| Risk retention groups serve as captive insurance companies formed to provide insurance to members of the group. Rather than purchase insurance from independent insurers, the group of companies forms its own insurance company. Companies with similar risk management concerns thus may exercise greater control over their insurance coverage, pricing, and claims administration.
Risk retention groups often are formed under the provisions of the federal Liability Risk Retention Act of 1986. The Act preempts certain statutory and regulatory provisions in states other than the state where the risk retention group is formed. In order to meet the requirements of the Act, the group must form a corporation or limited liability company under the laws of one of the states or the District of Columbia. The group's company must have sharing of risk among members of the group as the company's primary purpose and activity.
The risk retention group's company may be set up as a stock company with shares owned by members of the group or as a company owned by an association with a membership made up of members of the group. In either event, the name of the company must include "Risk Retention Group" in its name.
While the risk retention group's company must comply fully with the insurance regulatory scheme of the jurisdiction in which the company was chartered, some preemption of regulation in other states in which the company does business is provided by the federal act. Thus, other states may not make insurance activities of the company unlawful or require the company to contribute to insurance guaranty funds that provide coverage for policyholders of insurers that become insolvent. Other states also may not require agency or broker participation in the issuance of policies by the company. Overall, other states may not act in a discriminatory manner toward a risk retention group's company chartered in a different state.
However, the risk retention group's company is subject to the jurisdiction of U.S. District Courts which may enjoin such a company with an inadequate financial position from doing business in any state. Also, there are numerous requirements of other states that are not preempted by the Act. Those requirements in each state in which the company does business include provisions such as:
Examination by the insurance commissioner if such an examination has not taken place where the company is chartered;
Compliance with fair marketing and claims handling regulations and with non-discriminatory financial disclosure and responsibility requirements;
Satisfaction of state financial responsibility statutes;
Payment of taxes that are non-discriminatory relative to admitted insurers; and
Licensing of brokers or agents of the company.
Companies formed by risk management groups benefit from limited exemptions from federal registration requirements for securities, from the Investment Company Act of 1940, and from state Blue Sky laws. However, the ownership interests issued in connection with the formation of a risk management group company are considered securities within the meaning of anti-fraud provisions in the securities laws, and those provisions will apply to the issuers of securities in the company. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |