What Is a Risk Retention Group (RRG)?

A Risk Retention Group (RRG) is a specialized liability insurance company formed and owned by its members. These groups were established to address challenges businesses and organizations faced in securing affordable liability insurance. RRGs emerged under the federal Liability Risk Retention Act (LRRA) of 1986, a federal law created to provide a market solution for liability insurance accessibility. This unique structure allows for streamlined operations across state lines compared to traditional insurance providers.

Core Characteristics of a Risk Retention Group

Risk Retention Groups are distinct entities within the insurance landscape because they are member-owned. Businesses or organizations with similar liability exposures collectively establish and own the RRG. This structure differs significantly from traditional commercial insurers, which are owned by shareholders or private entities aiming to maximize profits for non-policyholder owners.

RRGs are specifically authorized to provide liability insurance to their members, including general liability, professional liability, malpractice liability, and product liability. However, RRGs are restricted to offering only liability coverage and cannot provide other types of insurance, like property, health, or workers’ compensation. This focused scope allows RRGs to tailor policies and underwriting to their members’ shared business activities or exposures.

Membership in an RRG is restricted to those who also purchase insurance from the group. Members must engage in similar or related businesses or activities concerning their liability exposures. For instance, medical professionals might form one RRG, while educational institutions could form another. This homogeneity enables the RRG to specialize in risk management strategies pertinent to their shared risks, potentially leading to more customized coverage and long-term rate stability.

The financial structure of an RRG involves members committing capital, which forms the collective financial backing essential for solvency and risk-based capital management. Any underwriting profits generated by the RRG can be reinvested into the group or returned to members as dividends. This alignment encourages members to actively participate in risk management and loss control efforts.

Formation and Operation

Establishing a Risk Retention Group requires it to be chartered and licensed as a liability insurance company in at least one U.S. state, referred to as the domiciliary state. This involves submitting a plan of operation or feasibility study to the chartering state’s insurance commissioner for approval. This plan details aspects such as coverages, deductibles, limits, rates, and rating classification systems. Initial capitalization requirements vary by state.

Once chartered in a single state, an RRG can operate and issue policies in all other states. This multi-state operation is a key provision of the Liability Risk Retention Act, preempting many state-specific licensing requirements that traditional insurers face. However, the RRG must provide a copy of its feasibility study and annual audited financial statements to each non-domiciliary state where it intends to do business. These financial statements must be certified by an independent public accountant and include an actuarial opinion on loss and loss adjustment expense reserves.

Operationally, an RRG must maintain a formal business structure, including a board of directors composed of representatives from member organizations. The board oversees the RRG’s governance, ensuring adherence to its business plan and regulatory compliance. This structure provides members with a higher degree of control over their insurance programs, including policy terms and claims management.

RRGs are designed to assume and spread the liability risk exposures of their members. They can be structured as stock or mutual companies, or as reciprocal exchanges, aligning with the laws of their chartering state. This allows for specialized underwriting and claims handling tailored to the group’s specific risk profile.

Regulatory Oversight

Risk Retention Groups operate under a unique regulatory framework established by the federal Liability Risk Retention Act of 1986. While an RRG must be chartered and licensed in one domiciliary state, this federal law permits it to operate and issue policies in all other states without needing separate licensing in each. This single-state regulation for multi-state operation is a defining characteristic that differentiates RRGs from traditional insurers.

The chartering state holds primary regulatory authority over the RRG, overseeing its solvency, financial condition, and overall operations. Regulators in the domiciliary state monitor compliance with the RRG’s approved plan of operation and require regular financial filings, including audited statements and actuarial opinions. If a non-domiciliary state believes an RRG is in hazardous financial condition, it can compel the RRG to submit to an examination.

Despite the preemption of most state licensing laws, non-chartering states retain limited regulatory authority over RRGs operating within their borders. They can require RRGs to register with their insurance commissioner and designate the commissioner as an agent for service of process. Additionally, non-domiciliary states can enforce laws related to unfair claim settlement practices and collect applicable premium taxes.

RRGs are exempt from participating in state guaranty funds, which protect policyholders if an insurance company becomes insolvent. This exemption can contribute to lower premium costs for RRG members. However, policies issued by an RRG are federally required to include a notice indicating that the policy is not regulated in the same manner as traditional policies and that state guaranty funds are not available.