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FAQ's & Info
Q: Risk Retention Groups
In 1986 the U.S. Congress passed the federal law known as the Liability Risk Retention Act (LRRA). LRRA allows for the creation of Risk Retention Groups and Risk Purchasing Groups. This law was passed during a time considered by many to be a liability crisis. The purpose of the law was to allow the opportunity to purchase insurance coverage from entities other than insurance carriers. These entities do not have to undergo the same degree of regulation as licensed, admitted insurance carriers.
A Risk Retention Group (RRG) is an entity that performs functions of a captive insurance company and is organized for the purpose of assuming and spreading the liability risk exposure of its group members. These types of entities must be chartered and licensed as a liability insurance company in one of the fifty states or the District of Columbia. It can also charter as an industrial or association captive under special state captive laws such as Vermont, Delaware, Colorado, Illinois, etc. A RRG typically bears risk and may purchase reinsurance. It is important to note that except for the chartering state, an RRG is exempt from any state law, rule or regulation that regulates or makes an RRG unlawful.
At the time the “Medical Malpractice crisis” was reaching its peak RRGs appeared to be a good alternative. However, despite their once attractive nature, RRGs are not for everyone and before a decision is made many factors should be strongly considered.
If you were to consider a RRG, then it is recommended to research, among other things, whether or not the RRG is exempt from any state law, rule or regulation that regulates or makes an RRG unlawful.
The difference between a RRG and a Risk Purchasing Group (RPG) is that a RPG is a group of insurance buyers who form a group to purchase liability insurance from an insurance company. This group can be an admitted company, a surplus lines company or a Risk Retention Group. A RPG typically does not bear risk and does not purchase reinsurance. Whereas, a RRG typically does bear risk and may purchase reinsurance. If the RPG decides to reorganize at some point as a Risk Retention Group, then this would be allowed under the LRRA.
It is important to note that a RRG operating in New Jersey would only be subject to New Jersey Department of Banking and Insurance (NJDOBI) oversight if its state of domicile is New Jersey. We are not aware of any RRGs offering medical professional liability insurance that use New Jersey as their state of domicile.
The primary differences between a Risk Retention Group and a licensed, admitted insurance company relate to regulation oversight. A licensed, admitted insurer is an entity that has filed an application and been granted a Certificate of Authority to operate in the state. It must also file all of its rates, rating rules and coverage forms for state approval. Additionally, a licensed, admitted insurer must file quarterly financial statements with the state and is subject to financial examinations by the state every three years, as well as market conduct examinations at any time. This regulatory oversight is intended in part to protect policyholders from the possibility of insurer insolvency. Such oversight and protection is not applicable to RRGs or their members.
The advantages of a Risk Retention Group were originally thought by some to include reduced costs, providing alternative mechanisms for coverage, and promoting greater premium competition among the general liability insurers. The Congressional Committee on Commerce, Science, and Transportation was convinced during the mid 1980’s that an expansion of the Products Liability Risk Retention Act of 1981 was needed to facilitate group insurance programs. The thinking was that this would encourage insurers to set premiums that would compete with the new formations created under the revised law and ultimately result in the advantages mentioned. The result was Congress passing the LRRA, which allowed the formation of new insurance entities that would be exempt from certain state laws. This could impede the information and interstate operation of association captive insurance companies or RRGs. It was also believed the LRRA would allow for preferential premium rates, terms and conditions to groups seeking liability insurance coverage.
The disadvantages of a Risk Retention Group include the fact that RRGs are not subject to the same regulatory oversight as licensed, admitted insurers. They are exempt from state laws and regulations concerning premium rates, coverage language and rating rules. RRGs are also exempt from the regulatory intent of protecting policyholders from potential insurer insolvency. Additionally, RRGs may require capitalization assessments in addition to premium and they may not offer individual legal representation in the event of multiple defendant cases.
Risk Retention Groups for medical professional liability insurance have operated in New Jersey previously. One of the largest medical professional liability RRGs, Physicians National Risk Retention Group, made inroads in New Jersey in the late 1980’s before going out of business several years later. Also, certain specialty-specific RRGs have operated in New Jersey for many years.
Health Care Providers are encouraged to exercise caution when considering insurance proposals from a Risk Retention Group.
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