The basic idea of any risk management strategy is to spread or transfer the potential for catastrophic loss to an entity that can absorb it. While risk retention in insurance can sometimes mean a company handling its losses independently, others choose to cede the potential for loss to a risk retention group. While there are similarities between traditional insurance and risk retention groups, there are three key differences.
Insurance is a highly regulated industry with oversight often provided at the state level, whereas risk retention groups are not subject to government scrutiny. Group members are not afforded the same legal protections provided to insurance policyholders, but the coverages offered and types of investments are more varied without those restrictions.
Insurance companies underwrite and own traditional insurance policies. Risk retention groups are owned and operated by the business owners protected under them, giving more control and profit-sharing options to the companies than regular insurance policies provide.
Risk retention groups require capital sufficient to pay losses within the group. That means the share of the loss is often more significant among members than it normally would be among entities that purchase insurance.
Risk management is a necessary part of doing business. Business owners should understand their options and choose according to their unique needs.