Risk Retention Groups (RRGs)

What is a Risk Retention Group (RRG)?

A Risk retention group (RRG) is organized for the primary purpose of assuming and spreading the liability risk exposure(s) of its group members . It must be chartered and licensed (i.e., licensed and admitted) as a liability insurance company in one of the 50 states or the District of Columbia. It can also charter as an industrial or association captive under special state captive laws in some states.

What is Meant by Domiciliary State?

The state where an RRG is chartered is known as the RRG’s domiciliary state.

Are Risk Retention Groups a form of Captive insurance?

Yes, they are, because RRGs involve risk transfer like any other captive insurance entities which provide insurance for their owners/members.   The difference is that RRGs are enabled under a unique federal statute not available to other types of insurers.

How are Risk Retention Groups Unique?

The liability Risk Retention Act passed by the Congress in 1986 allowed people or entities in the same or similar businesses to join together, pool their money and form an insurance company that is required to be licensed in only one (1) state, called its state of domicile.  After that, the RRG is then permitted to sell their insurance in the other 49 (non-domiciliary) states with very limited state regulatory authority.  

Can Risk Retention Groups Sell Insurance to Members of the Public?      

No.  One of the reasons why the Courts treat RRGs differently is that they only sell their policies of liability insurance to their members, not to the public. The two most prevalent structures are: a structure where insured members of the group own the company, or a structure where the members of the group are also members of an association which owns the company, which then issues the coverage to that association’s members.    

What is the Origin of Risk Retention Groups?

Congress passed the Product Liability Risk Retention Act in 1981. This created a new type of insurance carrier, Risk Retention Groups. In 1986, Congress broadened the Act to include commercial liability and renamed it the Liability Risk Retention Act (LRRA ). The LRRA is codified in Title 15 of the United States Code, beginning at Section 3901.

Federal Liability Risk Retention Act Guide

How can a Risk Retention Group be Structured?

The structuring of the RRG must conform to the laws of the chartering state and can include formation as a stock or mutual company or as a reciprocal exchange. Members of an RRG must be engaged in businesses or activities which are similar or related to the liability exposures created by virtue of common business or trade practices, products, services, premises, or operations. In addition, an individual or firm that meets these criteria cannot be excluded from the group if the intent of the exclusion is to provide the group with a competitive advantage.

Who Owns a Risk Retention Group?

The LRRA allows for two different RRG ownership schemes: 1) Member Owners and 2) Sole Organization Owner.

Under both permitted ownership schemes, members of the Group who are also insured by the Group are in control of the Risk Retention Group, either as Member Owners or as member-owners of the Sole Organization Owner.  Not all members of a Group need be insured by the Risk Retention Group.  Nor are all persons insured by the Risk Retention Group required to be owners of the Risk Retention Group.  But all owners of the Risk Retention Group must also be both members of the Group and provided insurance by the Risk Retention Group.

In the case of Member Owners, ownership of a Risk Retention Group is restricted to persons who are both members of the Risk Retention Group and who are provided insurance by the Risk Retention Group. (LRRA § 3901(a)(4)(E)((i))

In the case of a Sole Organization Owner, that organization’s owners are restricted to persons who are both members of the Risk Retention Group and who are provided insurance by the Risk Retention Group. (LRRA § 3901(a)(4)(E)((ii))

Who is a Member of a Risk Retention Group?

The members of a Risk Retention Group must be engaged in businesses or activities that are similar or related with respect to the liability to which those members are exposed by virtue of any related, similar, or common business, trade, product, services, premises, or operations.  For example, a group of medical professionals could belong to one RRG, while a group of schools would belong to a different RRG.

Members of a Risk Retention Group include not only the Risk Retention Group’s equity owners and contributors, but also entities affiliated with or related to such owners or contributors.  Membership in a Risk Retention Group includes active participants in a risk retention program.  Active participants include persons whose own liability is currently assumed, in whole or in part, by the Risk Retention Group.

Is a Risk Retention Group Ownership Interest a Security?

Yes, the ownership interests of an RRG are securities, but they are exempt from filing registration statements under Federal Securities Law and state Blue Sky Laws. However, in line with the anti-fraud provisions of applicable State and Federal laws, any solicitation for funds must disclose all material facts regarding the RRG and its insurance operations.

What Does a Risk Retention Group Have to do to be Chartered and Operate In a Domiciliary State?

LRRA requires an RRG to submit a plan of operations or feasibility study for approval to the chartering state before offering insurance. Under LRRA, the plan or study must include coverages, deductibles, coverage limits, rates, and rating classification systems.  The RRG must provide any revisions to that plan if the RRG intends to offer any additional lines of liability insurance.

Can a Domiciliary States Regulate a Risk Retention Group?

Yes. Since the state of domicile is responsible for the licensing and admission of RRGs, the domiciliary state may regulate the formation and operation of an RRG. 

What Does a Risk Retention Group Have to do to Operate In a Non-Domiciliary State?

Before an RRG may operate in a non-domiciliary state, the RRG must provide the state with a copy of its feasibility study that was approved by the domiciliary state as well as any revisions to that study submitted to the domiciliary state.  The RRG must also provide annual audited financial statements and statements of opinion on loss and loss adjustment expense by an actuary or qualified loss specialist.

Can Non-Domiciliary States Regulate a Risk Retention Group?

Except for the domiciliary state, an RRG is exempt from any state law, rule, or regulation that regulates the operation of an RRG or makes the operation of an RRG unlawful except, any state can require an RRG to:

  1. Comply with unfair claim settlement practices

  2. Pay applicable premium or surplus lines taxes

  3. Participate in residual market mechanisms (Joint Underwriting Authorship’s/Assigned Risk Pools)

  4. Designate the insurance commissioner as agent for service of process

  5. Submit to financial examination by other state insurance commissioners if the chartering state has not initiated such an examination

  6. Comply with state deceptive, false, or fraudulent trade practice laws

  7. Comply with lawful orders for delinquency or dissolution proceedings

  8. Comply with an injunction for hazardous financial condition

  9. Include a notice in insurance policies, in 10-point type, stating the RRG is not subject to all state laws and regulations, and that the insolvency guaranty fund is not available for the RRG.

Unless the law, rule, or regulation is on this list, the non-domiciliary state has no approval authority over rates, coverages, policy language, forms, insurance-related services, management, operation, investment activities, or loss control and claims administration. In addition, LRRA prohibits states from otherwise discriminating against RRGs.

Are There any Liability Coverages That a Risk Retention Group Cannot Write?

Yes.  An RRG cannot write coverage which is prohibited by state statute or by the highest court in the state (e.g., punitive damages, intentional or criminal conduct). This is not the same as coverage which is prohibited by the state insurance department. However, the states can have broad discretionary powers in deciding whether coverage from an RRG is acceptable where proof of financial responsibility is needed to obtain a license to engage in certain activities (i.e.: hazardous waste hauling, certain motor vehicle operations. (Not including, however, situations where DMV declines to honor RRG coverage as not being from an “authorized” insurer. Reason: by definition, RRGs under the Federal Act are “authorized” carriers.)