Preparing A Feasibility Study

The first step is to compile data for review as follows:

1.1. Information required to determine the feasibility of forming a Risk Retention Group

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, volume of sales etc taking into account any future acquisitions or expansions.

A general rule is that a minimum premium of $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

1.2. The Feasibility Study

A feasability 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 which will benefit the policyholders and owners to the extent that they benefit from the Risk Retention Group approach as compared to traditional insurance.

1.3. Establishing Links with Service Providers

Working with the right service providers is often key to a Risk Retention Group's success. It is important to ascertain that the professional services required are available and to ensure that the right ones are selected. Service Providers can include Underwriting Managers, Consultants, Legal Counsel, Auditors, Accountants, Reinsurance Intermediaries and Loss Control specialists. Since the passage of the 1986 Liability Risk Retention Act and the emergence of captives in general, the industry has grown in sophistication . All services are widely available but as with any hiring of services care needs to be taken that those chosen are professionally qualified as well as capable of providing an efficient service.