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How does a Risk Retention Group work?

Risk Retention Groups

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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.

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:

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:

Risk Retention Groups usually form in industries that face extremely high risks, such as malpractice. In fact, medical malpractice coverage currently makes up the bulk of Risk Retention Group activity.


What are the advantages and disadvantages of Risk Retention Groups?

Risk retention groups can be advantageous to members in several ways:

However, you should be aware of some of the disadvantages:


Are Risk Retention Groups stable?

According to the Analysis of Risk Retention Groups: Third Quarter 2018 report by the Demotech rating agency, risk-retention groups’ liabilities, cash, and assets have all increased since the second quarter of 2017.

Among the other findings:

Overall, Demotech concludes that Risk Retention Groups are a good bet despite uncertainty in the political and economic realms, with reasonable financial ratios given fluctuations over time.

How is a Risk Retention Group created?

A feasibility study is a major first step in creating a Risk Retention Group. Here, the participating businesses’ current insurance solutions are evaluated, collecting information including:

Within the feasibility study lies a comparative analysis. This is a breakdown of average losses versus premiums over the past five years or more as compared to costs associated with a new Risk Retention Group. Should premiums for the group exceed the marketplace, forming a new Risk Retention Group may be considered inefficient.

From there, service providers are appointed—specifically, an underwriting management firm and reinsurance company.

An underwriting manager:

The reinsurance intermediary:

Other associated service providers often include consultants, auditors, and loss control specialists.

How are Risk Retention Groups regulated?

Risk Retention Groups are exempt from all state rules, regulations, and laws other than the state in which they are chartered. Additionally, Risk Retention Groups do not need to register under federal securities laws or state Blue Sky laws.

That said, any U.S. state has the right to require a Risk Retention Group to:

However, states in which Risk Retention Groups are not domiciled have no say over insurance-related services, investment activities, management, operation, rates and coverages, forms, or claims and loss control administration.


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. In other words, let the buyer beware.

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