Captive Insurance

Risk Retention Group vs. Captive Insurance

As an alternative to traditional insurance, captive insurance companies have provided cost-effective solutions for thousands of business owners. There are numerous types of captive insurance, each with its own attributes. One of the self-insurance formats, called risk retention groups (RRGs), is unique in that it is often – yet not always – a captive. In this guide, we will compare captive insurance with RRGs, illustrating the similarities and the differences to help business owners understand which format might be right for their risk management needs.

What is a Risk Retention Group?

Risk retention groups (RRGs) are liability insurance companies owned by their members. Companies with similar business and risk profiles pool their risks under an RRG; this insurance model is often used by law firms, dental or healthcare practices, nonprofits, or financial services firms. First created in 1981 for manufacturers facing product liability risks, RRGs gained the ability to provide a full range of liability insurance solutions to members with the passage of the Liability Risk Retention Act (LRRA) in 1986.

Under the Act, all insureds of an RRG must be the owners of the group, and all owners must receive insurance by the RRG. Members must be business owners; again, these members share similar risk profiles and operating environments. 

Differences Between RRGs and Captives

The unique aspect of RRGs is that they can be formed under a state’s captive or traditional insurance laws. In other words, an RRG may be a captive, or it may be considered a traditional insurance company. In fact, a few states will only license an RRG under traditional insurance statutes.

Although exact numbers are difficult to obtain, about 7000 captives are licensed around the world as of 2019. Only about 250 of these are RRGs, and almost all of these are licensed in a U.S. state. Another important difference between RRGs and captives is that RRGs are only required to establish domicile in one state, but then can conduct business in other states without separate licensing. In most cases, the RRG needs only to complete a registration process in each state it wishes to do business in. By contrast, a captive insurance firm must be licensed in each state in which it does business or must use a fronting insurer to do business across state lines. 

The most crucial difference between captives and RRGs is the business written. When first established in 1981 by the Product Liability Risk Retention Act, RRGs could only write product liability and completed operations coverage. 1986’s LRRA expanded business for RRGs, allowing them to write all commercial casualty coverages except for workers’ compensation. Under current rules, RRGs cannot write property coverages. In contrast with RRGs, captive insurers can write the full range of property and casualty coverages with few or no limitations. 

Finally, growth between RRGs and captive insurance companies differs. Since their creation, the formation of RRGs has been influenced by factors in the traditional insurance market. If premium costs rise and coverage availability dwindles, interest in forming RRGs increases. Captives, on the other hand, have enjoyed steady growth over the past several decades, regardless of traditional insurance market conditions. 

Changes in Risk Retention Groups

The captive insurance market has seen continual changes in terms of legislation. These changes have allowed captives to form different insurance models and to expand their insurance offerings. RRGs, by contrast, have changed little since the passage of the LRRA in 1986. Legislators have attempted to expand the law to allow RRGs to write property coverages but have so far been unsuccessful. RRGs were developed to address an emerging need in the business liability sector – namely, the loss of liability protections and skyrocketing premium expenses. The property insurance market experiences no such factors, and is readily available, making the expansion of RRGs into property coverages unlikely in current political and market conditions. 

Still, RRGs represent a unique insurance solution for business owners, whether established as a traditional or captive insurance entity. By helping members to manage costs and claims, RRGs are expected to be an integral part of liability protection well into the future. 

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (855) 975-4949.