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The Differences between Captives and Risk Retention Groups, Explained

risk-retention-group

The Differences between Captives and Risk Retention Groups, Explained

Captive insurance groups have long been a means for small organizations to band together and manage risk. However, captive insurers lacked the flexibility required by emerging business models and were unable to remain competitive in hard markets. These conditions led to legislation for the creation of risk retention group. Since the mid-1980s, RRGs have provided organizations with the ability to access to liability insurance, remain strong when the market is in flux and develop their own products as needed. Although an RRG is considered a form of captive insurance, captive insurers are not RRGs. Here are several key differences.

 

Benefits of Fronting

 

Unlike RRGs, captive insurers are bound by jurisdictional regulations. However, they are allowed the benefit of partnering with reinsurers. Captive insurers partner with various insurance providers that follow local regulations. Through these reinsurers, captives are able to offer their members a greater number of customized levels of protection, far beyond the scope of liability coverage.

In addition to this benefit, captive insurers do not have to file in numerous jurisdictions because paperwork is taken care of by the insurance partner. Single platform captive insurance software tools allow captive managers to securely access data and share information through integrated claims management systems, even when they are acting as a front.

 

Transferring Risk Without Fronting

 

RRGs’ one main benefit is their ability to operate across jurisdictions so long as they follow the regulations of their domicile state or region. Such a scenario results in little need for fronting but does require filing in every jurisdiction in which the RRG operates.

An RRG is also limited in scope. The organization can only offer liability coverage and the group has no power outside of the United States, which is a major limiting factor for U.S. businesses wishing to conduct business overseas.

Another limitation is access to capital. Since RRGs are composed of organizations with similar risks, business practices and industries, there are fewer low-risk members capable of absorbing industry-wide catastrophic events. Plus, unlike captives, RRGs are owned only by the organization’s named insurers. Limited stockholders translate to limited capital.

Limited financial resources are a reason why RRG formation requires a feasibility study, detailed rating classification systems and an annual financial statement, among other requirements. Risk management software simplifies this extensive process and assists managers in developing and maintaining numerous filings across different geographies.

Risk management software tools and captive insurance software solutions are capable of providing policy and claims management, underwriting and filing regardless of structure.
Because of these tools, the choice between forming or joining a captive or an RRG can be made based on what best serves your organization rather than on ease of management.

CHSI Technologies