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I've been on the phone talking #riskretentiongroup formation with a few brokers. The #rrg is a great corporate form that provides unique opportunities in the #insurance marketplace. Here's basically how they work.
The #rrg is a mutual providing insurance for its owners. It is a form of #captiveinsurance company that is formed pursuant to federal law. This is one of the very few exceptions to the McCarran Ferguson Act which states that insurance is the province of the states.
Consequently, an #rrg formed in state A is permitted to provide insurance in state B without any additional filings in state B. In general, the RRG's admin costs should be about 1/2 of an admitted carrier.
Lower overhead means that RRGs can write cheaper insurance than admitted carriers without sacrificing underwriting discipline. However, RRGs are only permitted to underwrite liability. No workers comp. No property. No health insurance. So, it's a niche play.
Only insureds are allowed to own an RRG; however there is an exception for non-profits to own RRGs. This is pretty common for trade associations that want to provide bespoke coverage for members of their organization.
RRGs are not cheap. All states with RRG laws require $400k - $500k in statutory capital that can be held in the form of a letter of credit. In addition, you'll need to inject surplus into the company in relation to the amount of exposure insured by the RRG.
In general, I'd not consider an #rrg unless you've got about $5m in premium within the initial group of insureds. Anything less than that and the margins get pretty thin. You've got a lot of fixed costs with an RRG.
For example, you'll need a policy admin system, at least 1 underwriter, internal accounting, external audit, rate & reserve studies from an actuary, and claims. While these costs are no joke, there is tremendous opportunity.
The RRG is a great way for a new risk-bearing entity to enter into the insurance marketspace without the regulatory requirements of an admitted carrier. While RRGs are expensive, they're nothing compared to the costs of a brand new traditional insurance company.
When considering opportunities for an RRG, look for industries where liability premiums are very expensive and insureds are desperate for a solution. Commercial trucking is a great area. If the risks are good then the RRG will be more affordable than admitted carrier coverage.
Exit strategies for an RRG are tough. Given the federal mandate that insureds must be owners, the market for selling shares in an RRG is pretty slim. So, the owners need to determine their goal before incorporation.
