Most physicians have heard the term “risk retention group” in discussions about malpractice insurance coverage. But, hearing the term and deeply understanding it are two different things. Risk retention groups (RRGs) are a specialized form of member-owned insurance that emerged from legislation aimed at addressing an affordability crisis in the liability insurance market.
Historically, RRGs were formed by consortiums which worked to mutualize risk and support shared needs at a time when traditional industry players had abandoned the market. Compared to traditional insurance, this structure allows more direct member oversight over claims, increased opportunities for customizable coverage, and premiums set based on the group’s own loss experience, operating costs, and capital needs.
Over time, the vast majority of traditional insurers have formed RRGs of their own to increase pricing flexibility along with the range of products they offer, while reducing administrative cost. While RRGs underwrite a range of different types of insurance coverage, medical professional liability remains the dominant segment, accounting for more than half of all RRG premiums according to a 2019 study.
This guide explains how RRGs work, how they’re regulated, how they compare to traditional malpractice insurers, and what to consider if you’re evaluating coverage.
According to the International Risk Management Institute (IRMI), a risk retention group is a member-owned liability insurance company formed under the Liability Risk Retention Act (LRRA) of 1986 (15 U.S.C. § 3901).
Under LRRA, a risk retention group includes any corporation or liability association formed to provide insurance to the group's members, owned by those insureds, and organized to provide liability coverage only by assuming and spreading their liability exposure. RRGs must be chartered and licensed as liability insurance companies in at least one state in the United States and authorized to transact insurance within that state (unless a narrow grandfather clause applies).
There are also other specific requirements RRGs must meet, including the following:
RRGs are not surplus line carriers, which are non-admitted insurance companies authorized to cover specialized risks that standard insurers won’t cover. And, by definition, RRGs cannot be property insurers. They’re also not standard admitted insurers.
Standard admitted insurers must meet licensure requirements in all states where they sell policies. This requires following each state’s laws on policy forms, rates, premiums, regulatory oversight, and guarantee fund participation.
RRGs are regulated by laws in the domiciliary state where they’re chartered, but under federal law they can operate across state lines with less state-by-state oversight than traditional insurers. Federal preemption laws ensure that states cannot pass laws that interfere with or prevent RRG operation.
RRGs arose due to a liability insurance crisis in the 1960s and 1970s. Companies and professionals in specific industries, including manufacturing and healthcare, faced surging premiums. In some cases, they couldn’t purchase coverage at any price as insurers left markets behind. Product liability coverage, in particular, became very difficult to secure, and many firms struggled to obtain product liability coverage.
Concerns began to mount that companies couldn’t operate without an alternative insurance mechanism, but creating one was a challenge, as a 1945 law called the McCarran-Ferguson Act gave each state the power to regulate its own insurance market.
While the McCarran-Ferguson regulatory framework remains largely intact, Congress took action by creating narrow exemptions for Risk Retention Groups and Risk Purchasing Groups to address gaps in the traditional insurance market.
Since insurers weren’t offering affordable coverage to insure against certain types of risks, those without coverage options were offered flexibility to create their own liability insurance solutions in the form of RRGs.
The Product Liability Risk Retention Act of 1981 was the first law passed, allowing companies with similar product liability exposures to form self-insurance groups. This legislation established the foundation for the modern RRG structure.
When healthcare providers and other professional groups continued to experience coverage challenges, Congress responded with the passage of the Liability Risk Retention Act of 1986 to help commercial businesses obtain liability insurance that had become unaffordable or unavailable during the liability crisis. This significantly broadened the scope of RRGs, making it possible for these groups to write nearly all types of commercial liability policies – including professional liability coverage.
Interest in RRGs then surged following another insurance crisis after the September 11, 2001, attacks, as insurers raised premiums, tightened underwriting standards, and withdrew from certain specialties entirely.
In particular, physicians’ groups and healthcare organizations accelerated RRG formation as they sought greater control over pricing, underwriting, and claims management. Today, approximately 245 RRGs operate nationally, generating over $3 billion in premiums, over half of which come from the healthcare industry alone.
Traditional insurance companies are typically owned by shareholders or private equity investors. RRGs are liability insurance companies, but they’re owned by policyholders instead of investors. Everyone who is insured by the RRG must be an owner, and every owner of the RRG must be an insured.
Insured owners of RRGs may also be required to make capital contributions, in addition to covering annual premiums. The contributions help the RRG meet any solvency requirements and establish the initial surplus for the insurer, and that long term commitment from members supports the RRG’s stability, but they create risks for members who could lose their contributions and potentially face additional assessments if the RRG becomes insolvent.
Some domicile states do allow letters of credit or alternative capitalization mechanisms during formation, which can help RRGs meet insurance solvency requirements without forcing members to invest substantial amounts of money at the start and tie up those funds.
RRGs are also subject to a “homogenous risk” requirement, which means all owner/members must share similar or related liability exposures. When physicians insure physicians or contractors insure contractors, the group is better positioned to understand risk exposure, manage risk effectively, and underwrite coverage responsibly. But if one member has a large loss, that shared liability exposure can also raise premiums and reduce surplus across the group.
Because policyholders are also owners, governance structures are member-driven. Typically, the membership elects a board of directors to oversee the RRG. This allows insured owners direct influence over underwriting policies, claims management, litigation issues, risk management, and strategic direction. This is a sharp contrast to traditional commercial insurers that give policyholders no operational control.
