Risk Retention: Risk Retention Groups & Examples

Risk retention groups management and examples
Image Source: InsuranceLitigationAndRegulatoryLaw

Facing numerous risks or dangers is part of the regular day-to-day operations of business owners or companies. However, while many business corporations will transfer these risks to their insurance provider, a few don’t take this risk management strategy. And rather than acquiring insurance to manage these risks, many businesses choose to pay for their losses out of pocket. This piece will blend you into the concept of risk retention without leaving out its groups and examples.

What is Risk Retention?

Risk-retention refers to a person or organization’s decision to assume responsibility for a specific risk rather than passing it to an insurance company through insurance purchase.

Put another way, rather than moving the risk to an insurer or employing derivative mechanisms, risk retention entails building up a self-insurance contingency budget to cover for losses whenever they occur. When a company finds that the expense of self-insurance is far lesser than the actual insurance premiums, it is much more likely to adopt risk retention.

However, when a firm decides or is forced to retain the risk, such a company will surely be accountable for any losses incurred as a result of that risk. Therefore, it is critical for businesses to ensure that they can afford to pay for any losses before deciding to retain certain risks.

In addition, risk-retention might be willingly(voluntary risk retention) or involuntarily(forced).

While the choice to deliberately keep a risk is usually driven by economic considerations. On the other hand, force retention occurs when the risk is not part of the company’s insurance policy. Or maybe such risk is uninsurable, or when the damage is less than the insurance policy deductible.

Losses from theft are an instance of a risk that many businesses opt to retain rather than claim on their crime insurance policy.

Risk Retention Groups

A risk retention group is an organization or limited liability company founded underneath the statutes of any state. And with the major goal of taking on liability risks on behalf of the members of the group. In other words, RRGs are self-insurance organizations formed to keep risks for a specific group of policyholders who shares a specific common interest. However, there is a limit to risk retention groups’ coverage; third-party liability only. This can include general liability, errors, and omissions, medical negligence, professional liability, as well as products liability.

Generally, this concept emerged in the late 1970s, when several businesses were finding it difficult to obtain product liability insurance at any price, necessitating congressional action. After evaluating the situation, the federal government, which generally leaves insurance problems to the states, passed the Product Liability Risk Retention Act of 1981. This allows people or enterprises with comparable or related liability exposure due to any similar or related commercial exposure, trade, product, service, to create “risk retention groups” mainly for the goal of self-insurance.

In 1986, Congress stepped in again to address the market crisis when a similar incident occurs; obtaining other forms of liability insurance. And this time passed the Liability Risk Retention Act (LRRA). This permits risk retention groups to cover all sorts of commercial liabilities without having to go through the regular insurance markets. Although under the LRRA, the state is the regulator of  RRGs, they follow a set of rules that is entirely different from that of regular insurers.

The LRRA pre-empts “any State law, rule regulation, or order to the extent that such law, rule, regulation or order would make unlawful, or regulate, directly or indirectly, the operation of a risk retention group.” The LRRA also prohibits states from enacting regulations that discriminate against risk retention groups.

Risk Retention Groups differ from traditional insurance

In general, the state and federal governments have teamed up on RRGs, but they take a different strategy than typical insurers. RRGs, on the other hand, are subjected to NAIC accreditation requirements that are tailored to their specific needs.

And while Risk Retention Groups operate in a similar manner to traditional insurance companies, users should be aware of the distinctions:

Ownership Role.

Risk Retention Groups are founded and controlled by enterprises, unlike traditional insurance companies, which are managed and run independently. As a result, such organizations are covered and have the ability to tackle their own risk management challenges.

Oversight by Regulators.

Conventional insurance subscribers get protection from a number of legal safeguards, whereas members of Risk Retention Groups do not have such privilege. Risk Retention Groups are immune from any laws, rules, restrictions, and decrees that might regulate their activities or operations. Their only exception is that to the laws of their domiciled state 

Financial Accountability

Risk Retention Groups, to obtain a license must have in place adequate funds to cover liabilities. Also, they need to provide written documentation of historical financial statements, insurances policies among other criteria or Infos.

Upsides

  • Multiple state registration and licensing obligations are avoided.
  • Risk and lawsuit operational challenges are within the control of members.
  • Development of a sustainable coverage and revenue market
  • Elimination of market residuals.
  • Insurance brokers are exempt from countersignature regulations.
  • No payment of an upfront fee.
  • Services broadband

Downsides

  • Liability insurance is the only connected danger.
  • Risks outside of its own unified group are not eligible to be in written.
  • Problems with members not fully compliant with the affirmation of financial responsibility rules
  • It is possible to operate or control with no need for a fiscal rating.

