RISK RETENTION FOR THE WIN
This proven solution can be a salvation for industries and organizations saddled with hard-to-place risks
By A. Ren Agarwal and Brian Johnson
Is the concept of a risk retention group (RRG) scarier than the concept of blockchain or bitcoin? It shouldn’t be, because it’s a proven option for many insureds, especially nonprofits.
Done right, risk retention can be a salvation for those industries and organizations that are saddled with hard-to-place risks.
The status quo can be difficult to change. Risk Retention Groups are scary only because of lack of understanding. [They] are competitors to the traditional market and should not be overlooked.
Did you know that the creation of RRGs was the response to a cry from business consumers during the insurance market crisis of the 1980s when the commercial markets failed to provide the insurance products consumers needed at reasonable prices?
Federal protection enacted RRGs
It was a cry heard at the top of government. In 1986, the Federal Liability Risk Retention Act was enacted, setting up a framework through which risk retention groups must operate. It also preempted state insurance regulation, allowing for the groups to provide insurance to their members, provided all members engage in similar activities and have a similar exposure to loss.
At Nonprofits Insurance Alliance (NIA), an A.M. Best A (Excellent) rated group brand that insures more than 21,000 nonprofit organizations, having a risk retention group lets us serve organizations in 32 states and D.C., many of which have not been well served by admitted carriers during the current hard market.
The federal statute allows risk retention groups to pool together both risks and resources to protect similar organizations. Because they’re focused on one type of insured, RRGs often develop coverages and loss control resources that are highly specialized and focused on their members’ specific loss exposures. This is a major differentiator between commercially purchased coverage options and risk retention groups. Rather than look at risks from the standpoint of profit maximization, NIA and other RRGs look at the problem itself: How do we solve a problem for our members and stay financially sound ourselves to protect them for the long haul?
Protection that matters
Creating something of value for insureds was behind our latest offering—communicable disease liability insurance, which is an endorsement to NIA’s commercial general liability policy. Acting on the needs of nonprofits, we have developed a product that covers bodily injury and property damage claims caused by an act, error or omission, such as: hiring, employing or training anyone who may transmit a communicable disease to others; actual or alleged failure to prevent spread; actual or alleged failure to report to proper authorities; and testing for communicable disease.
While much of the insurance world is undergoing heavy reexamination of communicable disease coverage in policies, our goal is to cover members in a manner that is sensible. The overriding questions are, “What are the circumstances under which a nonprofit would need protection?” and “How do we protect the operations of the nonprofit?”
From there, we considered what limits we could offer. We wanted to have sufficient funds available so that, in the case of a frivolous lawsuit, we could mount a solid defense of the nonprofit. We also wanted sufficient funds available so that if someone did get exposed that there was coverage for care. This is where member-first thinking can really deliver value. By putting lower limits on the policy, the nonprofit is protected to some extent, but it discourages litigation.
This is very similar to what we did in creating sexual abuse coverage. Sufficient coverage helped to defend the members, but it did not create a runaway train. To discourage litigation, we wanted to make the defense part of the limit. That tells a plaintiff’s attorney that frivolous actions diminish any recovery available to the plaintiff rather than allow reasonable accommodation.
When it makes sense
Reasonable accommodation is what risk retention groups do best. In the case of nonprofit organizations, the need to provide reasonable accommodation for their varied and hard-to-place risks was the genesis of our NIA’s founding. However, setting up a risk retention pool requires a broad spread of risk and variety of risks to best serve its members. A demonstrated need and business demand should be the driver of the risk retention formation.
Are surplus lines an option? Yes, sometimes, but in our view, too often the default option is surplus lines when there’s a market constriction. This should be a market only for extremely difficult-to-insure risks.
Too often, nonprofits and other sectors are sent to surplus lines simply because commercial insurers don’t understand how to insure them, and agents and brokers are not aware of a risk retention group that specializes in the sector. It’s a knee-jerk reaction; the standard commercial market won’t provide this coverage, so the only option is surplus lines.
A risk retention group that is focused exclusively on this sector would be a better option.
Finding a group
While you may not have spent much time embracing risk retention groups, we view them among the most important financial innovations in the last 50 years. They represent a proven option available to many agency clients. RRGs are financially stable and subject to the same solvency requirements as commercial carriers. As David Provost, Vermont deputy insurance commissioner, has written, “Although statutory minimums for traditional companies vary state by state, they are often irrelevant since nearly all insurers in the U.S., including RRGs, are subject to risk-based capital (RBC) standards.”
Provost continues, “With RBC standards, RRGs are uniformly regulated in the same way as traditional insurance companies.”
The status quo can be difficult to change. RRGs are scary only because of lack of understanding. Risk retention groups are competitors to the traditional market and should not be overlooked.
Finding the right risk retention group is not difficult. Do an internet search to uncover insurance specific to that sector. Also, look at the associations for those sectors, which may have risk retention groups already operating. There are plenty operating in plain sight. For instance, the education sector has its own risk retention group that’s highly successful. Ophthalmologists have their own risk retention group. In fact, well over 200 risk retention groups exist; some have been around for decades.
Agents and brokers need to look for options that are not limited to the typical surplus lines or admitted markets to serve their clients. The risk retention group has earned its place as a very viable option for agents and brokers.
A. Ren Agarwal is the chief marketing officer and Brian E. Johnson is the chief underwriting officer of Nonprofits Insurance Alliance (NIA).