Risk retention group

From CEOpedia | Management online

Risk retention groups (RRG) - is a term for the alternative risk transferring entity. RGGs are established by combining federal and state regulations based on the federal Liability Risk Retention Act of 1986 (LRRA). The reason for adopting this act was the liability crisis in the 1980s (Baillon A., Bleichrodt H., Liu N., Wakker P.P. 2016). The RRG is a risk-bearing item which that must be licensed and authorized as liability insurance companies according to the laws of although one state. This regulation was created to expand the coverage and reduce the price of commercial liability insurance. When the an RGG is accredited in domiciliary government, then it can do business in other states and no need to have a license in this state (P.Born, M.M. Boyer, M.M. Barth 2008, p. 14). The policyholders of the RRG should be its owners. Membership must be limited to institutions or persons working in similar business. Therefore, there is a little diversification of the insurer's insurance portfolio, because all policyholders are exposed with similar risk. A lot of RRGs are arranged as captive insurance companies. But RRGs belonging to states not having captive law are arranged as traditional insurance companies. One of the last important risk-taking restrictions on RRG is that their owners can not get access to state guarantee funds in the event of insolvency. Risk retention groups can be exempt from the requirement to be licensed and other state laws which regulates the business of insurance (J.T. Leverty 2008, p. 4).

Risk Retention Groups - History

According McCarran-Ferguson Act, most insurance issue are determinated more at the state level than federal. But in the late 1970s, many businesses had got issue with obtain product liability. This unfavorable situation forced Congres to act. The Product Liability Risk Retention Act of 1981 was passed after several years of study. It let businesses or individuals with similar liability to create Risk Retention Groups for the goal of self-insuring. Next in the 1980s, when businesses had similar troubles, it receive other types of liability insurance, Congress have to do it something again. It created Liability Risk Retention Act (LRRA), which add to original Product Liability Risk Retention Act to commercial liability insurance. Domiciliary state is responsible for create and operation of a risk retention group (J. Tyler Leverty 2011).

Advantages:

  • Member has got control over risk and they can litigation management issue
  • Elimination of market remains
  • Avoiding many requirements for archiving and licensing by the state
  • Creating of balance market for rates and coverage
  • No payment for front costs

Disadvantages:

  • Risks are ended only to liability insurance
  • Members do not have a coverage guaranty fund
  • May not be able to compliance law of financial liability
  • There must not always be financial assessment from a rating agency

Examples of Risk retention group

  • The National Business Aviation Association (NBAA) Risk Retention Group was established in 1987 to provide aviation liability insurance coverage to its members. The group is organized and formed under the Liability Risk Retention Act of 1986, and is licensed and regulated by the insurance departments of the states in which it does business.
  • The National Trust Risk Retention Group (NTRRG) was organized in 1989 to provide liability insurance coverage to its members. The group is organized and formed under the Liability Risk Retention Act of 1986 and is licensed and regulated by the insurance departments of the states in which it does business.
  • The American Association of Orthopaedic Surgeons Risk Retention Group (AAOS RRG) was established in 1998 to provide professional liability insurance coverage to its members. The group is organized and formed under the Liability Risk Retention Act of 1986 and is licensed and regulated by the insurance departments of the states in which it does business.
  • The American Society of Consultant Pharmacists Risk Retention Group (ASCP RRG) was established in 2001 to provide professional liability insurance coverage to its members. The group is organized and formed under the Liability Risk Retention Act of 1986 and is licensed and regulated by the insurance departments of the states in which it does business.

Advantages of Risk retention group

One of the major advantages of risk retention groups is the flexibility they offer in terms of the coverage they provide. The following are the main advantages of RRGs:

  • Cost: RRGs are typically able to provide more competitive premiums than traditional insurers since they are able to operate with less overhead and regulation. This can result in significant cost savings for policyholders.
  • Coverage: RRGs are also able to provide more comprehensive coverage than traditional insurance, as they are not limited by the same coverage restrictions as traditional insurers.
  • Flexibility: RRGs are able to tailor coverage to the specific needs of their policyholders, and can provide coverage for risks not covered by traditional insurers.
  • Ownership: RRGs are owned by the policyholders, so the policyholders are able to control the direction of the RRG and the coverage it offers.
  • Speed: RRGs are able to respond quickly to changing needs, and can often provide coverage quickly and without the lengthy underwriting process required by traditional insurers.

Limitations of Risk retention group

Risk retention groups have certain limitations that should be taken into account when setting up one. These limitations include:

  • Regulatory oversight: RRGs are subject to the oversight of the state in which they are domiciled, but they are not subject to the regulations of the other states in which they operate. This can lead to certain difficulties in terms of compliance with state regulations, as RRGs may not be aware of the requirements in other states in which they operate.
  • Limited portfolio diversification: RRGs are limited to insuring members who are engaged in similar activities, and thus the risk portfolio of the RRG may be limited and not diversified.
  • Lack of access to state guarantee funds: RRGs are not eligible for access to state guarantee funds, which can leave them exposed in the event of insolvency.
  • Cost: RRGs may incur higher costs than traditional insurance companies, due to their limited size and lack of access to capital markets.
  • Limited geographic coverage: RRGs are limited in their ability to operate in multiple states, as they must be licensed and authorized in the state of domicile and may not be authorized in other states.

Other approaches related to Risk retention group

  • Risk retention groups can also be implemented through the use of self-insurance which involves the pooling of resources from different entities to cover potential losses.
  • Another approach is the use of risk-sharing pools, where a group of organizations share the responsibility for risk coverage.
  • Another way to manage risk is through the use of reinsurance, which is the transfer of risk to a third party.
  • Risk management techniques such as hedging and diversification can also be used.

In conclusion, risk retention groups can be implemented using a variety of approaches, including self-insurance, risk-sharing pools, reinsurance, and risk management techniques such as hedging and diversification. Each approach has its own benefits and drawbacks, and organizations should carefully consider which approach is most suitable for their situation.


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References

Author: Justyna Niemiec, Paulina Jurusik, Aleksandra Marcinkowska

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