So what exactly is a purchasing group? It is a vehicle that permits insurance consumers the opportunity to purchase, on a group basis, liability coverage free from many of the group restrictions imposed by the states.

The insurance is purchased through the marketplace with either a licensed or surplus lines insurer. As a group, the collective businesses possess greater purchasing power, resulting in more affordable coverage for the individual members.

In order to qualify as a purchasing group under the LRRA, the group must be comprised of members whose business or activities are similar and have related risk exposures. Additionally, the purchasing group may only provide insurance to its members.

A purchasing group is distinguished from an RRG by its ability to purchase liability insurance through the traditional marketplace. A risk retention group, on the other hand, is an insurance company owned by its members, who are also the insureds. In other words, it is a self-insurance vehicle providing insurance to its member insureds.

Risk retention groups are typically formed as captives, although they may be established as admitted insurance companies. As with a purchasing group, the risk retention group may only sell insurance to its group members, and the insured member-owners must be engaged in similar businesses or activities, and must have similar risk exposures.

No minimum number of members is required to form a purchasing group; theoretically a group could form with as few as one member.

Proponents of the LRRA originally had in mind that an existing trade or professional association would establish a purchasing group for its existing membership base. The trade association, by virtue of its existing membership base, would automatically be in a position to negotiate for the purchase of liability coverage on a competitive or preferred basis through a commercial insurer.

In practice, however, many purchasing groups are formed by agents or brokers who see an opportunity to market a program for companies in a similar business.

The purchasing group acts as a marketing tool for the broker in the sale of a program to a larger customer base. The status of the purchasing group permits the broker to negotiate group insurance coverage, which might not otherwise be possible under many state laws.

Neither type of purchasing group is given preferred status under the LRRA. A purchasing group formed by an agent or broker has the same privileges as one formed by an existing trade association.

The purchasing group may be domiciled in any state. The LRRA requires that the purchasing group itself notify the insurance commissioner in each state where it intends to operate.

The LRRA also requires the purchasing group to notify the insurance commissioner of four specific items when registering:

The state of domicile of the purchasing group.

The lines and classifications of liability insurance the group intends to purchase.

The insurance company from which it will be purchasing the insurance.

The principal place of business of the purchasing group.

Various states, however, require much greater information to complete a filing. In fact, the Kansas City, Mo.-based National Association of Insurance Commissioners adopted a standard purchasing group registration form that seeks an even greater amount of information.

As with other NAIC models, it is only advisory, and states are not required in any way to conform their own documents to this model. Presently, 29 states use the NAIC form, while the remainder have implemented some other version.

The majority of purchasing groups have an agent, broker or administrator handling the day-to-day operations of the group. Although the LRRA does not require a group to have an agent, it is unusual for a group not to have an agent. Most insurance departments require it.

Some states permit direct marketing by the purchasing group by exempting the group's officers, directors and full-time employees from state agent licensing requirements.

In the past year, lobbying efforts have been underway to expand the LRRA to permit risk retention and purchasing groups the ability to offer property insurance as well as liability coverages.

Appropriately named, the Council for Expansion of Risk Retention Act, or CERRA, has been formed and its members include risk retention and purchasing groups as well as real estate interests, consumer groups, educational institutions and insurance producers.

Prior to the close of the 107th Congress, CERRA was successful in securing bi-partisan support in the Senate for the inclusion of property lines in the LRRA. Progress was also made toward obtaining bi-partisan support in the House. Lobbying efforts are continuing in 2003.

Risk retention and purchasing groups are an important alternative to the standard liability market and their numbers continue to grow. In the past year alone, many new risk retention groups have been formed to provide physicians with medical malpractice coverage when none was affordable or available in the standard marketplace.

Without a doubt, the LRRA has achieved the results intended by its proponents and continues to provide the market with important alternatives for consumers.

For more information on purchasing groups and RRGs, visit the National Risk Retention Association Web site at www.nrra-usa.org.

Stacey Kalberman is an attorney with Powell, Goldstein, Frazer & Murphy, LLP in Atlanta, Georgia. Beth Kravetz, an attorney with Beth Kravetz and Associates in Washington, D.C. also contributed to this article.

Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.