Risk Retention

13/05/2020 1 By indiafreenotes

Risk retention is a company’s decision to take responsibility for a particular risk it faces, as opposed to transferring the risk over to an insurance company. Companies often retain risks when they believe that the cost of doing so is less then the cost of fully or partially insuring against it.

If a company retains a certain risk, it will have to pay for losses from that risk out of its own reserve funds. For this reason, it is important for companies to make sure that they can properly afford to pay for potential losses before they make the decision to retain particular risks. Companies may retain risks if the premiums for insuring against it are particularly high.

A risk retention group (RRG) is an alternative risk transfer entity created by the federal Liability Risk Retention Act (LRRA). RRGs must form as liability insurance companies under the laws of at least one state its charter state or domicile. The policyholders of the RRG are also its owners and membership must be limited to organizations or persons engaged in similar businesses or activities, thus being exposed to the same types of liability. Most RRGs are regulated as captive insurance companies. However, RRGs domiciled in states without captive law are regulated as traditional insurance companies.

A risk retention group is a corporation or limited liability association formed under the laws of any state for the primary purpose of assuming liability exposures on behalf of its members. Members of the group must be engaged in similar activities or related with respect to liability exposures by virtue of any related or common business exposure, trade, product, service, or premise. Members must have an ownership interest in the group and only members may benefit from the group. Risk retention groups only apply to liability loss exposures.

RRGs provide their members with the following benefits:

  • Program control
  • Long-term rate stability
  • Customized Loss control and risk management practices
  • Dividends for good loss experience
  • Access to reinsurance markets
  • Stable source of liability coverage at affordable rates
  • Multi-state operations

Advantage of Risk Retention

  • Avoidance of multiple state filing and licensing requirements
  • Member control over risk and litigation management issues
  • Establishment of stable market for coverage and rates
  • Elimination of market residuals
  • Exemption from countersignature laws for agents and brokers
  • No expense for fronting fees
  • Unbundling of services

Disadvantage Risk Retention

  • Risks are limited to liability insurance
  • Not permitted to write risks outside its homogenous group
  • No guaranty fund coverage for members
  • May not be able to comply with proof of financial responsibility laws
  • Can be without a financial rating from a rating agency