Risk Retention Groups (RRGs): Achieving Success Across Sectors

Risk retention groups (RRGs) have carved out a unique niche in the insurance industry, providing critical coverage in sectors where traditional insurers often fall short. At the Vermont Captive Insurance Association (VCIA) conference on August 13, 2024, the session titled "RRGs: Why, How, and When They Exist" highlighted the significant successes of RRGs.

Historically, RRGs have been most effective during hard markets, stepping in to provide coverage when traditional insurers are either unwilling or unable to do so. The number of active RRGs has fluctuated over the years, peaking at 262 in 2008 before stabilizing at 246 in 2024.

Sectoral Impact and Growth

RRGs have made strides in various sectors, notably in health care and transportation. In health care, RRGs now underwrite over 20 percent of all medical professional liability (MPL) coverage in the United States. Among them, 15 healthcare RRGs have been operational for over 2 decades, with 2 ranking among the top 10 MPL insurers nationwide. The entry of traditional insurers, such as Medical Protective Company and Coverys, into the RRG space through sponsored groups underscores the recognition of RRGs as viable insurance solutions.

The growth in healthcare RRGs has been substantial over the years. In 1993, there were 21 healthcare RRGs, comprising 29 percent of the total RRGs at the time. This number grew significantly to 163 healthcare RRGs by 2008, representing 60 percent of all RRGs. By 2024, although the number slightly decreased to 128, healthcare RRGs still make up 52 percent of the total RRG market, reflecting their ongoing importance in the sector.

In transportation, RRGs have also seen noteworthy growth. Starting from just 4 transportation RRGs in 1993, which made up 5 percent of the total RRGs, the number increased to 21 by 2008, accounting for 8 percent of the market. By 2024, this number rose to 60 transportation RRGs, representing 24 percent of all RRGs. RRGs have played a crucial role in providing coverage for the transportation sector, which is often considered too risky by traditional insurers.

Beyond these key sectors, RRGs have established a solid presence in legal services and nonprofit organizations. The Attorneys' Liability Assurance Society RRG, for instance, insures 5 percent to 10 percent of all US attorneys, while the Alliance of Nonprofits for Insurance RRG covers one-third of animal shelters and half of foster family organizations in its active states. These RRGs have evolved from temporary solutions during hard markets to long-term, sustainable options for their members.

Mature RRGs by Business Sector

Among mature RRGs—those that have been in operation for at least 20 years—healthcare dominates the landscape, accounting for 62 percent of all mature RRGs. Other sectors with notable mature RRGs include government and institutions (10 percent), property development (9 percent), and transportation (7 percent). Additionally, smaller percentages are seen in environmental (4 percent), professional services (5 percent), and manufacturing and commerce (3 percent). Notably, 55 percent of these mature RRGs are domiciled in Vermont, the leading domicile for RRGs, due to its favorable regulatory environment and robust infrastructure.

Case Study: Recreation Risk Retention Group

The Recreation Risk Retention Group was founded in 2016 to address the unique insurance needs of the recreational sports sector, which includes activities like hang gliding, paragliding, powered paragliding, hiking, and parasailing—niche areas where traditional insurers, including Lloyd's, had been unwilling or unable to provide coverage.

With about 75 members and a projected premium of $2 million for 2024, the Recreation RRG illustrates how RRGs can effectively fill critical gaps in the insurance market. The group's focus on safety and risk management as core elements of its underwriting process ensures that members not only obtain necessary coverage but also engage in practices that enhance the insurability of their activities. RRG members have committed to a collective approach to risk management that benefits all involved, according to Timothy Herr, vice president of underwriting, secretary, chief financial officer, and general counsel.

Mr. Herr emphasized that RRGs, including the Recreation Risk Retention Group, are not vehicles for cheap insurance. If lower pricing were feasible, traditional insurers would have already offered it. RRGs are typically formed because no other insurer would take the risk at a premium that insureds are willing or able to pay. The Recreation RRG, like others, was established to promote availability, stability, and insurability in the market.

The RRG may occasionally reject an insured—not out of personal reasons but due to the risk posed by the operation. This rejection should motivate the entity to improve its operations. The group's goal is to make its members better risks, leading to stable pricing and shared profits over time.

The Recreation RRG embodies the concept of a purpose-driven RRG, according to Mr. Herr. It is formed to serve the interests of its members, not to act as a market maker. The group is responsible to its members and policyholders (who are the same individuals, wearing two hats) to provide coverage, risk management advice, a common industry network, a stable market, and as best as possible, stable pricing. It exists to fulfill the needs of its members rather than serving the interests of its incorporators, management team, or directors.

For those considering starting an RRG, Mr. Herr said, it's crucial to explore the decision from varied perspectives—such as business needs, potential members, premium sufficiency, capital commitment, and long-term commitment. Connecting with industry experts, including other RRG owners, and considering a feasibility study can provide valuable insights into whether an RRG is the right solution for specific risk management challenges.