Preparing a Feasibility Study for a Risk Retention Group

The Feasibility Study

Part of the feasibility study involves a review of all the participating companies' current insurance programs to determine suitability by comparing to what might be achievable under a Risk Retention Group scenario. 
The first step is to compile information for review as follows: 

1.Full details of all participating companies' current insurance programs with details of limits purchased, deductibles, premiums and loss experience for the last five years.

2. Information showing the exposures to the current and future insurance program including values of all locations, numbers of staff, taking into account any future acquisitions or expansions. 

A general rule is that a minimum premium of around $5,000,000 is needed to make a Risk Retention Group viable. The reason for this is that liability classes are often expensive to reinsure as limits are generally higher than property physical damage coverages and a minimum size is required to offset the costs associated with forming a Risk Retention Group.

Once the information has been compiled a comparative analysis can be performed which will help determine the viability of establishing a risk retention group.

The Comparative Analysis

The feasibility Study should include a comparative analysis which should demonstrate what the average amount of losses versus the premium for at least the last five years and how these compare to a newly-formed Risk Retention Group's projected losses after reinsurance recoveries against premiums after its costs. 

If the premiums that are required to make the Risk Retention Group profitable are greater than those being charged in the open market, it may mean that forming a Risk Retention Group may not make sense. However, it may be the case that once the Risk Retention Group is established other companies will join the group and economies of scale be achieved. 

Also in this section

Preparing a Feasibility Study for a Risk Retention Group
Appointing Service Providers for a Risk Retention Group
Filing an Application and Monitoring a Risk Retention Group
The Advantages and Disadvantages of Risk Retention Groups