Captives and RRGs: Understanding the Key Differences

Risk retention groups (RRGs) and captive insurance companies both insure the risks of their owners. However, they are established under different laws and follow distinct regulatory rules. RRGs are created under federal law and limited to liability insurance, while captives are formed under state laws and can insure a broader range of risks. Although RRGs may be supervised by the same state regulators who oversee captives, they are generally not classified as captive insurance companies under state law. However, some states may treat them similarly for regulatory or administrative purposes, leading to occasional industry confusion.

As of late 2023, there were about 244 RRGs operating in the United States, according to the Risk Retention Reporter. In contrast, an estimated 8,000 captive insurance companies are active globally, based on various industry forecasts that include micro-captives, series captives, and other alternative structures. More conservative estimates place the number closer to 6,300 when counting only traditional standalone captives.

RRGs are formed under the federal Liability Risk Retention Act of 1986 and are authorized to provide liability insurance to their member-owners. To qualify as an RRG, all insureds must be owners, and all owners must be insureds. Members must also be part of businesses or organizations with similar or related liability exposures. Once licensed in one state, an RRG can provide liability insurance to its members in all 50 states and the District of Columbia, though it must comply with each state's registration and fee requirements.

"That is a great benefit," said Robert "Skip" Myers Jr., managing partner of the Washington, DC, office at Morris, Manning & Martin LLP.

Captive insurance companies are formed under state-specific laws and are licensed on a state-by-state basis. Captives can be used to insure a wide range of risks—including property, liability, and, in some cases, employee benefits—depending on the rules of the licensing domicile.

"In most states, captives can cover almost any property-casualty line," said Michael Serricchio, regional leader for captive solutions in the United States and Canada at Marsh.

While captives commonly insure affiliated risks across multiple jurisdictions, they cannot typically issue admitted policies outside their licensing state. When coverage must be admitted in another state, captives usually partner with a fronting insurer that is licensed there. In other cases, captives may issue nonadmitted policies if permitted under surplus lines rules, particularly for sophisticated commercial insureds.

Captives are especially useful in managing emerging or hard-to-insure exposures. In addition to covering traditional property and casualty lines, they are increasingly used for cyber liability, supply chain disruption, environmental risks, and professional liability in specialized sectors. Captives may also reinsure employee benefits—such as life, disability, or accident coverage—if they meet US Department of Labor requirements under the Employee Retirement Income Security Act (ERISA). These ERISA-governed programs require regulatory approval and often involve a fronting insurer. Captives are also widely used for non-ERISA benefits, such as medical stop-loss insurance, which can improve cost predictability without the same regulatory hurdles. Many organizations use captive structures to enhance benefit offerings—including employer-paid or voluntary benefits like fertility, adoption, or supplemental health coverage that are not typically included in standard plans.

One key feature of RRGs is their ability to operate across state lines. Once licensed in a single state, an RRG can issue liability insurance to its members in all other states without obtaining separate licenses, though it must comply with each state's registration process.

Captives, by contrast, do not benefit from this federal preemption. Captives can insure risks across multiple states, but whether they can directly issue policies depends on the location of the risk and the licensing requirements of the relevant state. In many cases, captives work with fronting insurers that are licensed where coverage must be admitted.

Captive formations today are driven more by long-term risk management strategies than by market cycles. While formation rates may vary year to year, captives are increasingly mainstream, offering organizations control over underwriting, claims, and capital. They are also used creatively to address complex, emerging, or poorly insured risks that traditional markets may struggle to cover.

"The growth of pure captives continues in soft and hard markets," said Jason Palmer, regional head of captive and insurance management solutions, United States, at WTW.

RRG formation, by comparison, tends to respond more directly to commercial market conditions. New RRGs often emerge during periods when liability coverage is either unavailable or unaffordable—especially in niche or underserved sectors.

Vermont—not only the leading US captive domicile but also the top RRG domicile—licensed 41 new captives in 2024, bringing its total to 683 statutory captive licenses, including 29 dormant captives, according to the Vermont Department of Financial Regulation website. It also licensed 85 RRGs as of year-end 2024. While RRGs are not formed under Vermont's captive statute, they are regulated by the state's Captive Insurance Division and represent approximately 12 percent of all entities overseen by the division.

State captive insurance laws continue to evolve to support innovation and meet the needs of modern risk managers. Several leading domiciles have made recent updates. In Delaware, regulators introduced a faster application process through conditional certificates of authority and increased flexibility around governance and capital requirements. Utah clarified rules for protected cell captives and formalized its dormant captive option. South Carolina updated capital standards and streamlined licensing requirements for cell structures, while Vermont expanded guidance for dormant captives and digital reporting. Other active domiciles—including Tennessee, North Carolina, Missouri, and Iowa—have strengthened their programs through updated statutes, competitive tax structures, and hands-on regulatory support.

Despite being limited to liability coverage only, RRGs continue to serve an important role in niche markets—especially those overlooked by traditional insurers. One example is the Alliance of Nonprofits for Insurance, Risk Retention Group (ANI), domiciled in Vermont and based in Santa Cruz, California. According to the Risk Retention Reporter's "2023 Domicile Rankings," ANI reported premium growth of $20.3 million, bringing its total premium to $151.9 million for the year.

ANI was among the top three Vermont-domiciled RRGs for premium growth in 2023, alongside Physicians Insurance RRG Inc. (up $38.4 million to $64.6 million) and Attorneys' Liability Assurance Society Ltd., A RRG (up $26.5 million to $420.7 million). Vermont remains the dominant RRG domicile. While it licensed 85 RRGs as of year-end 2024, the most recent premium data reflects activity from 2023, when 80 RRGs reported nearly $2.92 billion in gross written premium—approximately 58.6 percent of total RRG premium nationally.

"Most commercial insurers will decline a risk that includes commercial auto liability for a volunteer driving a van full of kids," said Pamela Davis, founder and CEO of ANI. "They don't understand nonprofit risk."

Whether an organization turns to an RRG or a captive insurance company depends on the nature of its risks, coverage needs, and ownership structure. Understanding the regulatory and operational differences between these two vehicles is a critical first step for any business exploring alternative risk financing options.