such as anti-fraud or nondiscrimination clauses. In addition, Risk Retention Groups often find themselves on the hook to provide a deeper look into their financial picture to prove their solvency.
Let Mainline Insurance help give you peace of mind as you go about working hard.