The benefits of broadening the scope of risk retention groups
- Herman Schoeman, MD of Guardrisk

A risk retention group (RRG) is essentially an insurance company that is owned by its members who, in turn, retain the risk themselves. Alternative risk transfer (ART) structures, like cell captives, can easily be set up to enable a RRG to operate in a formal insurance structure where the members of the RRG own and control the cell.

In essence, an RRG must represent insureds involved in similar activities that present similar liabilities to them or similar exposures to their clients. In the US, for example, many RRGs are made up of medical professionals who have set up insurance licences to provide cover for medical malpractice risks for their members. This was necessitated by cover becoming too expensive or too difficult to obtain in the traditional market.

RRGs can conceivably be used by many classes of professionals who are seeking similar liability covers, which the conventional market is unwilling to provide. RRGs allow their members to control and manage their risks, obtain coverage at more predictable rates and practice more effective risk management and loss control.

RRGs are still relatively new to the local market but, if the international market is anything to go by, there is scope for considerable growth in this arena. In the United States RRGs account for 1.17% (or US$1.8bn) of the commercial liability market. Between 2002 and 2004 more RRGs were formed than in the previous 15 years; and of these 58% are healthcare related.

Although, in the international market, RRGs have traditionally been used to provide for members? own risks there is no reason that the same principle could not be applied very effectively in a different environment. For instance, a group of professionals could easily use such a facility to provide cover for the risks or exposures of their clients or patients. After all, they can significantly influence the management of these risks and, as such, are in a good position to quantify the risk.

While it is not unlikely that the biggest growth of RRG type structures in the local market could also come from the healthcare sector; it may not only be in the more traditional areas such as malpractice. In fact, South Africa is at the forefront of broadening the use of ART structures. For instance, patients are often hesitant to undergo procedures that are not covered by medical aid because, while they may be able to raise the money to cover the operation itself, unforeseen complications could send costs spiraling and have dire financial consequences. A group of specialist doctors could fill this gap by setting up an ART structure that offers cover to patients should medical complications arise.

Another example is a group of building contractors wishing to provide cover to home owners for structural problems that could arise through no fault of the contractor. This could include material defects or failures where it would be difficult for the consumer to claim against the professional indemnity policy of the provider of these materials.

These are just two examples; there is no doubt that the local ART market could enjoy significant growth in this area, while providing professionals with a useful competitive differentiator.

For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: +27 11 669-1001

Issued by:
Melanie Davis, PR@Work
Telephone: +27 11 615-3309 / +27 83 225 7450