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Liability Risk Retention Act – Definition

Liability Risk Retention Act Definition

Liability Risk Retention Act, LRRA is a federal law that got the approval of the United States in 1986. Contained in the act is the ability of businesses, professionals and cities to obtain liability insurance. Liability insurance offers businesses and individuals protection damages and risks related to people or property. However, liability insurance in past times was difficult for businesses or individuals to obtain given risk factors that arose during liability crisis but with the passing of LRRA into laws, liability insurance was also reinstated.

A Little More on What is the Risk Retention Act

Liability Risk Retention Act became a gateway for business owners and professionals to access liability insurance. The passage of LRRA also provided businesses with an escape from and a solution to liability crisis. This was achieved through the formation of Risk Retention Groups, RRGs and Purchasing Groups, PGS. Risk Retention Groups are saddled with the responsibility of creating insurance companies under the laws of each state where the retention group is based. Purchase groups however refers to insurance buyers who are provided with liability insurance by RRGs. However, for PGs to enjoy the liability insurance provided by RRGs, they must have membership with RRGs.

What is a risk retention group?

A Risk Retention Group, RRG refers to a domicile or state-chartered liability insurance company that is owned by its members. The members of a risk retention group can be called the purchase group, in this group are businesses, professionals or cities entitled to the insurance offered by RRG. As provided by the Liability Risk Retention Act (LRRA), a RRG must have a chartered state, that is the state in which it is domicile. RRGs base their modes of operations in accordance to the laws of LRRA. The major role of RRGs is to retain risks that might arise due to liability crisis.

What is a purchasing group?

A purchasing Group, PG is one of the two entities created by the congress of the United States when the Liability Risk Retention Act was passed in 1986. A Purchase group is an assembly of insurance buyers who come together on a unified motif of securing liability insurance. Purchase groups have a uniform aim of purchasing liability insurance from insurance companies usually the Risk Retention Groups or Companies. Hence, membership of PGS avail business owners or professionals the opportunity to purchase liability insurance coverage.

What is the difference between risk retention groups and purchasing groups?

Although, risk retention groups (RRGs) and purchasing groups (PGs) have some terms that bring them together, they are not the same and do not have similar functions. PGs look up to RRGs for liability insurance coverage while RRGs basically offer insurance to members of the Purchase groups. The major differences between RRGs and PGs are;

RRGs retain risks while PGs do not

RRGs are insurers, PGs are the insured.

RRGs bear liability risks, PGs are protected from liability risks.

Other difference between these two groups include their policies and how they are regulated under the Liability Risk Retention Act.

What are the similarities between risk retention groups and purchasing groups?

Despite that many differences exist between the risk retention groups (RRGs) and purchasing groups (PGs), they still have some things in common. Under the the Liability Risk Retention Act (LRRA), there is a requirement for the membership of both RRGs and Pgs, this requirement is that their memberships must be homogeneous. For instance, they must have businesses in common, they must also desire similar liability insurance coverage in the case of PGs.

What kinds of insurance coverage do risk retention groups and purchasing groups provide?

As contained in the laws of LRRA, risk retention groups have specific insurance they provide. Both risk retention groups (RRGs) and purchasing groups (PGs) have some kinds of insurance coverage that they offer and this is in compliance with the liability definition by Liability Risk Retention Act. RRGs provide insurance for all types of third party liability, professional liability, products liability and general liabilities such as medical malpractice, errors and omissions among others. However, since the definition of liability by LRRA does not include property insurance, worker’s compensation or personal insurance, RRGs do not provide these kinds of insurance.

What are the advantages of risk retention groups?

There are quite a lot of benefits that members enjoy from risk retention groups. Aside from providing basic insurance coverages, there are other advantages of risk retention groups;

Members have control over their liability programs.

RRGs provide cost-effective liability insurance.

Members enjoy lower rates.

Provision of risk management programs that are efficient.

Access to reinsurance markets.

Members enjoy stability of liability coverage at a low rate.

Helpful loss experienced by members.

Members of RRGs enjoy the above benefits regardless of insurance market cycles or instability.

What are the advantages of purchasing groups?

There are certain significant benefits that purchase groups offer to their members or insurance buyers. The administrators of the purchase groups also have some benefits they derive from PGs, that is PGs also have some benefits in favor of insurers. These benefits can either be financial or non-financial. The ability to have huge profit through the insurance buyers is one of the benefits of PGs to insurers. The benefits that members of PGs enjoy include lower purchase rates, risk control or management programs, wider insurance coverage and protection in times of loss. Also, PGs enables brokers to retain their business and also enhance profitable transaction.

