Have you ever considered risk retention general liability insurance for your business? If the cost of your liability insurance premium is very high, or worse, if no insurance company will provide you with coverage, then risk retention may be what you need. The goal of this liability coverage is to provide you with reasonably affordable insurance. Read on to learn how it works.
History of Risk Retention
In 1986, Congress enacted the Federal Liability Risk Retention Act, which was signed by President Reagan. Prior to this act, risk retention groups already existed, but it was hard for them to form and compete with insurance companies. The act was designed to change the rules to make it easier for groups to form. The overall goal was to lower premiums for all businesses through competition between retention groups and insurance companies.
What is a Risk Retntion Group?
A risk retention group is a group of companies that gather together and form their own insurance company, which is owned by the member companies. Each company pays premiums into the group, and the group as a whole assumes the risk of insuring each member company.
What is Required to Form a Group
There are certain requirements that must be met in order for a group to form. They include:
- Being chartered and licensed in a state or District of Columbia. The group must be formed as a liability insurance company.
- Similar businesses. Each of the member companies must operate a similar business or service. This keeps the burden of insurance more equal among members and provides the group with a focused goal.
- No excluding companies. The group cannot exclude a company from joining, if the exclusion is done to provide an advantage. This means that you can't exclude a company that you think may have a high amount of losses.
- Submit a plan of operation. Information that must be included in the report include deductible amounts, coverage limits that will be in effect, the actual coverages provided, the rates charged to member companies, and the rating classification system that will be used.
Advantages of a Risk Retention Group
The biggest advantage to risk retention general liability insurance is being able to have coverage, often at reasonable prices. By being a member-owner of the insurance company, this gives the members more control than by purchasing insurance through an insurance company. More control can translate into lower premiums, additional insurance coverages, risk management programs tailor-made for your industry, and the ability to use reinsurance companies.
Other Reasons to Retain Risk
In addition to the reasons outlined above for joining a risk retention group, there are some other good reasons to retain some risk instead of transferring it all to an insurance company.
- High premiums. Part of the premiums you pay go toward the cost of the insurance company doing business. Why pay them if you don't need to?
- Small claims are expensive. One benefit to transferring all risk to a company is to deal with the all the small claims that come up during your normal business operations. The problem is that managing small claims can be expensive, to the point where it may be better to just pay the claims.
- Small claims can increase your premiums. By letting your insurance company handle--and pay for--small claims, you risk having your premiums go up even more.
- You already retain some risk. Even if you think you have "full coverage" you really don't. You retain certain risks through having a deductible, for example, or by not purchasing coverage for natural catastrophes.
How Much Risk to Retain?
There are several formulas that you can use to determine how much risk to retain. They include:
- Materiality Test
- Net Working Capital
- New Quick Method
- Earnings/Surplus Method
- Percentage of Sales
- Earnings Per Share
For More Information
For more information about risk retention groups, and to find a group, visit the Risk Retention Reporter website.