What is Risk Retention Group (RRG)

A risk retention group (RRG) is a state-chartered insurance company that insures commercial businesses and government entities against liability risks. Risk retention groups were created by the federal Liability Risk Retention Act, a federal law created in 1986. A member of a risk retention group must be a business.

BREAKING DOWN Risk Retention Group (RRG)

Risk retention groups are treated differently from traditional insurance companies. They are exempted from having to obtain a state license in every state in which they operate, and also are exempt from state laws that regulate insurance. For example, a risk retention group is exempt from having to contribute to state guaranty funds, which can lower premium costs but can also increase the possibility that policyholders will not have access to state funds in the event of group failure. All policies issued by a risk retention group are federally required to include a warning indicating that the policy is not regulated the same as regular policies.

Risk retention groups are mutual companies, meaning that they are owned by the members of the group. They can be licensed as a standard mutual insurer, but they can also be licensed as a captive insurer, which is a company organized by a parent company specifically to provide insurance coverage to the parent company. Examples of risks protected by RRG policies include medical and legal malpractice, however, property damage caused by a flood is not a covered risk. Policies can be owned by a group of individuals, such as a law firm, but they can also be purchased by public universities or county administrations. Members of an RRG must be engaged in similar activities or related with respect to liability exposures by virtue of any related or common business exposure, trade, product, service, or premise. 

The number of risk retention groups is likely to increase when insurance is either unavailable or unaffordable. While they may be popular in some business climates they still must follow certain state regulations, including non-discrimination and anti-fraud requirements. Risk retention groups may also be required to provide regulators with more information about their financials in order to ensure that they are financially solvent. 

Benefits of Risk Retention Groups

  • Program control
  • Long-term rate stability
  • Customized Loss control and risk management practices
  • Dividends for good loss experience
  • Access to reinsurance markets
  • Stable source of liability coverage at affordable rates
  • Multi-state operations

History of Risk Retention Groups

Under the McCarran-Ferguson Act, most insurance matters are regulated at the state level, rather than federal. However, in the late 1970s, many businesses were unable to obtain product liability coverage at any cost, and the situation required congress to act. After several years of study, it passed the Product Liability Risk Retention Act of 1981, which permitted individuals or businesses with similar or related liability exposure to form "risk retention groups" for the purpose of self-insuring. The act only applied to product liability and completed operations insurance.

Late in the 1980s, when companies faced similar issues obtaining other types of liability insurance, Congress acted again with the passage of the Liability Risk Retention Act (LRRA), which extended the reach of the original Product Liability Risk Retention Act to commercial liability insurance. Under the LRRA, a domiciliary state is charged with regulating the formation and operation of a risk retention group.

The LRRA pre-empts "any state law, rule regulation, or order to the extent that such law, rule, regulation or order would make unlawful, or regulate, directly or indirectly, the operation of a risk retention group." The LRRA also prohibits states from enacting regulations that discriminate against risk retention groups.