How many risk retention groups and purchasing groups are there?

As at October 2018, there number of risk retention groups and purchasing groups have increased tremendously unlike when they were first created by the Congress on United states when the Liability Risk Retention Act was passed in 1986. A total number of 217 risk retention groups were recorded in OCtober, 2018 while a number of 1003 purchasing groups were accounted for in that same year. This figure are got from the updates of a risk retention reporter.

Who keeps track of risk retention groups and purchasing groups?

Some people do believe that both risk retention groups and purchasing groups are let on the loose since the time they were established. However, this is not true, there is a close monitoring of both groups right from the time of establishment. Since 1987, the Risk Retention Reporter has been tracking the activities of risk retention groups (RRGs) and purchasing groups (PGs) with the assistance of state insurance departments. Before RRGs and PGs can operate in any state, they have to register with state insurance departments and this has made tracking these groups easier for the risk retention reporter.

Who forms risk retention groups and purchasing groups?

Although, risk retention groups and purchasing groups are the two entities created by the Congress to have a greater control of liability insurance programs, the question of who forms these two groups should not be left unattended to. The formation of these groups refer to their memberships. Risk retention groups are made up of sponsors for the liability insurance program, these sponsors are often members of trade associations and professional unions. Purchasing groups on the other hand is formed by insurance buyers, agents, brokers and other insurance professionals.

Who regulates risk retention groups and purchasing groups?

Just as the activities of both risk retention groups and purchasing groups need to be tracked, these groups also need to be regulated. State insurance departments are responsible for the implementation of  risk retention groups and purchasing groups in compliance with the federal laws of LRRA, state insurance departments are also responsible for their regulation. State insurance departments regulate each of these groups in line with their peculiarities. Since every RRG must be domicile in a state, the insurance department of the state has the utmost right to regulate it. PGs on the other hand are not only regulated by the domicile states but also by the insurer of the PGs.

References for the Liability Risk Retention Act

Academic Research on the Liability Risk Retention Act

The risk retention act of 1986: Effects on insurance firm shareholders’ wealth, Moore, W. T., & Schmit, J. T. (1989). Journal of Risk and Insurance, 137-145. This is a discussion of the Liability Risk Retention Act that was passed into federal law in 1986 and how this act impacts the wealth of shareholders of insurance firms. This discussion inc;udes the provisions of the LRRA and the requirements of federal law as regards this. The effects of the risk retention act on insurance firm shareholders’ wealth are extensively discussed. This handbook explores LRRA and the NAIC Model Risk Retention Act and highlights cogent issues of the act.

Development of Association Insurance Captives: Application of The Federal Risk Retention Act To Developed and Developing Countries., Ling, F. K. (1987). Journal of Insurance Regulation, 5(4). This paper examines the concept of ‘Insurance Captives’ as an application of the federal laws of risk retention act to help both developed and developing countries. This paper identifies that the Liability Risk Retention Act as established and amended by the United States serve as a vital structure for forming an association captives. In an ordinary sense, insurance captives helps companies with more than one subsidiary to integrate these subsidiaries in such a way that each captive can function as a licensed insurer. This paper also analyses strategies that should be put in place before the association can occur, it also provides guidelines for companies or sponsors of insurance captives.

Regulatory Authority Under the Risk Retention Act., Myers Jr, R. H. (1987). Journal of Insurance Regulation, 6(1). This paper examines the roles of regulatory authority under the Risk retention Act and the impacts of the regulatory authority in ensuring the both risk retention groups and purchasing groups operate within the confine or provision of the law. The author of this paper finds out that because there was no allocated period to debate the legislation of the liability Risk Retention Act of 1986, this gave rise to regulatory authorities at the state level. This paper examines the effectiveness of the regulatory authority as well as regulatory voids noticeable in certain areas.

Product Liability Risk Retention Act of 1981, The, Shea, E. E. (1982). Prac. Law., 28, 9. The Product Liability Risk Retention Act was passed by the congress in 1981 and this act allows risk retention groups to cover product liability risks. According to the provisions of the 1981 Product Liability Risk Retention Act, product manufacturers, distributors and retailers are permitted to jointly form captive liability insurance companies or purchase liability insurance coverage. A purchase liability insurance coverage stipulates that a manufacturer, distributor or retailer can purchase the product liability insurance as a coverage for a product in cases of faults or damages to the third party. This paper examines the product liability risk retention act of 1981, its advantages and downsides.

