Feasibility Study First Step In Forming RRG As corporate insurance buyers once again steel themselves to the reality of the hard market and continuing rate increases, many may consider moving their programs into risk retention groups. To determine whether an RRG is the best solution, preparation of a feasibility study is essential.
A feasibility study not only helps insureds determine whether an RRG is the best option, but it is also a requirement of the Liability Risk Retention Act, which provides that a feasibility study or plan of operation be submitted to the RRGs domiciliary state regulator as well as to regulators of states in which the RRG intends to operate.
The first decision that prospective insureds must make is who will conduct the feasibility study.
In most cases preparation of a study is outsourced to professionals, such as captive management firms or independent consultants who have expertise in forming RRGs and other captives. The Service Provider Directory at www.rrr.com can be utilized as a source for finding service providers with expertise in preparing feasibility studies.
The cost of a feasibility study, which typically ranges between $100,000 and $150,000, seems less daunting when divided among the prospective participants.
The feasibility study should be prepared by a qualified actuary and will concentrate on three key areas: accumulation of loss history, actuarial projections and preparation of pro formas.
Three to five years of pertinent loss history should be accumulated for each participant. If loss histories cannot be obtained, the actuary will have to rely on industry standards. Premium projections, including both expected losses and losses based on a worst-case scenario will be prepared.
Using these projections, the actuary will develop two sets of five-year financial pro formas, one that reflects assumptions based on expected losses and the other on worst-case-scenario assumptions.
Captive premium levels in the initial years should be set at the higher level, reflecting the worst-case scenario. If actual losses are better, any premium redundancies belong to the policyholders and owners of the RRG and can be used to declare future policyholder dividends or reduce renewal premiums.
The knowledge gained from the feasibility study will enable insureds to make informed decisions on whether to proceed with an RRG.
Assuming the decision is to move ahead, the feasibility study provides an invaluable roadmap for moving through the next stages required for RRG formation.
Karen Cutts is managing editor and publisher of the “Risk Retention Reporter,” a monthly newsletter based in Pasadena, Calif., that she founded shortly after passage of the 1986 Liability Risk Retention Act.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.