The Liability Risk Retention Act (LRRA) is a federal law that was
passed by Congress in 1986 to help U.S. businesses, professionals, and
municipalities obtain liability insurance, which had become either
unaffordable or unavailable due to the "liability crisis" in the United
In passing the Liability Risk Retention Act, Congress provided
insurance buyers with a marketplace solution to the "liability
crisis," enabling them to have greater control of their liability
insurance programs. To achieve this goal, Congress created two
entities -- risk retention groups (RRGs) and purchasing groups (PGs).
A risk retention group (RRG) is a liability insurance company that is
owned by its members. Under the Liability Risk Retention Act (LRRA),
RRGs must be domiciled in a state. Once licensed by its state of
domicile, an RRG can insure members in all states. Because the LRRA is
a federal law, it preempts state regulation, making it much easier
for RRGs to operate nationally. As insurance companies, RRGs retain
A purchasing group (PG) is comprised of insurance buyers who band
together, typically on a national basis, to purchase their liability
insurance coverage from an insurance company, including a company
operating on an admitted basis, a surplus lines basis, or a risk
retention group. As the name implies, the PG serves as an insurance
purchasing vehicle for its members.
The primary difference between risk retention groups (RRGs) and
purchasing groups (PGs) is that RRGs retain risk while PGs do not. PGs
purchase insurance from an insurer, which issues the policies and
serves as the risk bearer. RRGs, as insurers, issue policies to their
members and bear risk. Another key difference between the two entities
is that RRGs typically require members to capitalize the company
whereas PGs require no capital. Other differences derive from the way in
which the two entities are regulated, both under the Liability Risk
Retention Act (LRRA), as well as state laws. Another difference has to
do with reinsurance, which almost all RRGs purchase.
For both risk retention groups (RRGs) and purchasing groups (PGs), the
Liability Risk Retention Act (LRRA) requires that members be
homogeneous, i.e. engaged in similar businesses or activities that
expose them to similar liabilities. This is an important similarity,
as PGs can reorganize into RRGs at a future time.
For both risk retention groups (RRGs) and purchasing groups (PGs), the
type of insurance coverage permitted is set forth in the Liability
Risk Retention Act's (LRRA's) definition of "liability," which includes
all types of third party liability, such as general liability, errors
and omissions, directors and officers, medical malpractice,
professional liability, products liability, and so forth. The LRRA
does not extend to workers compensation, property insurance, or to
personal lines insurance, such as homeowners and personal auto
As insurance companies owned by their members, some of the key
advantages offered by risk retention groups (RRGs) to their members
relate to the control members obtain over their liability programs. This
control often translates into lower rates, broader coverage,
effective loss control/risk management programs, participation by RRG
members in favorable loss experience, access to reinsurance markets,
and stability of coverage, notwithstanding insurance market cycles.
Purchasing groups (PGs) provide advantages for their members, their
insurers, and the agents/brokers who administer the group program. For
PG members, the PG offers tailor-made coverage, broader coverage
terms, lower rates, loss control/risk management programs, and often
provides rewards for good loss experience, such as dividends in the
form of credits against next year's premium. For insurers, PGs offer
the ability to achieve greater profitability. For agents and brokers,
PGs offer the ability to add value to transactions and retain
At the end of 2003, there were 141 risk retention groups and 670
purchasing groups operating in the United States, according to the
Risk Retention Reporter.
According to surveys conducted by the Risk Retention Reporter, RRG
annual premium has increased from $250.2M in 1988 to an estimated
$1.725.5M in 2003. PG annual gross premium is estimated to top the $3
The Risk Retention Reporter has been monitoring the formation of risk
retention groups (RRGs) and purchasing groups (PGs) since 1987 with
the cooperation of state insurance departments. Before offering
insurance coverage to state residents, RRGs and PGs must register with
state insurance departments in compliance with the Liability Risk
Retention Act and state laws.
Risk retention groups (RRGs) are often formed from trade and
professional associations, which serve as the sponsor for the RRG
liability insurance program. Purchasing groups (PGs) are most often
formed by insurance professionals, including agents, brokers and
insurers, based upon an identified need of commercial insurance
Although the Liability Risk Retention Act is a federal law, it has no
enforcement mechanism of its own, and relies wholly on state insurance
departments for its implementation. Because of the differences between
risk retention groups (RRGs) and purchasing groups (PGs), the
regulation differs for each of the entities. For risk retention groups
(RRGs), the state in which the RRG is domiciled has primary
regulatory authority over the entity. For purchasing groups (PGs),
regulation entails not only the domiciliary state of the PG, but
regulation of the PG's insurer, as well as its agent and/or broker.
The LRRA requires that members be homogeneous, i.e. engaged in
similar businesses or activities that expose them to similar
Liability insurance only:
Coverage provided by a RRG must be restricted to liability insurance,
which is very broadly defined. Personal Risk Liability, Worker’s
Compensation and Employers Liability, and Property & Casualty
coverages are specifically forbidden to be underwritten by a RRG.
State of Domicile:
A RRG must be a corporation or limited liability association
chartered and licensed as a liability insurer and authorized to do
business as an insurance company in its state of domicile.
