08 Dec RRGs – Be Sure to Know the Issues
What’s an RRG? An RRG is a risk retention group. An RRG is an alternative risk transfer entity and operates essentially as a state-chartered insurance company that insures commercial businesses and government entities against liability risks. RRGs were created in 1986 by the federal Liability Risk Retention Act.
Typically, the number of risk retention groups increases when insurance is either unavailable or unaffordable. With the current hard market conditions, there is the possibility that they are viewed as a viable option. This is no doubt why I have received several inquiries from E&O Plus agencies on the positives, negatives, and issues regarding this topic.
RRGs are able to write a variety of liability lines of coverage, including (but not limited to):
- Medical Professional Liability
- Miscellaneous Professional Liability
- Commercial General Liability
- Commercial Auto Liability
- Environmental Liability
It is important to note that property coverage is not included.
There are many stated advantages to an RRG, including:
- Program control
- Long-term rate stability with dividends for good loss experience
- Customized loss control and risk management practices
- Dividends for good loss experience
What about the downsides or issues that could be problematic? Whether the following issues could cause a problem is certainly difficult to assess, but it is advisable that some be brought to the client’s attention:
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- Risk retention groups are exempted from having to obtain a state license in every state where they operate. Apparently, they are only required to follow the regulatory requirements in the state where they are domiciled even if they operate in other states. Some articles I reviewed contend that RRGs choose the states with the least regulation to be domiciled.
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- They are exempt from state laws that regulate insurance and are not subject to any state guaranty funds in the event of insolvency. 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 traditional policies.
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- The policyholders (membership) of the RRG must be limited to businesses essentially engaged in similar type activities.
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- Not all RRGs are rated by one or more of the various rating agencies. Newly formed RRGs do not often have the capitalization levels or operating history to initially secure a rating, especially from AM Best. There is the possibility that the RRG has secured a rating from Demotech.
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- The forms may be very unique. For this reason, special care should be undertaken to request and review any specimen forms. When moving the account to an RRG, any reductions in coverage should be brought to the client’s attention.
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- They are essentially owned by the members. As a result, the experience of one member can result in all members getting accessed / paying extra premiums. RRGs typically attract business through low rates. Low rates and claims activity could result in members getting accessed. I am not sure what happens if an RRG goes under as to whether the members have to pay the bill.
- Management of the RRG. It would be prudent to check who manages the RRG as well who is on the board.
As an alternative risk transfer entity, any interest in the RRG should be referred to the proper individuals / department in your firm. This will ensure that the RRG is properly vetted.