Tennessee Insurance Practice Exam

What mechanism exists for the sharing of risk among members of a risk retention group?

1. Peer-to-peer insurance

2. Reinsurance arrangement

3. Shared responsibility clause

4. Group self-insurance

The correct answer is: Group self-insurance

The mechanism for the sharing of risk among members of a risk retention group is referred to as group self-insurance. This arrangement allows members to pool their resources to cover their collective risks instead of seeking coverage from traditional insurance providers. Each member contributes to a common fund intended to pay for losses that the group members may incur. This self-insurance approach enables members to have greater control over their risk management strategies and potentially lowers the costs associated with insurance. In contrast, other options such as peer-to-peer insurance, reinsurance arrangements, and shared responsibility clauses do not accurately encapsulate how risk retention groups operate. Peer-to-peer insurance typically involves individuals sharing risk directly with one another outside of organized groups. Reinsurance refers to insurance purchased by insurance companies to limit their risk exposure, which is fundamentally different from the mutual sharing of risk among members of a risk retention group. A shared responsibility clause may imply a contractual arrangement involving multiple parties, but it does not capture the essence of how members within a risk retention group collectively manage and indemnify risks, which is best represented by the concept of group self-insurance.