Until I started getting asked recently, I didn’t think anyone would care about a small part of Vouch lore: we seriously considered structuring Vouch as a Risk Retention Group (RRG) when we first got started.
There was an idealistic appeal to it. I loved the idea of a community of founders sharing risk together. Everyone has skin in the game, with founders incentivized to de-risk their businesses. In theory, you could build around those principles and drive positive self-selection.
But the more we thought about it, the more we saw the structural limitations and the potential for adverse selection. So we chose a more reliable (and harder to execute) structure, and innovated elsewhere in the stack.
The reasons we made the harder choice should matter to any founder buying coverage today.
One of the biggest issues is simple: RRGs cannot write all the coverage startups need. Under federal law, RRGs can only write liability coverage.
Let’s take first-party cyber coverage, for example. The things that actually hit when you're breached like response cost and downtime? It’s not allowed to be covered by an RRG. That’s what the federal Liability Risk Retention Act of 1986 says.
Startups also need their insurance to actually work with the contracts they sign. If you have a quote from an RRG, ask whether it meets your requirements. Get the answer in writing.
Most RRGs don't carry an AM Best rating (some do), even though an “A- or better” rating from AM Best is the specific requirement written into most investor term sheets and enterprise contracts. They’re looking for the stability that comes with transferring risk to a durable balance sheet.
With an RRG, you’re the customer and the balance sheet. It’s in the name! Risk is retained within the group.
If losses run ahead of the underwriting model? There’s a reason every RRG policy is required by federal law to disclose, "State insurance insolvency guaranty funds are not available for your risk retention group."
Just ask Claude to do some research for you. You’ll find the doctors whose malpractice RRG got liquidated in Vermont last year. It owes more than $35M on a single claim, and the insured is likely getting pennies on the dollar. Or the owner-operators whose commercial auto RRG went under owing $198.7M in claims against $41.9M in assets.
Startups already take on more than enough risk. The job of insurance is to transfer the exogenous risks that can unexpectedly derail your business.
It’s a choice founders should take seriously.
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