When it comes to managing your business’s liability insurance, exploring alternatives beyond traditional coverage can open up valuable opportunities. Two popular options are risk retention groups (RRGs) and captive insurance companies. Both offer ways for your business to pool risks, reduce costs, and gain greater control over their insurance programs. Understanding how they differ will help you find the best fit for your organization.
In this article, we’ll break down the key distinctions between RRGs and captives, highlighting the advantages and considerations of each. Whether you’re a business owner, risk manager, or insurance professional, gaining clarity on these self-insurance formats can empower you to make smarter decisions and unlock new possibilities for your risk management strategy.
What Is a Risk Retention Group?
An RRG is a liability insurance company owned by its members, typically businesses in the same or similar business, formed under the federal Liability Risk Retention Act (LRRA). RRGs were originally created to address product liability and product liability risks for manufacturers and similar businesses. RRGs are limited to writing liability insurance, such as general liability, professional liability, and products liability, and cannot write casualty coverages like property or workers’ compensation.
Licensed in one state, RRGs can conduct business across all 50 states after initial registration, without needing separate licenses in each state. They must offer insurance through a formal insurance policy that outlines coverage terms and compliance with insurance laws. RRGs may access reinsurance markets to manage their risk exposure and are often tracked by industry sources such as the risk retention reporter for trends and compliance updates.
What’s the Difference Between a Risk Retention Group and a Risk Purchasing Group?
Risk retention groups (RRGs) and risk purchasing groups (RPGs) both help businesses with liability insurance, but they work a bit differently. RRGs are actual insurance companies owned by their members, who share similar risks. They take on the risk themselves and provide coverage directly.
On the other hand, RPGs don’t insure risk themselves. They simply band together to buy liability insurance from traditional insurers, whether admitted or non-admitted. However, to qualify for protection under the state guaranty fund, insurance purchased through an RPG must be from an admitted insurer. Both types of groups are regulated under insurance laws like the Liability Risk Retention Act, but the rules vary depending on the group.
Captive insurance companies, meanwhile, follow traditional insurance laws and need state regulatory approval. And throughout it all, the insurance commissioner keeps an eye on things, overseeing RRGs, RPGs, and captive insurers to make sure everything runs smoothly.
What is Captive Insurance?
Captive insurance is a form of self-insurance where a company or group creates its own licensed insurance company, known as a captive insurer, to cover its risks. Captive insurers can take various forms, like as pure captives, which are owned by a parent company to insure only that company and its subsidiaries, or group captives, which are formed by unrelated companies with similar risks to collectively insure their exposures. In some cases, captives may use a fronting insurer to operate in multiple states and meet regulatory requirements. Popular domiciles for captive insurance companies include South Carolina, Vermont, and Hawaii, due to their favorable regulatory environments. Captive insurance allows businesses to have more control over their insurance coverage, manage risks more effectively, and potentially reduce costs compared to traditional insurance options.
RRGs vs Captives: Key Differences
You may recognize some similarities between RRGs and captive insurance, and the truth is, there are far more similarities than differences. Some people consider RRGs to be a type of captive! However, here are a few factors that distinguish RRGs from captives:
- Domicile: a captive insurance company can be formed and regulated (domiciled) in a wide variety of locations all over the world, whereas a risk retention group must be domiciled in the United States.
- Legal structure: an RRG is regulated under the LRRA, and must be licensed in at least one state. A captive is regulated under insurance laws specific to the jurisdiction in which it is domiciled (these can be overseas or in certain U.S. states).
- Purpose: an RRG is typically formed to provide liability coverage to their members, who are focusing on a specific line of insurance or within a defined industry. A captive could be used for a wider range of risks including property, casualty and even employee benefits.
- Ownership: an RRG is required to be owned by its members, whereas captives have varying methods of ownership. While many captives are also owned by their members, within some organizational structures such as rented captives, association captives or trade captives, they may be owned by a separate group.
Should I Consider a Risk Retention Group or a Captive?
If you’ve spent more on premiums than claims over the last five years and have liability exposures suitable for an RRG or captive, we’re here to help you explore these long-term alternative risk strategies. Our experienced team at Gregory & Appel can guide you through the complexities, helping you learn more about your options and find the right fit tailored to your organization’s unique needs. To get started, please fill out the form below, and one of our specialists will reach out to discuss how we can support your risk management goals.
This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.