Introduction to Purchasing Groups
In the complex world of insurance regulation, Purchasing Groups (PGs) represent a unique mechanism allowed under federal law to facilitate the procurement of liability insurance. For students preparing for the complete Surplus Lines exam guide, understanding how these groups interact with state surplus lines laws is critical.
A Purchasing Group is essentially a collection of similar businesses or individuals who band together to purchase liability insurance from a commercial insurer. The primary purpose is to gain better leverage, lower rates, or more customized coverage terms through collective bargaining. While they are often discussed alongside Risk Retention Groups (RRGs), they function very differently from a regulatory and risk-bearing perspective.
The Federal Foundation
Purchasing Groups were authorized by the federal Liability Risk Retention Act (LRIA). This act was designed to help businesses, professionals, and municipalities obtain liability insurance which was otherwise difficult to find or prohibitively expensive in the traditional market.
Defining a Purchasing Group
To qualify as a Purchasing Group under federal law, the entity must meet several specific criteria. These criteria are often tested on the surplus lines exam to ensure candidates can distinguish between legitimate groups and unauthorized entities.
- Homogeneous Risk: The group must consist of members who are engaged in similar or related businesses or activities that expose them to similar liability risks.
- Sole Purpose: The group's primary purpose must be the purchase of liability insurance for its members.
- Liability Only: PGs are restricted to purchasing liability insurance. They cannot be used to purchase property insurance, life insurance, or workers' compensation.
- State of Domicile: A PG must notify the insurance commissioner of the state in which it is domiciled and any other state in which it intends to do business.
Purchasing Groups vs. Risk Retention Groups
| Feature | Purchasing Group (PG) | Risk Retention Group (RRG) |
|---|---|---|
| Nature of Entity | A group of buyers | An insurance company |
| Risk Bearing | Does NOT bear risk; buys from an insurer | Bears risk; owned by its members |
| Regulation | Regulated primarily by the insurer's state | Regulated by the state of domicile |
| Insurance Type | Liability only | Liability only |
Interaction with Surplus Lines Laws
One of the most important aspects for the surplus lines professional is how PGs utilize the non-admitted market. Under the LRIA, states are generally prohibited from making it difficult for a PG to purchase insurance from an insurer that is not admitted in their state, provided the insurer is authorized elsewhere.
However, there are nuances regarding surplus lines requirements:
- Diligent Search: In many jurisdictions, the requirement to perform a "diligent search" of the admitted market is waived or modified for Purchasing Groups. This allows them to move directly to the surplus lines market if the group's needs are best met there.
- Taxes and Filings: Even though the federal law preempts many state regulations, it does not exempt PGs from paying surplus lines premium taxes. The broker or the PG must ensure that the appropriate state taxes are remitted to the home state of the risk.
- Authorized Insurers: While a PG can buy from a surplus lines insurer, that insurer must generally be an eligible surplus lines carrier in the state where the PG is purchasing coverage.
Practicing with practice Surplus Lines questions can help reinforce the specific filing deadlines and tax implications associated with PG placements.
PG Regulatory Highlights
Member Notification and Disclosure
Transparency is a key requirement for Purchasing Groups. When a PG procures insurance from a surplus lines insurer, it must often provide specific disclosures to its members. Because surplus lines insurers are not backed by the State Guaranty Fund, members must be informed that in the event of the insurer's insolvency, their claims may not be paid by the state.
Furthermore, the broker facilitating the transaction must be properly licensed. If the group is multi-state, the Nonadmitted and Reinsurance Reform Act (NRRA) principles apply, meaning the "Home State" of the Purchasing Group is typically the only state that can collect premium taxes and regulate the surplus lines placement.