States With Captive Laws Offer Advantages When Forming RRGs

By Karen Cutts

The 1986 Liability Risk Retention Act requires that a risk retention group be “chartered or licensedunder the laws of a state and authorized to engage in the business of insurance under the laws of such state.” The Act defines a “state” as “any state of the United States or the District of Columbia.”

While RRGs can select any state as their state of domicile, in practice, RRGs most frequently select states that have enacted captive laws. These laws typically provide advantages that would not be available to an RRG if it formed under the states' traditional property-casualty law, including lower capital and surplus requirements, fewer restrictions on investments, and lower premium tax rates.

At the time the LRRA was enacted, less than a dozen states had captive laws. Since that time, the number of states with captive laws has almost doubled, with 22 states having captive laws on their books as of year-end 2002. Of these 22 states, 15 permit RRGs to be formed under their captive laws.

If an RRG were to form in a state with a captive law that did not permit formation of RRGs, the RRG would have to become licensed as an admitted insurer, subject to that state's capital and surplus and other requirements for traditional insurers. However, the RRG could still operate nationally as an RRG because of the preemptions afforded to RRGs by the Liability Risk Retention Act.

A survey conducted by the Risk Retention Reporter in August 2002 determined that the minimum capital and surplus requirements for RRGs under states' captive laws are typically $500,000 for stock and mutual companies, and either $500,000 or $1 million for reciprocals. Vermont, however, recently passed legislation increasing its capital and surplus requirements for RRGs to $1 million from $500,000.

It should also be noted that, while states have minimum requirements, regulators are free to require whatever amount they feel is appropriate for the types of risks being insured and the lines of coverage offered.

Karen Cutts is managing editor and publisher of the “Risk Retention Reporter,” a monthly newsletter based in Pasadena, Calif., which she founded shortly after passage of the 1986 Liability Risk Retention Act.


Reproduced from National Underwriter Edition, July 7, 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.


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