Q. What is a Risk Retention Group?
A. A risk retention group (“RRG”) is a policy issuing liability insurance company that is owned by its member insureds and formed under the Liability Risk Retention Act of 1981, as amended 1986. The Liability Risk Retention Act (LRRA) is a federal law that helps U.S. businesses, professionals, and municipalities to create their own solutions for liability insurance which has become either unaffordable or unavailable due to “liability crisis” problems in the United States. The LRRA permits a RRG to operate on a direct basis in all 50 states (and the District of Columbia) under one state license, provided that it registers in each state in which it conducts business. The LRRA is a federal law and therefore preempts most state regulation, making it easier for RRGs to operate nationally under uniform legislation. The primary requirements of a RRG include that:
- It can only write liability insurance
- There must be more than one insured/owner
- All insureds must be owners and likewise all owners must be insureds
Under the LRRA, the membership of the RRG must be relatively homogeneous: operating in a similar business or profession which exposes the group to similar risks.
EMPAC RRG is a Nevada domiciled risk retention group insuring the risks of its Emergency Medicine Physician owners.
Q. Does my state overview RRGs?
A. Per United States Code, Title 15-Commerce and Trade, Chapter 65-Liability Risk Retention every state may:
- Require RRGs to comply with their unfair claim settlement practice
- Pay taxes
- Participate in any mechanism created to pay an equitable apportionment among insureds for policies written through the RRG
- Register with and designate the State Insurance Commissioner as agent for service of legal documents
- Submit to financial examination by the state if the domicile state commissioner has failed to do so
- Comply with any lawful state order
- Comply with state law as to deceptive, false, or fraudulent acts
- Comply with injunction alleging impaired financial condition
Q. How does a RRG differ from a captive?
A. Several states, including Nevada, have passed their own captive insurance laws in order to create an attractive “domicile” for homogenous groups wishing to start their own RRG. Obviously, being the domiciled state is a revenue producing venture for these captive states.
The word “captive” is a general term and usually refers to “self-insuring” in some manner and under the heading of “captive” we find such structures as: single parent or pure captives, group captives, RRGs, self insurance funds or trusts, off-shore captives, rent-a-captives and other alternative insurance mechanisms.
A RRG may be formed as a captive or as a traditional insurance company but in all cases must be domiciled in a U.S. state and therefore must be an onshore entity. Once licensed by a single state, a RRG is permitted to write business on a direct basis in all fifty states (and the District of Columbia) whereas other forms of captives are not able to operate on a nationwide basis without the use of a fronting carrier. As a RRG, EMPAC RRG is a regulated insurance carrier providing underwriting, claims, risk management and financing management to its insureds. At EMPAC RRG, daily management and board overview is executed by EM physician owner/insureds.
Q. How does a RRG differ from an admitted insurance company?
A. Traditional admitted insurance companies must be licensed and comply with the insurance rules of each state in which it operates. Usually such admitted carriers must file all their forms and rates for approval by each state insurance department. A RRG is created under a federal act and is required to be licensed only in its state of domicile. A RRG registers with but is not subject the insurance laws of any state except the state of domicile.
Q. How does a RRG differ from an Excess & Surplus Lines Company?
A. RRGs are similar to E&S in that neither RRGs or E&S carriers participate in state guarantee funds and nor have their rates and forms approved by the departments of insurance. However, an E&S carrier must be approved by each state, are subject to the insurance laws of each state in which it wishes to write business and brokers selling E&S insurance in a state must receive declinations from admitted carriers before coverage can be bound.
Admitted companies and Excess and Surplus lines companies typically insure multiple specialties and are owned by individuals/corporations other than the insureds. EMPAC RRG is owned solely by its insureds EM physicians and has only the well-being of those owners as its sole reason for existing.
Q. What is the legal structure of EMPAC RRG?
A. EMPAC RRG has been formed as a non-assessable reciprocal insurance company. As a reciprocal EMPAC RRG is an unincorporated entity. The RRG is managed by an “Attorney-in-Fact”, EMPAC Managers, LLC.
A. Typically a reciprocal is a pass through entity and taxes are paid proportionately by its subscriber owners. However EMPAC RRG has elected to pay corporate income taxes on behalf of its subscribers and will be taxed under rules for domestic property and casualty insurance companies.
Q. How and when will dividends be declared?
A. The board of directors will determine a dividend formula and dividends will be declared and paid from time to time to all subscribers in good standing based on the number of units held. As a member owned insurance company engaged in long tail liability risks it is expected that the first dividend will be paid after three to five years of operation.
Q. How many votes will I receive?
A. Each insured emergency room physician group will receive one vote regardless of size or premium.
Q. Who overviews a RRG?
A. The state of domicile reviews EMPAC RRG’s financial statements quarterly and such statements are also filed with the National Association of Insurance Commissioners. EMPAC RRG has filed a business plan with its state of domicile specifying its scope of business and states where it plans to write insurance. Other non-domiciled states do have some overview rights as noted above. The reinsurers of EMPAC RRG (who are all rated A – or better by AM Best’s) have a strong vested interest in EMPAC RRG’s well-being and EMPAC RRG’s business plan, underwriting guidelines and financials are provided to and approved by its reinsurers. Reinsures visit EMPAC RRG at least annually to audit its underwriting files for compliance with the agreed upon business plan.
EMPAC RRG’s financial statements are audited annually by the CPA firm Shores, Tagman & Company, P.A.
Milliman, Inc., a national actuarial firm provides state by state by state rates for EMPAC RRG and annually conducts a loss reserve valuation study confirming the adequacy of EMPAC RRG’s loss reserves.
EM physician board members who are also insureds of EMPAC RRG personally are involved with the major functions of EMPAC RRG including Underwriting, Risk Management, Claims, and Financial Management.
Q. Do state guarantee funds apply to a RRG?
A. No. As noted above RRGs, like Excess & Surplus Lines carriers, are not required to contribute to any state guarantee fund so they are not supported by those same guarantee funds in the event of insolvency. However it should be noted that in an insolvency, state guarantee funds vary from state to state, but generally provide only a limited amount of coverage (typically $300,000 per claim) restrict the time available to report a claim and assign their defense counsel to handle claims.
Q. Where do I find more information on RRGs?
A. The following organizations have excellent information on risk retention groups.
National Risk Retention Association
4248 Park Glen Road
Minneapolis, MN 55416
Risk Retention Reporter
P.O. Box 91115
Pasadena, CA 50147
Q. What are some of the advantages of a physician owned insurance company?
A. As a member owned insurance company, a RRG permits the members to control the type of insureds it admits and the nature of the insurance programs that are offered by the RRG. Over time, and properly managed, this control can result in more effective loss control programs, lower rates and more stable coverage creating decreased reliance of the traditional insurance market. In addition, if successful, the invested capital of the RRG can accrue to the benefit of the membership. Most importantly, the members own and control the RRG. Members are fully informed as to its operations and finance, and can benefit financially from sound underwriting and good claims management.
Q. Are there many RRGs operating currently?
A. There are over 220 RRGs currently operational in the United States as of January 20, representing over $2,560,000,000 in premiums written. Collectively, these companies insure a significant percentage of America’s private practice physicians. Since the hard insurance market that started in 2001 there have been over 180 new RRG formations, compared to only about 20 in the prior decade. The resurgence of RRG formation is a direct result of the unaffordability and unavailability of insurance for many professions and industries and RRGs have been established to provide affordable and dependable professional liability insurance free from the uncertainties of the commercial market.