Risk retention group

Risk retention group
See also
Phoenix company Capital buffer Funding agreement Finance company Takaful Cash pooling Bridge Bank Statutory Audit Principal agent problem

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, s.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, s.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

References

• Baillon A., Bleichrodt H., Liu N., Wakker P.P. (2016) Group decision rules and group rationality under risk, Erasmus University Digital Repository vol 10.1007
• Born P., Boyer M.M. (2008) Risk Retention Groups in Medical Malpractice Insurance: A Test of the Federal Chartering Option, CIRANO - Scientific Publications No. 2008 s.14
• Leverty J.T. (2008) An Economic Analysis of Single versus Multiple Jurisdictional Regulation – The Case of Risk Retention Groups, CiteSeerX
• Leverty J.T. (2011) The Cost of Duplicate Regulation: Evidence From Risk Retention Groups, The Journal of Risk and Insurance vol.79, iss.1

Author: Justyna Niemiec, Paulina Jurusik, Aleksandra Marcinkowska