Is a risk retention group a safe place for a senior care liability program?

A risk retention group is a liability insurance company owned by its policyholders, formed under the federal Liability Risk Retention Act. It is licensed in one state and permitted to write liability coverage for its members across many.

Senior care has a long history with them for a specific reason: they tend to form when the commercial market withdraws from a class, which describes this industry more than once. Buying from one means you are simultaneously a customer and an owner.

Membership is usually selective, so the pool is composed of operators who were underwritten rather than whoever happened to buy. For a well-run operator that is favorable: you are pooled with peers rather than with the whole market.

Pricing tends to be less exposed to the commercial cycle, because the group is not repricing to a shareholder return target every year. And because members are owners, underwriting surplus that would otherwise leave the industry can stay in it.

There is also a practical advantage that operators undervalue: risk management services from a group focused entirely on this class are usually better targeted than generic loss control.

No guaranty fund. State insurance guaranty funds do not stand behind a risk retention group, so if it fails, unpaid claims are unpaid. The policy will say so on its face, because federal law requires the notice.

Assessment. Many groups can assess members if reserves prove inadequate. That converts what looks like a fixed premium into a potentially variable obligation, and it is the term that most surprises members who did not read the governing documents.

Exit cost. Leaving may require paying a share of run-off, and capital contributions may be returned slowly or not at all.

Read the audited financial statements for several years, not one. The number that matters most is loss reserve development: are prior-year reserves developing favorably or adversely. Adverse development over multiple years is the warning sign, because it means the group has been under-reserving, and under-reserving is what precedes an assessment.

Then read the governing documents for the assessment provision, the exit provision, and how capital contributions are treated on departure. Ask how concentrated the membership is, because a group whose loss experience is dominated by a few large members carries their risk profile.

Ask what the group does when a member has a bad year: is the member repriced, assessed, or non-renewed. That answer tells you what happens to you.

It suits an operator with a genuinely good loss record, a long time horizon, and the financial capacity to absorb an assessment without distress. Those operators are effectively being offered the underwriting profit on their own good performance.

It suits less well an operator with volatile results, thin liquidity, or a near-term sale or refinancing, since the exit provisions and the possibility of an assessment complicate both. And it requires checking against your lease and loan documents, some of which specify an admitted carrier or a stated rating that a risk retention group may not satisfy.