Risk retention groups (RRG) came into existence in the U.S. in the 1980s as a way for those who could not find affordable insurance to join with others in the same situation. Companies join RRGs as members and contribute premiums. These premiums are used to insure the service contracts written by the group. Therefore, the RRG itself underwrites the policies issued by other members of the group.

RRG's often delegate the role of administrator to one of the members of the group. The administrator is responsible for structuring the service contracts and managing the claims against the assets of the RRG. In some cases, the role of the administrator and underwriter are performed by the same RRG member. People who went down the path of risk retention partners thought they could not only safeguard their customers, but also make a little more money on the deal.

Now, even Warranty Gold's (see National Warranty and Warranty Gold failure for more information ) own advice column counsels against RRGs. "Remember that lower price sometimes means higher volume and that higher volume may create future liability that exceeds cash reserves and reinsurance limits with little hope of protection for the consumer," the company's online FAQ now suggests.

Insured products are just that, Companies that work hard to provide first-class insurance backing for clients and their customers are careful about whom they choose to insure their products.

Insurance regulations generally require companies to:

• maintain an adequate financial reserve to pay claims.
• base their contract fees on expected claims. Some service providers have been known to make huge profits because the cost of their contracts far exceeds the cost of repairs or services they provide.
• seek approval from the state insurance office for premiums or contract fees.