A Risk Retention Group (RRG) is a member-owned liability insurance company formed under federal law that allows businesses with similar risk exposures to create their own insurance entity to provide liability coverage.
A Risk Retention Group is an alternative risk transfer mechanism established under the federal Liability Risk Retention Act (LRRA) of 1986.
Unlike traditional insurance companies, RRGs are owned by their policyholders, who must all be engaged in similar businesses or activities with comparable liability exposures. This homogeneity requirement ensures that members face similar risks, allowing for more tailored coverage and risk management solutions.
RRGs operate under a unique regulatory framework that combines federal and state oversight. Each group must be licensed as an insurance company in one state, its “domicile” state, but once licensed, it can operate in all 50 states without obtaining additional licenses.
While RRGs don’t participate in state guaranty funds, domicile states typically impose strong capitalization requirements to ensure financial stability.
This multi-state capability represents a significant advantage over traditional captive insurance arrangements, which face more regulatory hurdles when operating across state lines.
A captive insurance arrangement is a form of self-insurance where a company or group of companies establishes its own licensed insurance entity to insure their risks, providing greater control, cost efficiency, and tailored coverage compared to traditional insurance.
In a captive arrangement, the business acts as both the insurer and the insured, allowing it to retain underwriting profits, manage claims directly, and access reinsurance markets. This model is particularly beneficial for businesses facing high premiums or limited options in the traditional insurance market.
RRGs offer an important alternative for business owners when traditional coverage becomes prohibitively expensive or unavailable. By pooling resources with similar businesses, companies gain greater control over their insurance programs, including underwriting, claims management, and loss prevention strategies.
The practical operation of an RRG involves members contributing capital to form the insurance entity, which then underwrites liability policies for its members. Unlike regular insurance companies, profits generated by the RRG remain within the group and can be distributed to members as dividends or used to stabilize premiums during hard market cycles.
RRG Examples
Medical Practice RRG
Imagine a group of 50 independent orthopedic surgery practices across multiple states facing skyrocketing medical malpractice premiums. Traditional carriers have either exited their markets or raised rates by 30-40% annually.
These practices form the “Orthopedic Liability Risk Retention Group,” contributing $5 million in initial capital and domiciling in Vermont, known for its favorable captive insurance regulations.
Once established, the RRG provides medical malpractice coverage tailored specifically to orthopedic risks at more stable rates than the commercial market.
The surgeons implement specialized risk management protocols for common orthopedic procedures, reducing claims frequency by 25% within three years.
Because they own the RRG, they receive dividends in profitable years and maintain consistent coverage even when the traditional market hardens further.
Transportation Company RRG
A network of 75 regional trucking companies transport specialized industrial equipment. After several large industry accidents, commercial auto liability premiums increase dramatically, with some carriers refusing to renew policies.
These companies form “Industrial Transport Risk Retention Group,” domiciled in South Carolina.
The RRG provides comprehensive auto liability coverage with limits up to $5 million per occurrence. Member companies implement standardized safety protocols and driver training programs developed by industry experts within their group.
When one member experiences a significant claim, the group’s loss control committee reviews the incident and shares preventative measures with all members. Despite two major industry-wide premium spikes over five years, the RRG maintains rate stability, averaging just 3% annual increases while commercial market rates rise 15-20% during the same period.
Pros and Cons of RRGs
Risk Retention Groups offer several compelling advantages for businesses. Members benefit from greater control over their insurance programs, including coverage terms, underwriting guidelines, and claims handling procedures.
Premium stability is another key advantage, as RRGs typically experience less volatility than the commercial market during insurance cycles.
The ability to provide customized coverage designed specifically for the industry group often results in broader protection addressing industry-specific risks that traditional insurers might exclude.
A key requirement of RRGs is that they must be owned by their members, who must also be the insureds covered by the policies. This creates alignment between ownership and insurance interests, but also means that members share in both the profits and the risks of the enterprise.
Additionally, profits generated by the RRG remain with its members rather than flowing to external shareholders, resulting in dividend distributions or premium credits during favorable years.
On the other hand, capital requirements for RRG establishment and maintenance can be substantial. Members must contribute to the initial formation and may face additional capital calls if losses exceed projections. RRGs do not participate in state guaranty funds that protect policyholders if an insurer becomes insolvent
The shared risk structure also means poor results from one member can impact the entire group, potentially leading to higher premiums for all participants.
Limited coverage scope: RRGs are restricted by federal law to providing commercial liability coverage only, meaning businesses must still secure property, workers’ compensation, and other coverages elsewhere. Personal lines of insurance cannot be written by RRGs.
The exclusion of personal lines, property insurance, and workers’ compensation from RRGs stems from the intent of the LRRA. The law was created to solve a commercial liability coverage problem, not to replace traditional personal or property insurance markets.
Members must also be willing to share detailed operational information with other group members, which some businesses may find uncomfortable from a competitive standpoint.
Did You Know?
Despite being a creation of federal law, no federal agency directly regulates Risk Retention Groups.
The Liability Risk Retention Act creates a unique regulatory framework where the domiciliary state has primary regulatory authority, while non-domiciliary states have limited oversight powers.
This unusual arrangement emerged from the liability insurance crisis of the 1980s when Congress sought to increase market capacity without completely federalizing insurance regulation. This created what some industry experts call a “regulatory hybrid” that exists nowhere else in American insurance law.
As of 2022, there were approximately 225 active RRGs generating nearly $4.9 billion in annual premium.
Sources and further reading:
Risk retention group – Wikipedia
The Advantages and Disadvantages of Risk Retention Groups – SIM
Risk Retention Groups: A Basic Overview – Captive.com
Risk Retention Resources – Captive Insurance Companies Association
What is a Risk Retention Group?
About Risk Retention Groups
Insurance Topics | Risk Retention Groups – NAIC
Risk Retention Group vs. Captive: What’s the Difference? | G&A
What are Risk Retention Groups and How Do They Work?
Risk Retention Groups, Risk Purchasing Groups and Captive Insurers
Contrasting Risk Retention Groups and Captive Insurance Companies
risk retention group (RRG) – IRMI
NAIC Risk Retention and Purchasing Group Handbook