Definition: Risk Retention Groups (“RRGs”) are associations of like-minded businesses that come together to mutually protect each other from liability risks. This approach echoes the foundational principles of insurance, where individuals or organizations would band together—often based on shared geographic or other commonalities—to safeguard one another against unforeseen events and accidents.
⏲️ History:
1981: While the structure of RRGs / reciprocals / mutuals has been around for some time… RRGs specifically began with the Product Liability Risk Retention Act of 1981. Passed by Congress in 1981, this act allowed businesses with similar liability exposure to form RRGs, which are a type of self-insurance pool. The PLRRA was initially limited to product liability insurance. In the early 1980s, the United States experienced a liability insurance crisis. Businesses, especially those in high-risk industries, found it increasingly difficult and expensive to obtain liability insurance. The crisis was characterized by skyrocketing premiums, reduced coverage availability, and in some cases, the complete withdrawal of insurers from certain markets
1986: After some initial success with product liability in 1986, regulators broadened the scope of RRGs beyond product liability to include all types of commercial liability insurance, except for workers' compensation.
1980s+: By the end of the 1980s 70-80 RRGs had formed… with an addition ~100 formed in 1990s.
🦣 Here are some of the larger RRGs today…
🔨 Attorneys' Liability Assurance Society, Ltd. (ALAS): Legal malpractice insurance for large law firms.
🧑⚕️ The Doctors Company: Medical malpractice insurance.
🐴 Spirit Mountain Insurance Company: Liability insurance for Native American tribes and their enterprises.
🏫 States Self-Insurers: Coverage to municipalities, schools, and other governmental organizations.
🏠 Green Hills Insurance Company: Liability insurance for nursing homes, assisted living facilities, and other long-term care providers.
🚧 American Safety RRG, Inc: specialty liability insurance for various industries, including construction, environmental services, and security.
Below we challenge some of the typical “benefits” discussed with affinity group programs/ RRGs
🩼 Lower loss ratios: Authentic’s hypothesis is that “community based” programs create positive selection bias and beneficial social pressure. I took a look at all RRGs in CA. The 2023 CA RRG report shows a 49% loss ratio (aggregate) vs. 63% state average - 14% improvement in LR for RRGs. 2022 report shows 45% vs. a 56.2% state average - 11% improvement in LR for RRGs. When drilling down into the groups and recalling past conversations, there are success stories where this hypothesis is true, stories where it is not, and stories where it may have held but other factors impacted LR. We’re putting together a larger dataset here but for the time being… TLDR: Seemingly true in the aggregate. Not always / many factors at play
👐 “Custom coverage” how can you actually customize coverage? Contrary to popular belief, small commercial insurance is not a commodity (more to come on this in a separate post). I’ve learned this first hand as we customize BOP packages that are specifically tailored to affinity groups at Authentic. While RRGs typically only sell liability (and not property) there are still many ways to customize a liability package. For example, certain groups will need liquor liability, sexual above & molestation coverage, medical expense coverage, etc. Customizing this coverage takes work between the carrier and the group to understand the nuances of risk. So, even though a small commercial liability policy might be cheap… I wouldn't call it a pure commodity. There is value to “packaging” for an affinity group. TLDR: There is value here
🧑🤝🧑 Better/faster/cheaper distribution? These groups have different levels of affinity. People often lose sight of how SMBs interact with these groups. Higher affinity = better distribution. The goal is to create virality - this can be achieved if there is a clear value proposition to SMBs plus a high affinity. It is exciting to see the network effects in some cases. In other cases, groups will try to use the “stick” vs. the “carrot” to push adoption into the insurance program. In the worst case scenario, nobody joins the insurance program because the value proposition isn’t strong, affinity to the group is low therefore nobody cares. All three of these happen… and the first two are the programs that stick around! TLDR: Yes but not created equal
💡 RRGs and Captives: What’s the difference?
Regulatory Framework: An RRG is formed under the Liability Risk Retention Act of 1986, a federal law that allows businesses to collectively self-insure against liability risks. Once an RRG is licensed in one state, it can operate across all 50 states without needing additional licenses. This federal regulatory framework provides more flexibility for RRGs to offer liability coverage across state lines. On the other hand, a captive insurance company is governed primarily by state insurance laws. A captive is created and regulated by the laws of the state (or country) in which it is domiciled.
Types of Coverage: RRGs are limited to offering liability insurance only
Ownership and Membership: Captives can be owned by a single parent company or by a group of companies, depending on the structure. RRGs are owned by their members, which are companies or organizations that join the group to insure their liability risks. The members must share similar types of liability exposures
Risk Pooling: In a captive, risk pooling can be more diversified. A group captive might pool risks from multiple industries, helping to spread risk across different types of exposures. This flexibility can make captives more resilient to a broader range of risks, and they can also choose to reinsure certain exposures to further mitigate potential losses
👀 Authentic’s Perspective: In a very challenged insurance market we believe more businesses can benefit from these retention group structures. Typically the constraints have been capital, reinsurance, operations & technology, servicing and distribution. At Authentic, we believe that this fundamental, cooperative model of insurance is the way forward. We empower affinity groups to establish their own tailored insurance programs, designed specifically to meet the unique needs of their members. Through these programs, members not only benefit from customized coverage but also share in the financial rewards, creating a community-driven approach to insurance.