National Risk Retention Association

A Risk Retention Group is a corporation or other limited liability association, functioning as a captive insurance company and organized for the primary purpose of assuming and spreading the liability risk exposure(s) of its group members (member-owners). It must be chartered and licensed as a liability insurance company in one of the fifty states or the District of Columbia. It can also charter as an industrial or association captive under special state captive laws such as Vermont, Delaware, Colorado, Illinois, etc.

RRGs chartered or licensed under the laws of Bermuda or the Cayman Islands that have met the capitalization requirements of one state prior to January 1, 1985, can continue to operate as RRGs. These are the only off-shore formations permitted.

Structuring of the RRG will conform to the laws of the chartering state and can include formation as a stock or mutual company, or as a reciprocal exchange. Members of an RRG must be engaged in businesses or activities which are similar or related in regards to the liability exposures created by virtue of common business or trade practices, products, services, premises or operations. In addition, an individual or firm that meets this criteria cannot be excluded from the group if the intent of the exclusion is to provide the group with a competitive advantage.

Owners of RRGs must be both members of and insured by the group. Indirect or secondary ownership through a wholly-owned, single organization is permitted as long as the organization's owners are members of and insured by the RRG. Insurance companies cannot have an ownership interest in an RRG unless all members of the group are insurance companies.

The ownership interests of an RRG are exempt from filing registration statements under Federal Securities Law and State Blue Sky Laws. However, in line with the anti-fraud provisions of applicable State and Federal laws, any solicitation for funds must disclose all material facts regarding the RRG and its insurance operations.

Except for the chartering state, an RRG is exempt from any state law, rule or regulation that regulates or makes an RRG unlawful except, any state can require an RRG to:

Submit to financial examination by other state insurance commissioners if the chartering state has not initiated such an examination;

• Comply with state deceptive, false, or fraudulent trade practice laws;

• Comply with lawful orders for delinquency or dissolution proceedings;

• Comply with an injunction for hazardous financial condition;

• Include a notice in insurance policies, in 10-point type, stating the RRG is not subject to all state laws and regulations, and that the insolvency guaranty fund is not available for the RRG.

The non-chartering state has no approval authority over rates, coverages, forms, insurance-related services, management, operation, investment activities, or loss control and claims administration. In addition, the Act prohibits states from otherwise discriminating against RRGs.

Each RRG must submit a feasibility study or plan of operation for approval to the chartering state before offering insurance. Under the Federal Act, the plan or study must include coverages, deductibles, coverage limits, rates, and rating classification systems. The NAIC Model Act defines the feasibility study as an "analysis which presents the expected activities and results of a risk retention group." The NAIC requires more information including historical and expected loss experience of the members, pro forma financial statements and projections, an actuarial opinion defining the minimum premium necessary to begin operations and to avoid financial difficulties, information on underwriting and claims procedures, reinsurance agreements, investment policies, and management and marketing methods. In addition, the NAIC also requires that the RRG provide information identifying the initial members, the organizers, the administrator
and anyone else who will otherwise influence or control the RRG.

In each state in which the RRG is or plans to do business, the RRG is required to submit a copy of the feasibility study (including revisions) and a copy of the annual financial statement. The statement must be certified by an independent accountant and include an opinion of loss and loss adjustment expense reserves by an actuary or a qualified loss reserve specialist. An RRG cannot write coverage which is prohibited by state statute or by the highest court in the state (ex: punitive damage, intentional or criminal conduct). This is not the same as coverage which is prohibited by the state insurance department. However, the states do have broad discretionary powers in deciding whether coverage from an RRG is acceptable where proof of financial responsibility is needed to obtain a license to engage in certain activities (i.e.: hazardous waste hauling, motor vehicle operations).

If an RRG is found to be "in hazardous financial condition," any state or U.S. District Court may issue an order enjoining a RRG from soliciting, selling insurance, or continuing operations.