What is a risk retention group, and how is it different from a captive?

0:00HostSo what is a risk retention group and how does it compare to a captive

0:03Matt Queen? They're within the same universe as captives. They are distinct because they operate almost like an excess, the surplus lines carrier, but where an excess and surplus lines carrier has to pay an extra series of taxes. The ROG gets off light and they are governed by the state more akin to a captive. So their expense ratio is like 10%, whereas an ES or a Medicare is going to be anywhere

0:30Matt Queenfrom 25 to 40% expense ratio. The ROG is able to provide very affordable insurance without really having to sacrifice underwriting discipline. They are available for liability only. They arose in the late 1970s. Now, early 1980s, that passed the Product Liability and Risk Detention Act because Lloyd's of London virtually collapsed in the face of asbestos lawsuits because of

0:59Matt Queenthe triple trigger theory of insurance coverage. And as it consequence, the availability of insurance for everything went down, but for product liability in particular, it went to basically zero Congress intervened. In general, the business of insurance estate law, that's the McLaren Ferguson Act. But that's a Congress Act. So a Congress said, "Okay, we're going to make a giant exception here." The business of insurance for product liability is now federal government stuff. So you

1:27Matt Queencan make insurance companies that can cross state lines. So you can incorporate a company in South Carolina that will then do business in California, Washington, New York, Florida, Louisiana. And the departments of insurance hate these things because each state operates like its own little thief dump. And oh, by the way, second to only the Department of Revenue, the Department of Insurance is a huge moneymaker for the state. So these guys aren't just arrogant, but they're also revenue positive. So they carry a lot of clout in every aspect of power

1:56Matt Queen, both at the state and the federal level. But times were tough, so they passed the Product Liability and Risk Detention Act, and it was this huge success. Solved the problem overnight, and it was such a success that Congress was lobbied to expand the Product Liability and Risk Detention Act into the Risk Detention Act. And so it's now the Liability and Risk Detention Act. As a result of that, you can create a captive insurance company, or something like a captive, called a risk

2:24Matt Queenretention group. You can domicile it in any state which has an RRG law, I think 35 or 40 states have these laws. California does not, neither does Washington, notably. So you can't domicile it just

2:35Hostanywhere

2:35Matt Queen. But like South Carolina is a big one, Vermont's a big one, Arkansas has a few, they're all up to this. Alabama, I mean, Texas, I mean, actually, I'm not sure about Texas, but most a lot of states have these laws. And then you can write liability insurance across state lines. And you can, you still

2:53Matt Queenhave to obey the rules, you still have to go through a broker. You can write direct in very limited circumstances, but for the most part, you want to use some sort of a broker. But it's not admitted, and it's not an ENS product. So it's kind of in its own little gray area in terms of regulation. But they're useful. The reason I like a captain is because only an owner can be an insured. So the

3:19Matt Queenway we get around this is you typically have a

3:21Matt Queenhandful of alphas who want this thing really badly. So we were going to make one today to do liability for talking about cannabis earlier. So we're now in cannabis laboratory land. How are we going to do our product liability? Nobody wants to touch this stuff because Lloyd's London is incredibly conservative. Well, what we're going to do is raise about a million dollars for capital. We're going to go get, we're going to make a corporation in a great state of, let's just say Delaware. And we're going to apply to the

3:49Matt QueenDepartment of Insurance and say, look, we got a million bucks. You're minimum paid in capitals a million bucks. We got two of us. You know, two of us are going to buy this insurance policy for ourselves. Here's the premium. Here's what the Actuary says is the right amount of money by the being by the boom. We're going to get a license from the government. And then from our Delaware risk retention group, we will then procure insurance wherever we are. In Colorado, let's just say, because we're in this cannabis laboratory space. But then our next friend says

4:18Matt Queen, hey, I heard you got cheap insurance over there. Can I get some of that too? And we would say, sure, go talk to this insurance broker. And we would appoint an insurance broker, almost

4:27Hostlike an M

4:27Matt QueenGA. And then that insurance broker would then go sell that insurance as if it were any other market. And it is successful because it's cheap. I mean, look, I mean, I'm not, I'm a big fan of the insurance industry, but I'm not like clueless. Well, view insurance as a commoditized sort of thing. So like risk retention groups can show up. And like I said earlier, without sacrificing under

4:47Matt Queenwriting discipline, their expense ratio is so low, they can naturally be the cheapest thing on the block. And that creates a lot of problems for the admitted in the ENS carriers. And since the Department of Insurance is structurally incentivized to promote admitted and ENS carriers, they will do what they can to make life hard for the ROG that comes in and takes over the market. That