About Purchasing Groups
The Purchasing Group, as we know it today, was created by the Federal Liability Risk Retention Act of 1986. The Act established guidelines for the formation of Purchasing Groups (PG’s) and Risk Retention Groups (RPG’s) with the intent of providing alternate means of acquiring affordable insurance for certain exposure classes.
A Purchasing Group can be any group of persons, corporations, or associations with similar liability risks who form an organization for the purpose of purchasing liability insurance on a group basis. These Purchasing Groups are usually operated by MGAs (Managing General Agents), who, depending on the agreement with the carrier, can quote, bind, and issue policies of insurance. Unlike a Risk Retention Group, Purchasing Groups do not bear risk, but rather serve as a means to obtain liability coverage. Purchasing Groups are beneficial to carriers, retail agents, and insureds alike for several reasons:
Carriers benefit from Purchasing Groups in that they are typically providing coverage for a low-exposure class with a very predictable loss probability. Agents benefit from Purchasing Groups in that they can usually procure higher limits of liability for their clients for less than what they would be able to obtain from the carrier directly. Insureds benefit from Purchasing Groups in that they can participate in a “group discount” for their liability policies. The policies are also tailored to the specific needs of that class, so the insured is assured to have adequate coverage.
In order to gain access to an Insurance Program designed for the members of a specific Purchasing Group, an Applicant must be a member of that Purchasing Group. Typically, an Applicant completes a combined “Application for Insurance & Membership,” which is used to develop an insurance quote for that Applicant and admit the Applicant into that Purchasing Group. The MGA or MGU uses the application to determine if the Applicant qualifies for insurance coverage in the Insurance Program, according to a set of underwriting guidelines. The MGA or MGU also determines what Premium to charge the Applicant. The Purchasing Group uses the application to determine if the Applicant qualifies for membership in the Purchasing Group.
Typically, though not always, the Purchasing Group hires a business manager to handle its business affairs, known as an Administrator. In this case, it is the Administrator which determines the eligibility of the Applicant for membership in the Purchasing Group. The PG and Administrator would also determine what Purchasing Group Membership Fee (“PGMF”) to charge the Applicant, which PGMF is used to fund the operations of the Purchasing Group. The PGMF is not related to the sale of insurance, but may be charged to the Applicant in a lump sum for the sake of efficiency. If the Applicant qualifies for inclusion in the Insurance Program and membership in the Purchasing Group, it receives an Evidence of Insurance & Purchasing Group Membership (“EOI”). The EOI delineates the amount charged as a Premium and the amount charged as a PGMF.
The purpose of the Purchasing Group is to offer its Members, regardless of their financial size, the ability to purchase quality insurance coverage and high limits of coverage at an affordable cost. To achieve this purpose, the Premiums and PGMFs charged to Members vary from Member to Member and may be determined in a manner that would otherwise be considered arbitrary, capricious, or discriminatory. This having been said, typically, all Members are provided better coverage, higher limits, and lower pricing than they could otherwise obtain in the general insurance marketplace. It is the responsibility of each Member to negotiate its total charges for insurance and membership (Premium + PGMFs) through its local, retail insurance broker (“Retail Broker”). Of course, if the total charges for insurance and membership are too high, the Member is free to not purchase coverage and not become a Member of the Purchasing Group. It should be noted that – sometimes – the Member might also have to pay taxes and surcharges required by State law. The Applicant’s Retail Broker may receive a commission for its services (which typically amounts to 10% – 20% of the total charges). If not, the Applicant’s Retail Broker will typically charge the Applicant a broker fee of 10% to 20%.