Primary purpose and activity:
The primary activity of an RRG must be the business of assuming and
spreading all, or a portion of the liability exposure of its group
member and its primary purpose must be the assumption and spreading of
risk related insurance activity.
1. The owners of an RRG can
only be persons who comprise its membership and who are insured by the
group. A RRG may be owned by an organization if the membership
comprises the insured members of the group.
2. The insured member/owners
of a group can only include those engaging in a similar business or
activities and having similar liability risk exposure.
3. A RRG cannot exclude any
person from membership in the group solely to provide a competitive
advantage for the group’s members.
Plan of operation:
Before a group may offer insurance in any state that group must
submit a plan of operation or feasibility study to the insurance
commissioner in its state of domicile. Before a RRG may offer
insurance in any other state in which it intends to do business, it must
provide the Commissioner of Insurance of that state a copy of the
plan of operation or feasibility study already submitted to its
A RRG must provide a copy of its annual financial statement,
certified by an independent public accountant and containing an
actuarial opinion on loss reserves, to the insurance commissioner for
each state in which the RRG operates.
RRG Domicile Selection:
One State must be selected to charter the RRG and the RRG is required
to meet all the licensing requirements of that state. The
determining factors in choosing a domicile state include Capital &
Surplus requirements and Depository Requirements. Depository
Requirements, if required, usually range from $100,000 to $500,000 in
cash or other acceptable securities. Capital & Surplus
requirements vary by state and most RRG owners have sought states with
captive legislation. Captive legislation generally requires lower
Capital & Surplus amounts. When considering domicile states, the
most lenient is not always the best choice. By meeting more stringent
licensing requirements, the RRG may receive less scrutiny by the
non-chartering state regulators.
Business Plan/Feasibility Study:
The Act requires the RRG to submit a business plan to the chartering
state as well as all other states where the RRG has exposures. The
business plan requirements vary by state but usually include five-year
projections, details of lines of insurance and reinsurance
arrangements, investment policies, ownership and proposed Capital
& Surplus. Complete and credible data can be hard to obtain for a
start-up operation, but a properly prepared and presented business plan
adequately supported by capital and solid reinsurance will be well
received by state regulators. It may be a requirement that the
feasibility study be prepared by a qualified actuary.
RRG membership is limited to persons engaged in similar business or
activities with respect to liability to which they are exposed. The
RRG must be owned directly or indirectly by the members it insures.
Designation of Agent/Agent licensing:
A RRG must register with and designate the State Insurance
Commissioner, Director of Superintendent at its agent for the purpose
of receiving service of process or other legal documents. A
nonresident agent’s license is required for every state in which the
RRG provides coverage. States cannot require countersignature by a
Unfair Trade Practices:
A RRG must comply with the unfair claim settlement practices laws and
laws regarding deceptive, false or fraudulent acts or practices of
each state in which it operates.
Taxes: A RRG will be required to pay applicable premium taxes at either the admitted or surplus lines rate.
Residual Markets/State Guaranty Funds:
There is no protection or participation for the RRGs in the State
Guaranty Funds. Every insurance policy issued by a RRG must contain
the following notice in 10-point type. NOTICE: This policy is
issued by your Risk Retention Group. Your Risk Retention Group may
not be subject to all of the insurance laws and regulations of your
state. State insurance insolvency guaranty funds are not available
for your risk retention group. Federal law gives states the power to
require RRG participation in any residual market funds in the state
for the lines of coverage written by the RRG. These include auto
liability assigned risk pools and JUAs for other liability coverages.
A RRG needs to be aware of such possible assessments and provide a
means for such a result of their participation in a state’s residual
Hazardous Financial Condition:
If a non-domiciliary commissioner believes a group may be financially
impaired, the RRG must submit to an examination by that commissioner
to determine the RRG’s financial condition. This can only occur if
the domiciliary commissioner has not or will not conduct an
examination. A RRG must comply with a lawful order issued in a
delinquency proceeding commenced by a state insurance commissioner if
there has been a finding of financial impairment. A RRG must comply
with an injunction issued by a court of competent jurisdiction, upon a
petition by a state insurance commissioner alleging that the RRG is
in a hazardous financial condition or is financially impaired.
Financial Responsibility Laws:
A RRG is not exempted from meeting the applicable financial
responsibility laws of any state. These may exist for auto liability
as well as hazardous waste hauling and long haul trucking. The limits
of liability provided by the RRG must meet the financial
responsibility standards. Certain states may require that certain
limits be provided by an admitted carrier of certain financial size
and Best’s rating, which most RRGs will not meet. Often a surety bond
or other security may be posted to meet these financial
Agents and Brokers:
A state may require licensing of a RRG’s agents or brokers, except that
a state may not impose any qualification or requirement which
Admitted Versus Non-Admitted Status:
It is not clearly stated in the Act if RRGs are to be treated as
admitted in non-chartered states. This has an impact on financial
responsibility requirements. RRGs will likely take an aggressive stance
and consider themselves as an admitted carrier based on the
presumption privileges of the Federal Law until states attempt to deny
them such status.
Avoidance of multiple state filings 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.
Risks are limited to liability insurance.
Not permitted to write outside business.
No guaranty fund availability for members.
- May not be able to comply with proof of financial responsibility laws.