Are you a builder who's frustrated with the high cost of liability insurance? Can you even get liability insurance from a local insurance company?
Ric Glover, senior vice president at risk- and insurance-services firm Marsh Inc.'s Construction Industry Practice, says risk retention groups (RRGs) could be the solution. Some groups have even profited from their endeavors.
An RRG is a group of businesses that pool their money and essentially form their own liability-insurance company. They may allow members to obtain membership from out-of-state entities to spread the risk. It may sound complicated, but there are several benefits.
"One positive aspect of RRGs," says Glover, "is one can actually invest the money he or she is putting toward insurance coverage." When paying traditional insurance companies, the money goes toward insurance and can’t be recovered, and it doesn’t usually pay dividends. RRGs, though, require that the money be placed in low-risk investments, where it does have the potential to earn dividends. Also, if the RRG is ever dissolved, as when its members retire, any surplus (once all liabilities are satisfied) are returned to the RRG's members.
It would behoove builders to gain membership from states other than their own, Glover says. "There would be a benefit for Florida builders to pool their resources with builders in Iowa, Arizona and Ohio, for example, in order to spread the risk potential around. Spreading risk helps avoid a single event resulting in claims against all members."
For example, Florida is subject to hurricanes, and building codes reflect this exposure. If a code is not accurately applied, all the members may be exposed to this single loss. Meanwhile, Iowa, Arizona and Ohio are not affected by this specific catastrophe but have their own unique exposures. The likelihood of a single exposure affecting buildings in all four states is less than if members were in a single state.
Regulations vary from state to state, and capitalization requirements are determined by the profile of the RRG. Additionally, capital contributions are required throughout the course of the RRG. And Glover says there are very specific rules to establishing an RRG. Generally, they follow the same guidelines as commercial insurance. To ensure its success, the RRG should retain a staff that includes such support as an investment manager and accounting and actuarial services.
Interested builders may also join already-established RRGs. "Depending on how the RRG was set up to begin with," Glover says, "some RRGs may require a contribution to capital (or an investment); others may not allow any new member to participate in the ownership or underwriting profits." The RRG can declare dividends to the individual insured members, and all members of the RRG can still distribute underwriting profits to the owners separately.
Glover says one of the biggest reasons that RRGs fail is that they understate and underfund a risk for loss. "It's helpful to seek help from an insurance consulting group because the process is complex," he says. "It's better to overfund the RRG to ensure its success in the long term."
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