As a business owner, you find yourself overseeing a host of issues, and making decisions that impact not only yourself but everyone who is employed within your company. Therefore, it is to your benefit to educate yourself on as many applicable matters as possible to ensure that your company has made the right choices with regard to risk retention group or captive and the differences between these options.
These are two options for insurance that many businesses have discovered to be extremely beneficial for their companies. The following will explain more in-depth what each form of insurance is and the differences between the two.
Thousands of business owners like yourself have found captive insurance companies to be a cost-effective alternative to traditional insurance. Captive insurance comes in a variety of forms, each with its own characteristics. Risk Retention groups, known in the industry as RRGs, are one of the self-insurance formats that offer unique insurance options. As a business owner, you can learn about the similarities and differences between captive insurance overall and risk retention groups specifically by reading the helpful information outlined below:
Before looking at what RRGs are, it’s helpful to learn about how they came about in the first place. They were actually the result of two pieces of Reagan-era legislation known as the Product Liability Risk Retention Act of 1981 and then the Liability Risk Retention Act of 1986.
This legislation gained popularity and began working its way into society, especially among industries that were having difficulty ascertaining liability insurance. By partnering with other businesses with similar challenges, RRGs allowed such businesses access to these resources that they previously had not enjoyed.
Now, to define a Risk Retention Group or RRG. It is an entity owned and operated by the insured and is authorized to underwrite its liability insurance risk. RRG owners are required to be from a homogenous industry group—meaning they all fall under the same category, offer the same services, provide the same product, etc.— and have a single state license to operate in all 50 states. RRGs are especially helpful for law firms, dental or health care practices, nonprofits, or financial services. These companies are often of the smaller size, and can therefore greatly benefit from being grouped together.
RRGs are federally regulated and can provide more focused coverage when compared to regular insurance. This provides a level of stability and shared interest amongst those who are part of RRGs that simply isn’t found when related to traditional insurance. In fact, especially as it relates to smaller companies, traditional insurance is sometimes simply out of their price range.
Captive is an insurance subsidiary that has been in existence for over 100 years. It was created to provide insurance to its non-insurance parent company. Owners of captive insurance own the insurer, thereby creating self-insurance. Owners typically establish captives in order to meet their unique risk management requirements.
By providing direct access to reinsurance markets and underwriting profits, captives lower the total cost or risk. Today, there are over 7,000 captives globally, while in 1980, that number stood at just around 1,000. Therefore, it’s obvious the industry has grown and expanded, especially throughout the last 30 years.
The primary benefit of captive insurance is that it increases control while reducing costs for businesses. The coverage is tailored to meet specific company needs, giving each company greater control over its own coverage. There are often smaller deductibles for operating units and greater control over claims as well, which can improve cash flow. Price stability within the industry is another notable advantage of captive insurance. In most cases, the more a captive can retain their risk and insulate their own company from the changes in the market, the more stability they will enjoy.
Captive insurance gives especially small businesses the benefits enjoyed by large corporations with thousands of employees. They can tailor coverages, as mentioned which is often something that is simply unheard of with regard to traditional insurance options for small or even medium-sized businesses.
Now, let’s look at the main differences between those two types of insurance options.
One main difference between the two is the fact that captive insurance companies are permitted to be headquartered anywhere in the world, while RRGs are allocated to operate within the United States alone.
RRGs also do not require fronting paper, while captive formations use fronting papers to appear on established insurance company financial ratings and filings both in the United States and abroad. Front paper is utilized by some captive companies to exist on an established insurance carrier. All certificates of insurance, auto ID cards, etc. will bear the name of this insurance carrier. Conversely, RRGs do not require the use of fronting paper because each state commissioner regulates RRGs. As a result, the captive with a fronting relationship could be a better option if you have to file under multiple insurance commissioners throughout multiple states. Simply going with an RRG can save you from a great deal of hassle if you are operating within more than one state.
It’s also possible for different entities other than the insured to own stock in a captive. Stock can be owned in four ways in a captive. These include being owned by a business owner, by the parent company or insured, by a family or corporate trust, or by key employees. This ownership model can vary to align with business objectives aimed at employee retention and other specific preferences.
On the other hand, Risk Retention Group stock can only be owned by the named insured, and the only liability coverage can be written by RRGs. Captive insurance can include any type of coverage, such as coverage for buildings, contents, collision, cargo, warranty, and cyber.
In many cases, organizations that are in need of self-insurance options can benefit from both RRGs and captives. The biggest factor you need to consider is your liability-related risk. If your needs are primarily focused here, RRG could be a good fit. Risk management has to be key in determining your enterprise-wide risk assessment.
Contact us today at Winter-Dent to learn more about these options. We are industry experts and can help you determine what type of coverage would best fit your situation and individual needs. Thankfully, this means you don’t have to decide which option will work better for your company alone as we are here to help and ready to walk you through the process.