Glossary
Risk retention group, defined
A liability insurer, formed under federal law, that is owned by its policyholders, who must all be in the same business or face the same kind of exposure. It is licensed in one state and can then write liability coverage for its members in every other state with only a registration.
In practice
They exist for professions and trades the standard market serves poorly: physicians, nursing homes, contractors, trucking, non-profits, and similar. Because they operate outside most states' guaranty funds, a member whose group fails has no state backstop, so the group's financial strength matters more than usual. They can write liability only, not property or workers compensation, so a member still needs other policies elsewhere. Members typically contribute capital, share in results, and accept that a bad year for the group is a bad year for them. Pricing is often stable in hard markets when commercial carriers withdraw, which is the main reason they are formed. The analysis compares the group's rating and capital against the commercial alternative and says which the client should prefer.
A worked example
Suppose a set of independent pharmacies cannot obtain professional liability in the standard market after a wave of claims across the industry. They form a group in Arizona, each contributing $25,000 of capital and paying an annual premium of, say, $12,000 for $1 million of coverage. A member is sued and the group pays a $300,000 settlement from its pooled premium and reinsurance. Hypothetical figures.
Applies to: Professional Liability (E&O) InsuranceNon-Profit Organization Insurance