RISK RETENTION AND PURCHASING GROUPS

(May 2022)

Risk Retention Groups (RRGs) and purchasing groups (PGs) both arose out of the serious liability insurance coverage crises of the mid-1980s. The traditional insurance market, due to fear of extreme losses posed by certain classes of business (including municipalities), either abandoned markets or only offered liability insurance protection on a restrictive and prohibitively expensive basis.

National legislators responded to the situation by amending the 1981 Product Liability Risk Retention Act. In 1986, both RRGs and PGs were authorized under the Federal Liability Risk Retention Act of 1986.

As is the case with other methods of alternative risk management, RRGs and PGs established themselves beyond their origin as last resort options and have long been dependable, thriving ways to handle business risks.

Risk Retention Vs. Purchasing Groups
Topic	Risk Retention Groups	Purchasing Groups
Legal Structure	RRGs are legally required to form as a liability insurance company under the laws of at least one state. As an insurer, they retain risk.	PGs are NOT insurance companies. No specific requirements are imposed regarding the legal structure of a purchasing group. They are not insurers and, naturally, do not retain risk.
Ownership	The owners of the risk retention group must also be its insureds.	Inapplicable
Legal Authorization	Allowed via the Liability Risk Retention Act of 1986.	Same
Membership	Membership in the risk retention group is limited to persons engaged in similar businesses or activities with respect to the liability to which they are exposed.	Members can consist of any group of persons with similar or related liability risks who form an organization, one of whose purposes is to purchase liability insurance on a group basis
Formation	RRGs are often formed from trade and professional associations	PGs are most often formed by insurance professionals, including agents, brokers
Feasibility Study	The Act requires the risk retention group to prepare a feasibility study or plan of operation which includes the coverage, deductibles, coverage limits, rates, and rating classification systems for each line of insurance the group intends to offer.	Inapplicable, no such requirement. PGs can become operational upon the filing of a notice with their state of domicile and the other states in which the group intends to operate. The notice must state the name and domicile of the purchasing group, the lines and classes the purchasing group intends to buy, and the insurer from which the group intends to buy.

Risk Retention Vs. Purchasing Groups
Topic	Risk Retention Groups	Purchasing Groups
Feasibility Study Filing	The feasibility study or plan of operation must be filed with the RRG’s licensing state as well as with every state in which the entity intends to operate.	Inapplicable. While a feasibility study would be prudent for deciding to form a PG, there is no legal requirement to perform one.
Capital and Reinsurance Requirements	As a licensed insurer, must spend resources arranging and maintaining both adequate capital and reinsurance.	Since it is not an insurer, a purchasing group does not have to concern themselves with raising capital or arranging reinsurance.
Minimums	RRGs must provide quality loss experience, have a minimum number of participants, a minimum premium volume, and the willingness to make a long-term commitment	Purchasing groups may find these factors helpful but are not necessarily critical to their formation.
Financial Statements	RRGs have to file annual financial statements with chartering state and all operating jurisdictions and such data (including loss reserves) must be independently certified	PGs have no such requirements.
Guaranty Funds	RRGs are specifically exempted from participation in state guaranty funds	Purchasing groups are covered by guaranty funds EXCEPT when insured by a non-admitted carrier
Permitted Lines of Business	Per the Liability Risk Retention Act, an RRG may write general liability, errors and omissions, directors and officers, medical malpractice, professional liability, products liability, etc.	Per the Liability Risk Retention Act, a PG may purchase general liability, errors and omissions, directors and officers, medical malpractice, professional liability, products liability, etc.
Other Benefits	RRGs provide their members more control over their liability programs, lower premiums, broader coverage, better access to reinsurance and less vulnerability to insurance market cycles.	PGs offer custom coverage, lower rates, access to risk management programs and premium credits and higher customer retention.

Related Article: Captive Feasibility Study