Contrasting Risk Retention Groups and Captive Insurance Companies

Black and white puzzle pieces

June 19, 2023 |

Black and white puzzle pieces

To paraphrase an old saying, while many risk retention groups (RRGs) are licensed under states' captive insurance company laws, not all captives are RRGs.

More than 7,000 captives are licensed in domiciles worldwide,1 while only about 245 RRGs now are operating,2 virtually all, as required under a provision of a federal law that took effect in the mid-1980s, are licensed in a US state.

The vast majority of RRGs are licensed under state captive laws, but it is not an exclusive club. A number of states will only license RRGs under their traditional insurance company statutes.

Even in states where there are a significant number of RRGs, those numbers are outweighed by other types of captive insurance companies.3 For example, Vermont's 88 RRGs make it by far the biggest RRG domicile of any US state, but RRGs comprise just 14 percent of Vermont's 651 licensed captives, said Sandy Bigglestone, deputy commissioner, Captive Insurance Division, Vermont Department of Financial Regulation.

Aside from the number licensed, a key difference between RRGs and other captives is the business written.

Under the 1981 federal law that first authorized them, RRGs could only write product liability and completed operations coverage for member-owners. Then, under expansion legislation Congress passed in 1986, lawmakers opened the door for RRGs to write all commercial casualty coverages—except workers compensation—while RRGs remained barred from writing property coverages.

"The scope of coverage funded through RRGs is limited," said Tom Jones, a partner with the law firm McDermott Will & Emery LLP in Chicago.

By contrast, states typically impose few restrictions on the kind of coverages other types of captives can provide.

In most states, "captives can cover almost any property-casualty line," said Michael Serricchio, a managing director in the Norwalk, Connecticut, office of Marsh LLC.

In addition, while RRGs are barred from funding employee benefit risks, employers—so long as they meet US Department of Labor (DOL) requirements—can use their captives to fund employee benefit risks, such as life insurance and long- and short-term disability coverages. Roughly three dozen employers4 have met those DOL requirements, which include use of a highly rated independent insurer to issue policies—though not necessarily taking on any risk—and sweetening benefits provided to plan participants.

Yet another significant difference between RRGs and other captive insurance companies: after an RRG is licensed in one state, it is free to provide coverage to member-owners in any other state.

"That is a great benefit," said Robert "Skip" Myers Jr., a partner with the law firm Morris Manning & Martin LLP in Washington, D.C.

By contrast, employers with other types of captives may have to use fronting insurers to issue policies for coverages they provide in states in which their captives are not licensed.

Differences between RRGs and other types of captives are not just limited to plan design but also extend to interest in formation.

RRG formation tends to be closely tied to conditions in the traditional commercial market. 

For example, in 1987, a year in which premiums for many lines in the commercial market still were sharply increasing, 16 RRGs were licensed in Vermont. By contrast, just two RRGs were licensed in Vermont in 2022.

The growth of pure captives "continues in soft and hard markets," while RRG formations are closely related to commercial market conditions, said Jason Palmer, regional managing director—US, captive management operations in the Burlington, Vermont, office of Willis Towers Watson PLC.

Still, once they are formed, some RRGs have racked up significant growth, even during times of soft conditions in the commercial market. For example, the Vermont-domiciled Alliance of Nonprofits for Insurance, Risk Retention Group now has 13,439 policyholder-owners, up sharply from about 7,500 at the end of the third quarter of 2017. In addition, at end of 2022, the RRG's premium volume was $132 million, up from $33.9 million in 2017.

That growth, says Pamela Davis, the founder, president, and CEO of the RRG, which is based in Santa Cruz, California, is due to a number of factors, including the inability of commercial insurers to understand nonprofits' risks.

"For example, most commercial carriers will decline a risk that includes commercial auto liability for a volunteer driving a van full of kids," Ms. Davis said.

Another difference: after states pass captive legislation, lawmakers often continue to make changes—minor in some cases and sweeping in others—to their captive laws. For example, lawmakers in Tennessee, whose original captive statute goes back to 1978, revamped the law in 2011 to, among other things, allow the formation of protected cell captives and branch captives and to allow captives to write workers compensation coverage in certain situations.

By contrast, Congress has not made any changes to the Liability Risk Retention Act since 1986 when lawmakers expanded the range of coverages RRGs could provide.

While RRGs have pressed Congress to allow RRGs to offer property coverages, lawmakers so far have not shown widespread interest in such an expansion.

With generally no shortage of property coverage in the traditional market, expanding the underwriting authority of RRGs to cover property risks will be "an uphill battle," said Mr. Myers.

Proponents of such an expansion say they will not give up and ultimately will prevail.

"I have said before and I'll say it again: I believe good people will ultimately get together to do what is right for our communities," Ms. Davis said.

  1. According to Business Insurance surveys.
  2. According to the Risk Retention Reporter.
  3. According to state regulators.
  4. According to DOL statistics.

June 19, 2023