Risk Retention Groups

Last Updated: 2/7/2023
Issue: Risk Retention Groups (RRGs) are liability insurance companies owned by its members. RRGs allow businesses with similar insurance needs to pool their risks and form an insurance company that they operate under state regulated guidelines. RRGs are formed using a combination of state and federal laws under the auspices of the Federal Liability Risk Retention Act (LRRA). All insureds of an RRG must be owners of the RRG, and all owners of the RRG must be insured. RRGs may be formed under a state's captive or traditional insurance laws. The RRG is domiciled in one state but may do business in any other state by completing a registration process and designating the state’s commissioner as agent for service of process.

Unlike other captives, RRGs may write directly in states where they are registered without obtaining a license. Because of this feature, RRGs are treated as multi-state insurance companies and are subject to NAIC accreditation standards, albeit modified to suit the unique nature of RRGs.

Overview: Typically, insurance matters are regulated at the state level rather than the federal. Due to a lack of options for businesses to obtain product liability coverage in the late 1970s, the Product Liability Risk Retention Act of 1981 was passed allowing businesses with similar liability exposure to self-insure as groups by forming RRGs. In 1986, Congress amended the law naming it the Liability Risk Retention Act (LRRA). The LRRA supersedes "any state law, rule regulation, or order to the extent that such law, rule, regulation or order would make unlawful, or regulate, directly or indirectly, the operation of a risk retention group."

Section 3902(d)(1) of the LRRA requires RRGs to submit a plan of operation or feasibility study to the insurance commissioner of the domiciliary state before it may offer insurance in any state. The plan of operation or feasibility study shall include the coverages, deductibles, coverage limits, rates and rating classification systems for each line of commercial liability insurance the group intends to offer. If the group intends to offer any additional kinds of commercial liability insurance, it must submit revisions to such plan or study to the domiciliary state.

Section 3902(d)(3) of the LRRA requires that an RRG submit to the insurance commissioner of each state in which it is doing business a copy of the annual financial statement that it files with the RRG’s domiciliary state. Non-domiciliary states should be aware that in many states where RRGs are licensed/chartered as captive insurers in conformity with NAIC accreditation standards, RRGs are permitted to use Generally Accepted Accounting Principles (GAAP) rather than Statutory Accounting Principles (SAP) to report on their financial conditions. Filing occurs annually, and the requirements for a complete file include an unaudited filing using the official Annual Statement Blank (property/casualty), an audited financial statement certified by an independent public accountant and a statement of opinion on loss and loss adjustment expense reserves made by an actuary or loss reserve specialist who is qualified in accordance with the criteria established by the NAIC.

Regulation of RRGs is limited by the LRRA to the state of domicile. That is, the LRRA preempts many of the typical rights and authorities of the non-domiciliary state. Under the NAIC accreditation program, regulation of multi-state RRGs is similar to the regulation of commercial insurers: RRGs must comply with the usual quarterly and annual filing requirements imposed on property and casualty insurance companies, including financial statements (Yellow Book format), Management's Discussion and Analysis (MD&A), risk-based capital (RBC) calculations, audited statements, actuarial opinions, etc. Regulators must perform quarterly surveillance procedures and conduct periodic examinations in accordance with the NAIC Financial Analysis Handbook and the Financial Condition Examiners Handbook. If a company is determined to be troubled, the regulator will follow the NAIC Troubled Company Handbook procedures.

Although the regulation of RRGs is comparable to that of traditional insurers, there are some key differences. Many RRGs file their financial statements using GAAP accounting, which requires some extra analysis.  Few RRGs, if any, are required to submit rate and form filings - rates are typically based on an actuarial analysis of the membership, and one of the advantages of captives is the ability to conform the policy to suit the needs of the membership. In addition, the LRRA specifically precludes RRGs from participating in state guaranty funds.

At the request of Congress, the Government Accountability Office conducted studies of the RRG market to assess the impact of the LRRA. The GAO studies found RRGs had a small but important impact in their niche markets and were generally successful. However, the study also concluded there were some weaknesses, and RRGs would benefit from more consistent regulation by the states. As a result, the NAIC worked to develop consistent guidelines for the states, which eventually became accreditation standards. The Risk Retention Group (E) Task Force is currently charged with reviewing the work of other NAIC groups related to financial solvency regulation and determining whether such should apply to RRGs through the accreditation standards.

For example, on March 2, 2020, the Risk Retention Group (E) Task Force confirmed their support for the recommendation that both the 2011 revisions to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) related to certified reinsurers and qualified jurisdictions, as well as the 2019 revisions to Model #785 and Model #786 related to reciprocal jurisdictions, be applicable to RRGs for accreditation, with an effective date of Sept. 1, 2022. This recommendation was subsequently adopted as a revision to the accreditation program. 

Another topic discussed by the Task Force was the impact and effectiveness of the recently adopted FAQ document about the registration and regulation of RRGs in non-domiciliary states, the “Best Practices – Risk Retention Groups” document; and the revised NAIC Uniform Risk Retention Group Registration Form. These documents are intended to provide clarity and serve as a resource for both domiciliary and non-domiciliary regulators in regard to RRGs.  

As of February 2021, the Property and Casualty (C) Committee plans to monitor and review developments in case law and rehabilitation proceedings related to RRGs. And if warranted, make appropriate changes to the Risk Retention and Purchasing Group Handbook.

In 2022, the NAIC posted the information for RRG Preliminary Memorandum, which is developed by the domestic state for a risk retention group (RRG) upon approving the initial licensing of the RRG. The information in this document will serve as a summary of key considerations in assessing and approving the license.

The three main annual goals of the Risk Retention Group (E) Task Force in 2023 include: (1) monitoring the work of other NAIC bodies related to RRGs and considering how and whether this should be included in the accreditation standards for RRGs; (2) monitoring and analyzing federal actions and considering any action necessary as a result of federal activity. (3) monitoring the impacts of the tools noted above and considering if additional action is necessary, including educational opportunities, updating resources and further clarifications.