Can someone explain the difference between "Admitted Insurance Carriers" and "Risk Retention Groups"?

    I asked alarm insurance broker Alice Giacalone to comment and she contributes:


    A non admitted carrier is not part of a guarantee fund.  If it goes insolvent claims would go unpaid (unlike admitted carriers who are part of the guarantee fund).  In my opinion, RRG’s are usually for when insurance is hard to find.  Admitted carriers are the way to go as they are regulated; have to follow rules; have a guarantee fund; have to get approval of rate and form…etc.  RRG’s have their positives but aren’t the best option for insureds when carriers that are A rated and Admitted are offering the same policies. It’s a no brainer.  I appreciate the opportunity to share my thoughts and add my two cents.

Alice Cornett Giacalone, Senior Vice President
Central Insurance Agency
          I'd like to add a little more information and any insurance brokers out there can feel free to correct or confirm.  
         An admitted carrier means it has submitted an application for a license to a state.  Typically a state will maintain a guarantee fund that will step in when an admitted carrier fails, goes broke, which I suppose occasionally happens, though I don't have the statistics on that.  I am not certain that all states have the same safeguards in place or the extent of the guarantee fund.  Admitted means admitted to the state where the insurance is being sold; where the insured is actually domiciled or maintains a place of business.  Thus a carrier can be admitted in New York but not in New Jersey.  I believe that carrier would not be permitted to sell insurance in NJ because it isn't admitted in NJ which is synonymous with licensed in NJ.
         Admitted also means that the carrier’s rates and underwriting guidelines are on file with the State and the carrier can not deviate from them. Also years ago carriers sold non-admitted “surplus lines” policies so if your agent gave you a document to sign when you bought your policy that the “State” required as a disclosure you bought a non-admitted policy. Admitted carriers can be admitted in as many states as they choose to do business, they need not be domiciled in each state and/or an admitted in one state can sell “surplus lines” or “non-admitted” policies in another state and not be part of the guarantee fund. 
       A Risk Retention Group is a very different legal entity.  Rather than being formed under a state law, which an admitted carrier will be, the Risk Retention Group is formed under Federal Law.  It must qualify in one state and then it is permitted to sell its insurance in all states without being admitted in that state.  Since it's not admitted it does not participate in the guarantee fund.  All RRG’s are required to submit quarterly reports and an annual statement to every state that they sell policies in and pay a tax (like a sales tax, but not the retail sales tax rate).
    So this is a hotly discussed issue because Security America Risk Retention Group is exactly what it sounds like, a risk retention group.  Though it isn't licensed in every state it is permitted to sell it's insurance in all states.  To protect it's policy holders it has obtained excess or reinsurance from Lloyds of London and the Lloyds policy steps in when the claim exceeds Security America's deductible [not your deductible].  
    What risk do you take if you decide to use SARRG.  Not only would you have to have a catastrophic loss, but many others insured by SARRG would also have to have such losses in the same year.  The losses would have to be such that they exceeded SARRG's reserves and Lloyd's excess coverage.  What you need to consider however is that SARRG's exposure is not the claim or even the aggregate of claims, but the policy limits of its insureds.  If you carry one million in coverage then SARRG's exposure, and the exposure of any other carrier, even if an admitted carrier, is limited to your policy limits, no matter what the claim is or how much it exceeds your policy limits.  There would have to be so many claims in one year that SARRG would have to pay out the policy limits on multiple claims, then exhaust its excess coverage with Lloyds.  Since SARRG began it has not once gone into the coverage layer provided by its re-insurers.
    I submit that this risk is less substantial than the amount of your policy limits.  If you carry one or five million SARRG is a reliable and most likely economical choice.  If you require more than five million, even as much as 25 or more then SARRG won't write you as it would be too burdensome for it to respond to such a claim [not sure i f that's the cut off number for SARRG].  
    The other reason I think SARRG is a good if not better choice is that you're less likely to be exposed to a claim that exceeds your policy limits, and indeed you're not likely to be exposed to damages that exceed your contractual limitations.  SARRG is going to insist that you have and use proper alarm contracts, and I am not shy about admitting that SARRG is going to recommend that you get those contracts from me at www.alarmcontracts.com.  Both you and SARRG are going to rely on these contracts as your first line of defense.  What about other carriers?  Some are not smart enough to insist on proper contracts and don't really understand how to use them to defend claims, at least not in the way I think they should be used.  That's a sad state of affairs.  Just today I got a call from head of claims of a carrier about a claim that arose in a collection case started by my office.  I was told by my attorney handling the case that the carrier assigned another attorney to defend the counterclaim.  This particular carrier added my firm to its approved attorney list a few years ago but never assigned a case.  So when the head of claims called and wanted to know what fees we charged I told him what we had agreed to years ago but that was based on getting cases assigned on a reg! ular basis, not when one of our clients had a claim in the form of a counterclaim.  Then in my charming way I told him I didn't care if he hired us or not and that he was free to make the mistake of engaging other counsel to handle the counterclaim.  Who is going to lose?  Well unfortunately our client who will have to pay its deductible which will certainly be charged by the insurance company attorneys and how that defense case gets handled is anybody's guess.  It won't be the way I'd handle it.  We'll have to see how it goes.
    SARRG's claims are administered by an alarm guy, Bart Didden, and don't kid yourself, he knows how to manage and handle the claims.  I've dealt with lots of carriers and none have the Bart Didden advantage.  For that reason alone I endorse SARRG.  It's not the only carrier I endorse but it may have the best premium structure, and it's probably the best bet for the small to medium sized companies.