Benefits of Risk Retention Groups

Businesses with significant or unusual risks benefit from a customized loss control approach and risk management techniques. However,  RRGs enjoy exposure to reinsurance markets, which can help keep liability coverage affordable. And unlike traditional insurance, it gives you more program control, while operating in many states is also not a problem.

  • Adequate program control 
  • Multiple states operations
  • Accessibility to reinsurance markets
  • Policyholders control the profit rather the insurance provider.
  • Tailored loss control and risk management procedures for individual
  • Reliable provider of liability insurance at a reasonable price.
  • Dividends for persons with good loss experience
  • Immune to many state requirements
  • Constant compensations
  • Elongated rate stability.

Examples Of Risk Retention

Below are a few cases or examples of risk retention

  • Damage to an outside roofing system over a shed is a typical example of a risk that a corporation might be willing to accept. However, Instead of just purchasing an insurance coverage to fund for the replacement of the shed’s roof, a corporation may prefer to save apart funds for its ultimate replacement.
  • If a corporation does not recognize that it is dealing with a risk transfer strategy, it may presume complete retention. The corporation in this regard can falls under uninsured by default in because it did not obtain insurance and was unaware that it could. And in this scenerio, retaining such risk looks like the best bet for the corporation.
  • Another example is; when business owners may make this decision due to a high frequency of low-value losses or an inability to get adequate insurance coverage. This is frequently referred to as “forced risk retention” when risk is uninsurable, is exempted from insurance plans, or in a situation whereby liabilities are far lesser than insurance policy deductibles.
  • Losses to a business, such as theft or burglary, can be sort out of pocket, which is less expensive than purchasing and maintaining insurance coverage. However, according to the Insurance Information Institute(III), loss coverage occurs when a business owner decides that perhaps the cost of loss coverage is much lesser than that of the cost of insurance coverage.

However, there are several other ways in which you can approach and treat risks rather than risk retention.

#1. Avoidance

This has to do with changing company and management policies to eliminate hazards. This policy when employed is a smart policy to contain the larger dangers that could have a substantial effect on a corporation or business project.

#2. Transfer

This is a process of shifting risks to another party, such as in the case of insurance. You can effectively transfer risks from the insured to the insurer through insurance policies. Otherwise known as risk-sharing, this concept is applicable to undertakings involving numerous partners.

#3. Mitigation

Mitigation is the process of reducing the impact of a risk and it is the most prevalent kind. Generally, it involves limiting the impact of risk so that if a problem arises, it will be easier to resolve.

#4. Exploitation

Good risks that are positive indicators of business are preserved and exploited. For example, the expansion of the business may necessitate the hiring of additional employees, which you take advantage of.

Conclusion

Risk Retention Groups’ main objective is to address the difficulties that some firms may face in obtaining liability insurance. Risk Retention Groups are advantageous because they offer these organizations a marketplace option. However, Risk Retention organizations need to frequently offer a more detailed fiscal situation in order to demonstrate their stability. On the other hand, deductibles, copayments, or self-insurance are examples or cases of risk retention.

FAQs

What is the difference between a captive and a risk retention group?

Captive insurance companies can be domiciled (or headquartered) anywhere in the world, while RRGs can only be domiciled in the United States. This poses particular challenges for companies that do business internationally because RRG legislation only applies in the US and cannot be expanded beyond US borders.

What is the risk management cycle?

Talking about the risk management strategy, there are 4 essential steps of the Risk Management Process are: Identify the risk. Assess the risk. Treat the risk. Monitor and Report on the risk.

Which are 5 risk management strategies?

The basic strategy for risk management —avoidance, retention, sharing, transferring, and loss prevention and reduction

Are copayments examples of risk retention?

Risk-retention examples; D Copayments. Premiums. Retention is a planned assumption of risk, or acceptance of responsibility for the loss by an insured through the use of deductibles, copayments, or self-insurance.

  1. RETENTION RATIO: How to Calculate it with Examples
  2. Jumia Affiliate Program: How to Start Guide (Updated!)
  3. FOCUS GROUP: Definition and Detailed Guide on How to Run a Focus Group Discussion
  4. 15 Best Customer Retention Strategies That Increases Profits (guide)
  5. Relationship Marketing: The A-Z Guide (+ Free Tips)
0 Shares:
Leave a Reply

Your email address will not be published.

You May Also Like