Proposed amendments to risk retention act debated, Wright, P. B. (1990). Risk Management, 37(9), 84-85. This paper examines the proposed amendments of the risk retention act and how these amendments would reflect on or adjust risk retention profiles and practises. This paper presents the debate around the amendment of the Liability Risk retention Act of 1986 and how the amendments would ensure membership control of risk retention groups and purchasing groups. This paper also highlights the stance of supporters and oppositions of the amendment to risk retention act. It also includes the deliberations of panels as regards the proposed amendments.

Risk retention act: Implications for hospitals, Salman, S. L. (1987). Perspectives in Healthcare Risk Management, 7(2), 6-8. This paper examines the significant implications of Risk retention act on hospitals. The risk retentions act is neither significantly useful for the hospitality industry nor does the industry have any concrete awareness of this act. Hence, the risk retention act has been of little or no benefit to the hospital industry since when it was passed into law in 1986. However, this paper identifies that the risk retention act will staring having impacts on hospitals as people in the healthcare industry are beginning to have awareness or the risk retentions act. This paper presents an overall highlight of the implications of risk retention act for the healthcare industry.

Risk Retention Act Passed; Other Issues Unresolved, Johnson-Pawlson, J. (1986). The Nurse Practitioner, 11(12), 19. Despite that the Liability Risk Retention Act, LRRA was passed as a federal law in 1968, there are still some cogent issues surrounding the act and its passage that are yet to be resolved. This paper examines issues of the liability risk retention act that are yet to be addressed or resolved.

Contractors’ claims insurance: A risk retention approach, El-Adaway, I. H., & Kandil, A. A. (2009). Journal of construction engineering and management, 135(9), 819-825. This paper examines contractors’ claims insurance and its effects on the construction industry, the parties involved and the economy of a nation at large. It also examines how a risk retention approach can be used to reduce the effects of contractors’ claims and disputes. In the bid to reduce the effects of contractors’ claims and disputes, the study investigates a number of factors such as whether pricing insurance premiums can be achieved using the options pricing theory. The investigation reveal that construction claims satisfy the required principles for insurance and the development of risk retention group for construction claims has recorded success for both the insured and insurer.

A study on risk retention regulation in asset securitization process, Guo, G., & Wu, H. M. (2014). Journal of Banking & Finance, 45, 61-71. There is a newly proposed methodology in risk retention process whereby an insurer has the right to withhold a specific portion of securitized assets. Securitization of assets happen in many forms but one of it is a case whereby an insurer can raise funds by selling receivables, which are then turned into assets. This paper highlights the impacts of asset securitization or risk retention regulations. It also examines the regulatory costs associated with this measure as well as it adverse effects on financial or insurance institutions.

Risk Retention Groups in Medical Malpractice Insurance: A Test of the National Chartering Option., Born, P., Boyer, M. M., & Barth, M. M. (2009). Journal of Insurance Regulation, 27(4).  The LRRA, Liability Risk Retention Act was passed as a federal law in 1986 to help address issues surrounding liability risks, however, to ensure adequate protection against liability risks and losses, risk retention groups, RRGs were formulated. These groups offer liability insurance coverages to buyers while they retain liability losses. Looking at the functions of risk retention groups in medical malpractice insurance, a recent annual data from the National Association of Insurance Commissioners, NAIC highlights  role of risk retention groups in increasing insurance availability as well as stimulating competition in the medical malpractice insurance industry.

Risk Retention Groups: Who’s Sorry Now, Sanders, M. A. (1992). S. Ill. ULJ, 17, 531. Risk retention groups are establishments that provide liability insurance coverages that are only enjoyed by their members. RRGs are also owned but not regulated by the members because these operate in accordance to set rules and regulations by the state insurance departments. This paper examines who should be responsible for the downsides of risk retention groups, whether the members who own the groups or the state insurance departments that regulate the groups. Hence, it examines who should be sorry for the shortcomings of risk retention groups.

State Laws Restricting the Operation of Risk Retention Groups-Necessary Protection or Illegal Regulation, Laughlin, V. M. (2011). Drake L. Rev., 60, 67. The operations of risk retention groups are controlled or regulated by the laws of the states in which they are domicile. This means RRGs operate under the standards of state insurance department which is the governing body at the state level. Certain star laws exist which tend to limit the operations of risk retention groups. This paper examines the state laws that restrict RRGs and whether these laws are necessary for liability insurance protection or they are just irregular regulations.

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