A Look Inside: Risk Retention vs. Risk Purchasing
Alternative risk mechanisms are available to help businesses address and manage their risks. This includes setting up risk retention groups (RRGs) and risk purchasing groups (RPGs), which are often mistaken for being the same thing. While there are similarities between the two – both require members to be homogeneous and both provide liability insurance under the 1986 Federal Liability Risk Retention Act (LRRA) – they are quite different.
The principal difference between the two is that a risk retention group retains risks while a risk purchasing group does not. RRG members are typically required to capitalize the company whereas RPGs require no capital. Other differences derive from the way in which the two entities are regulated, both under the LRRA as well as state laws. Another difference has to do with reinsurance, which almost all RRGs purchase.
As of March 2017 there are 236 RRGs and 998 RPGs, according to the Risk Retention Reporter.
Risk Retention Groups
An RRG is a liability insurance company owned by members with similar characteristics. The RRG must be domiciled in one state and, once licensed, can insure members in all states. In addition, because the Liability Risk Retention Act is a federal law, it preempts state regulation, which facilitates RRGs in functioning on a national basis. RRGs are often formed from trade and professional associations, which serve as the sponsor for the RRG liability insurance program.
Some of the benefits of an RRG include access to reinsurance markets, coverage stability, retention of profits by members/policyholders, lower rates, broader liability coverage, and effective loss control/risk management programs. There are also several issues to consider in setting up an RRG including the fact that the experience of one member can lead to all members having to pay additional premiums.
Risk Purchasing Groups
A risk purchasing group, on the other hand, is comprised of a group of similar business that share common risk characteristics and band together, typically on a national basis, to purchase insurance from an insurer. The insurance company under the RPG serves as the risk bearer. Members of the RPG are able to obtain tailor-made coverage, broader coverage terms, lower rates, and loss control/risk management programs. Often a RPG will provide rewards for good loss experience, such as dividends in the form of credits against next year’s premium. In addition, if one member of the risk purchasing group fails to pay the premium, coverage will be canceled for the individual insured, not the entire group. RPGs are also good for agents and brokers as they offer the ability to add value to transactions and retain business.
RPGs are typically formed by insurance professionals based upon an identified need of commercial insurance buyers. Several of Distinguished’s primary liability and umbrella liability programs are risk purchasing groups. Each group is registered in every state where we have insureds participating.
