Businesses, regardless of what they do or their size, make decisions that affect how they are covered. Many factors go into choices about what needs to be protected, such as:
- Business Furnishings
- Inventory, and
- Other assets
Besides physical assets, companies have to make coverage decisions to protect themselves against loss involving injury and damage they cause to others when they arise from their business operations.
When trying to arrange coverage for property, the primary issue is affordability. When coverage is not affordable, companies may decide that it can afford to keep that risk that it can do without coverage. When trying to arrange coverage for liability (responsibility for things the company does), the issues may be affordability and availability. When a business decides to go without insurance, it’s referred to as “going bare.”
A decision to go bare is a deliberate one, as opposed to a company that has overlooked a coverage need. Going bare is an accurate description, producing an image that an organization is, in some important respect, nakedly vulnerable to a serious loss.
Typically a company that has gone bare has limited options. The situation may develop because a company can’t find either a standard or specialty source of insurance that is willing to provide coverage at an affordable level. In some instances, coverage just isn’t available at any price, and companies choose to continue business under the threat of a crippling loss possibility; rather than cease operations.
In some cases, an entire industry or market niche may face temporary coverage crises. Several alternatives have been created in response to severe coverage gaps, such as the creation and growth of risk retention groups (RRGs).
RRGs are formal groups of companies that agree to pool financial resources to cover each other’s exposure to a similar source of loss that traditional insurance companies have either abandoned or have never chosen to provide coverage.
Risk Retention Groups (RRGs) were created in the mid-1980s during a serious liability insurance crisis. Certain types of businesses, as well as municipalities, found that their operations were threatened. The traditional insurance market, due to fear of extreme losses posed by certain classes of business, either abandoned markets or only offered liability insurance protection on a restrictive and prohibitively expensive basis. A new law, the Federal Liability Risk Retention Act of 1986, allowed (and encouraged) the use of RRGs.
Membership in the risk retention group is limited to those operating in similar businesses or activities and, naturally, which share exposure to similar, high-hazard risks of loss. With that being the case, RRGs are often formed from trade and professional associations. RRG owners must also be among its insureds.
The Federal Liability Risk Retention Act requires any proposed RRG to prepare a feasibility study or plan of operation, which includes the coverage, deductibles, coverage limits, and rates for each type (aka line) of insurance the group intends to offer.
Since RRGs are licensed in the same manner as insurance companies, they must comply with most of the operational, financial and reporting standards required of insurers, including arranging and maintaining both adequate operating funds (capital) and reinsurance. Further, they must:
- Provide quality loss experience data
- Maintain a minimum number of participants
- Maintain a minimum premium volume
- File annual financial statements (which are independently certified)
RRGs may write a variety of lines of insurance, including general liability, errors and omissions, directors and officers, medical malpractice, professional liability, and products liability. Compared to traditional insurance, RRGs provide their members with more control over their liability programs, lower premiums, broader coverage, better access to reinsurance, and less vulnerability to insurance market cycles.