The Differences Between Risk Retention Groups and Traditional Insurance
Usually, it’s easy to purchase the liability coverage you need from regular carriers. But what if a policy that you need is too expensive or even unavailable? Media attention on cyber attacks and workplace harassment has caused the cost of liability losses to rise dramatically, and businesses have other risk exposures they need to address. However, if you can’t find an affordable business liability insurance policy, you may be able to find coverage through risk retention groups.
These groups function similarly to regular insurance companies, but they’re formed and owned by the businesses seeking coverage. Because of this, risk retention groups allow businesses to control their own risk management issues and access stable insurance rates. However, this type of coverage is exempt from much of the regulatory oversight that protects policyholders, and businesses should be aware of other key issues before considering risk retention groups.
Background on Risk Retention Groups
Although Congress passed legislation on risk retention groups in 1981, at first they could only provide coverage for product liability and completed operations risks. However, later in the 1980s a crisis in the U.S. insurance market made it difficult or even impossible for businesses to obtain other types of liability coverage.
Although commercial insurance is usually regulated by individual states, Congress stepped in to address the market crisis and passed the Liability Risk Retention Act (LRRA) in 1986. This act allows risk retention groups to insure all types of commercial liability and essentially bypass traditional insurance markets.
How Do Risk Retention Groups Work?
The LRRA specifies that a risk retention group must be owned by all of its insured parties. Additionally, all of these parties must face similar liability exposures, (e.g., working in the same business, profession or industry). As a result, this type of coverage is popular in professions that face extremely large risks, such as medical malpractice liability.
Since the owners of a risk retention groups are the ones seeking insurance, they need to provide all of the finances to cover losses. There are also a number of federal and state regulations to consider:
- Each risk retention group must be licensed as a liability insurance company in a single state, referred to as the domicile state.
- In order to get a license, a group must provide its domicile state with specific documents outlining its intended insurance coverages, financial history, expected loss experience, underwriting procedures and more.
- Unlike regular insurance companies, once a risk retention group obtains a license it can operate in all 50 states and the District of Columbia. However, groups need to register, pay premium taxes and comply with unfair claim practices in each state.
- Risk retention groups are primarily regulated by their domicile states, and insurance commissioners in other states only have limited regulatory authority.
Advantages and Disadvantages of Risk Retention Groups
Although risk retention groups give businesses more control over their liability programs, they can also face significant financial risk. A group’s owners must provide all of the funds to back up insurance policies, which can put extreme pressure on each business in a risk retention group.
Here are some of the advantages of risk retention groups:
- Businesses can tailor insurance policies to their own needs.
- Risk retention groups are exempt from many state insurance requirements, which can lower premiums.
- The policyholders retain all profit instead of insurance carriers.
- Businesses with operations in multiple states don’t need to obtain multiple insurance licenses.
- Premiums won’t rise or fall unexpectedly during renewals.
- Reinsurance can help protect risk retention groups from severe losses.
Here are some of the ways risk retention groups can endanger businesses:
- Risk retention groups can’t provide property insurance.
- Businesses may not be able to access the funds they put into a risk retention group if needed.
- Risk retention groups that become insolvent or fail to cover a loss may have to forfeit each policyholder’s funds, even if they aren’t related to a claim.
- Domicile states may not monitor risk retention groups when they operate in other states, which can lead to unexpected compliance issues.
- One business’s loss may raise premiums for each member in a risk retention group.
- Businesses need to follow regulations to prove their financial responsibility, which can be difficult if they don’t have a certified insurance rating.
Your Risk Retention Coverage Options
When considering risk retention groups, it’s important to closely examine each party that’s forming the group to ensure their operations won’t endanger your business. Also, be sure to GDI Insurance Agency, Inc. at 209-634-2929 to discuss your commercial liability coverage options.