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Published April 08, 2024

Risk Retention Groups vs. Captives – What’s the Difference?

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What is a Risk Retention Group?

A risk retention group (RRG) is a method of alternative risk transfer available in the United States, regulated under the Liability Risk Retention Act (LRRA).

An RRG is a state-chartered liability insurance company, formed for the purpose of providing coverage for members within the same industry or facing similar risks with shared insurance needs. Once it receives a license, it can operate in all 50 states.

These licensed companies share liability risks and exposures similar to a captive (and, in fact, could be considered a form of captive).

A Brief History of Risk Retention Groups

In 1981, U.S. Congress passed legislation (LRRA) allowing for the formation of risk retention groups for the purposes of retaining product liability risks. Five years later, they passed the Federal Risk Retention Act (RRA), expanding the coverages allowed within RRGs to include a wider variety of liability exposures.

Differences Between Risk Retention Groups and Captive Insurance

You may recognize some similarities between RRGs and captive insurance, and the truth is, there are far more similarities than differences. Here are a few key 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.

The Benefits of Risk Retention Groups vs. Traditional Insurance

RRGs provide an alternative to traditional insurance options by enabling businesses to have more control over their insurance coverage and costs. By pooling risks between members who share similar liabilities, members of an RRG can collectively manage risk. Here are a few examples of how that benefits members:

  • More control over insurance programs – members of a risk retention group have a voice in how their insurance programs are structured, meaning they can influence the coverages, terms and conditions, limits and deductibles that best fit their needs.
  • Leverage and access to reinsurance – RRGs often have more collective leverage and purchasing power with reinsurers. As a group, they can gain direct access to reinsurance markets, purchasing reinsurance to help manage risks and provide long-term financial stability.
  • Long-term stability with pricing – owners have the ability to predict pricing more accurately because with larger risk pool than just their own exposures, losses are easier to forecast. Premiums are based on their actual loss history (and a prediction of future losses), instead of being subject to volatile market factors in the traditional market.
  • Potential return of dividends for good loss experience – in an RRG, there is potential for owners to receive an annual dividend in years when claims (and other expenses) are below projections. Traditional insurance, of course, does not offer this opportunity.

What Types of Risks Fit Best in Risk Retention Groups?

Risk retention groups are most commonly formed as risk-bearing entities for writing liability insurance, and are used by similar organizations facing similar risks. However, their exact use depends on the needs of the organizations in the risk retention group.

Some examples of common risks covered by RRGs include:

  • Professional liability – errors & omissions insurance, like legal or medical malpractice
  • Tech E&O – errors & omissions insurance related to technology-related professions or businesses
  • Product liability – coverage for liability that arises from the use of a product, such as manufacturing or design defects, or failure to issue warnings for safe use
  • General liability – such as bodily injury or property damage caused by a member organization’s operations
  • Directors and officers liability – risks arising from an organization’s management or decision-making processes
  • Auto liability – coverage for risks arising from the use of company vehicles, such as bodily injury and property damage

A risk retention group can include a variety of coverages, but is limited to liability coverage. While the above list gives you an idea of the types of risks which are often included, it depends on the organizations, what risks they share and whether there is a shared interest in retaining these risks collectively.

Where Can I Learn More About Captives?

If you are interested in learning more about captives, take a look at this deep dive into the types of captives, the advantages of forming or joining a captive, and what you need to know before considering this alternative risk solution.

Should I Consider a Risk Retention Group?

If your organization has been dealing with hard markets, and you’ve been seeing your premiums for liability insurance rise in recent years, a risk retention group could be one solution that provides relief from rising insurance costs.

This should not be done as a short-term solution – as with any method of alternative risk, this is a long-term solution. However, if you have spent more on premiums than claims over the last five years, and have liability exposures that could fit into an RRG, you should consider a RRG or captive.

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Learn More About Captives

Don’t miss the other entries in this series:

Captives 101: What is Captive Insurance?

What is Group Captive Insurance?

How Do Employee Benefits Captives Work?

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.