Because the insureds own the RRG, favorable underwriting performance directly benefits them, instead of outside investors. While traditional insurers distribute profits to shareholders, surplus funds that an RRG generates can be kept to strengthen its financial position, returned to members through dividends, or used to reduce future premiums or provide other member benefits.
RRGs can be structured as stock companies, LLCs, reciprocal insurers, or mutual insurers, depending on the laws in the domicile state. Most form under a state’s captive insurance statutes, as captive laws offer more flexibility in capitalization requirements, operational management, governance structures, and accounting treatment.
Some captive domiciles permit certain RRGs to prepare GAAP-based financial statements alongside or instead of following all statutory accounting principles (SAP). Following SAP adds complexity and creates volatility by accelerating expense recognition and limiting how aggressively assets and future benefits can be recorded.
GAAP is simpler and can provide a clearer picture of long-term operations as it aims to match revenue with expenses incurred to generate it.
Under the McCarran-Ferguson Act, most insurers are regulated by state law and must comply with the requirements of each and every state in which they sell policies. Conversely, RRGs operate under the federal Liability Risk Retention Act, a framework that helps regulate insurance differently from standard insurers and streamlines cross-state operation.
Federal laws have established certain rules and standards that apply to RRGs nationwide. Specifically, federal laws:
Domiciliary states establish requirements for quarterly and annual filings, risk-based capital monitoring, and other financial reporting. Their licensing requirements center on the domicile state and commonly include a business plan, investment policies, and review by the insurance commissioner. Many states also help ensure financial solvency through an annual financial statement certified by an independent public accountant and supported by an actuarial opinion on reserves.
RRGs must also submit a plan of operation or feasibility study to their domiciliary regulator before offering coverage. This filing functions as a business plan and must include information on proposed coverage, deductibles, underwriting methodology, rating system, operational structure, and how the group will use reinsurance markets. Any material updates must also be reported.
Because the domiciliary state plays such a major role in regulating RRGs, domicile selection is important. Vermont is widely regarded as the leading RRG domicile, as it has decades of experience and a large, dedicated captive insurance division. Other common domiciles include Arizona, Montana, Nevada, and the District of Columbia.
When RRGs operate outside of their domiciliary state, non-domiciliary states cannot regulate them in the same way that they regulate traditional insurers, and no separate state license is required in any other state, although notice and registration rules may still apply.
The non-domiciliary state, for example, can’t require a separate license or require state government approval of rates and forms. Non-domiciliary states can require RRGs to:
They also do not participate in state guaranty funds.
However, states can’t impose licensing barriers or other obstacles that prevent the RRG from acting upon its federally protected right to operate throughout the U.S. A non-domiciliary insurance commissioner may act if the group presents a hazardous financial condition.
There are major differences between RRGs and traditional malpractice insurers. Some of the key distinctions include the following:
Risk Retention Groups are often discussed alongside captive insurance, and with good reason. Captive insurers are generally fully owned and controlled by the entities whose risks they insure, and were created for the primary purpose of insuring the owners’ risk. The insured policyholders also benefit from the underwriting profits of the captive.
RRGs are a specialized type of captive insurance. However, not all captive insurance is structured as a Risk Retention Group.
The biggest distinction between RRGs and captive insurance is that ordinary captives are formed under state law, while RRGs exist because of federal law and are regulated under the terms set by the Liability Risk Retention Act. The implications of this are vast, with some of the key differences including:
Physicians choosing between an RRG or a different type of captive arrangement need to consider their objectives carefully.
An RRG can be more efficient at getting covered for malpractice or professional liability risks in multiple states. However, for any group that needs coverage beyond just a liability policy, including for property damage or employee benefits, a traditional captive structure may be the better choice.
Physicians should evaluate the benefits of risk retention group coverage when determining if an RRG would be a preferred option for getting professional liability coverage. Some of the most significant benefits include the following:
Despite their advantages, getting insured through Risk Retention Groups also comes with meaningful risks that physicians must understand before purchasing coverage. Here are some of the biggest downsides.
If you decide an RRG is the right choice for you, it’s important to find the right one. Typically, this means you will want to consider factors including:
You should make sure to ask the RRG for detailed information about its finances, as well as whether it can impose additional premiums or capital calls after the policy is issued. If the RRG can ask for more funds, find out under what circumstances that could occur.
Far too many healthcare providers don’t have a clear understanding of the structure of their malpractice insurance until a carrier exits the market, a claim occurs, or premiums spike.
Being reactive, instead of proactive, about coverage can result in providers choosing a malpractice insurer that doesn't fully fit their needs or goals. It can also create an outsized risk of financial loss if a problem arises.
The RRG model is a specialized model for malpractice coverage, which is neither inherently better nor inherently worse than traditional insurance. Because of its different ownership structure and regulatory burden, it becomes especially critical to research options carefully, as the strength of the coverage can depend heavily on the quality of the group.
Those shopping for malpractice coverage for the first time, or when switching carriers, should begin with a deep understanding of the different kinds of coverage to make an informed choice.
Indigo can help providers get the insurance coverage they need by leveraging the power of AI to offer tailored pricing and a rapid approval process. Not all RRGs are created equal.
With a strong AM Best financial rating, audited financials, blue chip reinsurers, years of successful operating history, and non-assessable policies, Indigo is well positioned to compete against traditional malpractice insurers.
Contact Indigo today to learn more about how we can help.
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