What is a Risk Retention Group as it pertains to Extended Warranties?

Risk Retention Groups or RRG’s are programs that many times are able to offer a less expensive price for extended warranty programs. However, the downside is that Risk Retention Groups are not required to undergo the scrutiny of insurance regulators to the extent of insurance policies or Warranty programs that are fully insured. The RRG groups can be backed through such sources such as dealerships, direct-to-consumer marketers, private investors, or any other type of organization. They can be established with far less capital and many RRG's lack the sophisticated staff and resources needed to ensure that proper reserve funds are being deposited to pay future claims.

Most RRG's have a short term business model and on average have been in the Service Contract or Extended Warranty business less than 5 years. So this would mean that these same companies that offer a 7 year warranty have yet to experience a full cycle of claims with possible detriment to the loss data. In addition, RRG's are not eligible for the State Guaranty Fund and offer little protection to the contract holder should they become insolvent. With all fully insured Extended Warranty or Extended Service Contract programs a portion of the premiums are paid to the Guaranty Fund in order for the program to get backed by the government in case the company should become insolvent.

Since this can usually cause consumer reluctance to purchase an Extended Warranty, many RRG’s choose to purchase reinsurance and make it appear as though it is fully insured. Reinsurance is a secondary insurance policy that is written and covered by the insurance company in case the RRG should become insolvent. However most the reinsurance policies have a limit to how much money will be paid should the RRG go out of business. So in this case again the customer who purchased an Extended Warranty with a reinsured RRG is vulnerable to being sold the warranty that would be no longer valid in the case of the company going out of business.

So if you still decide to purchase an Extended Warranty with a RRG, make sure to investigate their time in business, policy limits, total liability and volume of contracts administered.
 
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