Risk Retention Group
A liability insurance company owned by its policyholders, formed under federal law to insure similar risks across state lines.
What It Is
A risk retention group (RRG) is a special type of liability insurance company formed under the federal Liability Risk Retention Act of 1986. RRGs are owned by their member-insureds and provide liability coverage to those members. The key advantage of an RRG is that it needs only be licensed in its state of domicile to write coverage in all 50 states, bypassing the normal state-by-state licensing requirement.
RRGs are limited to liability coverages; they cannot write property, workers compensation, or personal lines. Members must share a common liability exposure, such as healthcare professionals, attorneys, or technology companies. The RRG must be owned by its insureds, and all insureds must be owners (though not necessarily equal owners).
RRGs are regulated primarily by their state of domicile, with other states having limited regulatory authority. This federal preemption of state regulation is both an advantage (streamlined multi-state operations) and a concern (limited consumer protection in non-domiciliary states). RRGs are not backed by state guaranty funds, meaning if an RRG becomes insolvent, policyholders have no guaranty fund protection for unpaid claims.
Why It Matters for Brokers
Brokers encounter RRGs primarily in healthcare, legal, and technology sectors where they compete with traditional carriers for professional liability business. Brokers should understand that RRGs lack guaranty fund protection, which means the members bear the risk of insolvency. This is a material difference that should be disclosed to clients when presenting an RRG option alongside traditional carriers.
Real-World Example
A group of 200 independent physicians forms an RRG domiciled in Vermont to provide medical malpractice coverage at $15,000 per member annually, compared to $22,000 from commercial carriers. The RRG writes $3M in premium with $2M in surplus. However, when three large verdicts in one year total $4.5M, the RRG must assess members an additional $7,500 each to maintain solvency. No guaranty fund exists to backstop the shortfall. The members' total cost ($22,500) now exceeds the commercial market price.
Common Mistakes
- 1Not disclosing to clients that RRGs lack guaranty fund protection, which is a material difference from admitted carrier coverage.
- 2Treating an RRG as equivalent to a traditional carrier without evaluating its financial strength, claims-paying ability, and reinsurance program.
How brokerageaudit.com Handles This
brokerageaudit.com identifies policies issued by RRGs and flags the lack of guaranty fund protection in the coverage summary. The system tracks RRG financial data from domiciliary state filings, helping brokers evaluate the financial stability of RRGs in their clients' programs.