The History of Risk Retention Groups
From the late 1970’s to mid 1980’s, businesses and municipalities from around the US inundated Congress with requests to help find a solution to what was considered an ongoing “liability crisis.” Congress first enacted the 1981 Product Liability Act which didn’t do enough to stop the rise of cost and difficulty to obtain liability insurance in certain industries.
So a new legislation, known as the Federal Liability Risk Retention Act of 1986 (the Act), created two new methods by which insurance buyers could protect their organizations with liability insurance: risk retention groups (RRGs) and purchasing groups (PGs). Though law primarily aimed to reverse the troubling trend regarding product liability insurance, it also includes all types of third party liability, such as general liability, directors and officers, errors and omissions, professional liability, medical malpractice, etc.
While the “liability crisis” served as the initial motivation for enactment of the Act, the overall advantages derived from risk retention groups and purchasing groups ̶ from both economic and regulatory
perspectives ̶ have been the driver for their continued growth. We estimate that today there are over 1,000 of such groups with premiums exceeding $5B annually.
A link to the law can be found here.
What is a risk retention group?
A risk retention group (RRG) is a liability insurance company that is owned by its members. In order to start an RRG, it must be domiciled in a specific state. Once licensed by its state of domicile, an RRG can insure business and municipalities (aka members) in all states. Since it is a federal law, it avoids state regulation, making it much simpler for RRGs to operate nationally. In contrast, an insurance company must obtain approval in each state it would like to offer insurance in. However, RRGs retain risk similarly to insurance companies.
What is a purchasing group?
A purchasing group (PG) is made up of insurance buyers who join their insurance needs. This is usually the case when insurance is needed on a national basis. Those groups purchase their liability insurance coverage from an insurance company, including a company operating on an admitted basis, a surplus lines basis, or a risk retention group.
What is the difference between risk retention groups and purchasing groups?
RRGs are essentially their own insurance company. They bear the risk of all losses (up to a reinsurance deductible) and premiums that are collected are used by RRGs to administer the group, pay for claims, and other expenses related to providing liability protection. In contrast, PGs do not take on that risk. Instead, they purchase protection from an insurer which in return offers policies and pays out the claims.
Another key difference between the two methods is that RRGs usually require members to capitalize the company via purchase of shares whereas PGs require no capital. Since RRGs bear the risk and have relatively less equity to pay out larger claims, they protect themselves from larger losses.
The D.O.K. Insurance Agency, LLC works with a select number of RRGs
We work with a few different RRGs. Our largest partners are:
- Alliance of Nonprofits for Insurance, Risk Retention Group (ANI) – Provides liability insurance to 501(c)(3) nonprofits with locations outside California
- PCIC General Liability Program – The PCIC program is designed for contractors
Please don’t hesitate to contact us to find out more about RRGs and PGs. You may reach us at 425-242-5252 or firstname.lastname@example.org.
1500 Benson Road South, Suite 201
Renton, WA 98055