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A risk retention group is a type of insurance company owned and operated by its members. It’s designed primarily to help people or businesses which struggle to get liability insurance through a traditional insurance company. The members of the group band together and effectively share the risks associated with their businesses.
Risk retention groups are authorized in the United States under the Liability Risk Retention Act. This was passed in 1986 to address a growing problem by which insurance companies either charged very high premiums or simply refused to issue liability insurance. This made it difficult for businesses to continue without facing excessive ongoing costs or running the risks of extremely high payouts if a claim was made against them successfully.
It’s important to note that the risk retention group is legally considered an insurer and bears the risks of the policies it issues. This type of group can only insure its members against liability risks, such as legal costs and compensation caused by claims that follow professional mistakes or faulty products. It cannot cover personal insurance such as healthcare or auto insurance for directors or employees. It also can’t cover property insurance such as fire or theft cover.
All members of a particular group must be involved in the same general type of industry. Where there is uncertainty about whether a group qualifies, the key is whether it bears similar liability risks, for example the risk of malpractice suits among medical professionals. A risk retention group cannot bar a relevant firm from joining if its motive for barring it is to gain a competitive advantage.
The major benefit of a risk retention group is that firms are able to get liability insurance at more reasonable rates than they might have got individually. There is also an advantage in that the set-up means firms effectively act as both insurers and clients. This can mean firms take greater care to avoid situations which would trigger a claim, thus improving professional standards.
A risk retention group must be registered in a state and is then governed by its laws. Once registered, the group can then take on and cover members from anywhere in the country. The Liability Risk Retention Act exempts groups from many state regulations. Generally a state’s powers over a risk retention group are limited to collecting relevant taxes and forcing it to follow some common insurance practices such as settling claims in a fair manner.