Momentum Building For Medical MalpracticeCaptives

With medical malpractice rates skyrocketingin some states, groups of physicians, hospitals and nursing homesare looking to form captive insurers for liability coverage. U.S.domicile regulators and captive administrators report skyrocketingrequests for information.

“We're getting four inquiries a week,” said Derek White,assistant director, captive insurance for the Vermont Department ofBanking, Insurance and Securities. “In fact, I'd say a third of thephone calls we're getting are probably to do with med mal.”

Mr. White said that out of 32 captives licensed this year inVermont, four are for medical malpractice coverage, and interest isescalating. Medical malpractice captives licensed this year includetwo risk retention groups made up of Pennsylvania hospitals outsideof Philadelphia; one pure captive for a Pennsylvania hospitalgroup; and one risk retention group formed for a medical group inFlorida.

“It started with Pennsylvania and their crisis with St. Paulpulling out, Phico going under, and Frontier and Reliance allleaving the state or being forced to leave,” Mr. White explained.“There really isn't a market in Pennsylvania, and that's spreadingto other areas. We knew Florida would be next.”

Clayton Ingram, manager of business development, alternativerisk-transfer services, for the South Carolina InsuranceDepartment, said that medical malpractice inquiries are “coming outof the woodwork,”

South Carolina so far this year has licensed six captives andhas another six “ready to go,” he said. Of those six, he said,three are for medical malpractice coverage.

Risk retention groups, he added, are a “hot ticket,” because“nobody can find fronting.” Fronting is an agreement with aninsurer, which is paid a percentage of premiums to issue a policyon behalf of the captive.

Tim Morris, captive insurance examiner for the Office of theAuditor, state of Montana, said the state, which has had onere-domicile since mid-July, has four potential captives in theapproval process. One of those is a hospital association.

“Smaller hospitals have a harder time getting coverage becausethey dont have the resources,” he said. Mr. Morris explained thathospitals serving rural populations of 1,000 to 8,000 might consistof only one or two beds.

Christopher Kramer, vice president, professional liability,alternative risk management for the Denmark Group in Beachwood,Ohio, said the situation could be considered a crisis for some thatneed coverage. The Denmark Group is an insurance intermediary andconsulting firm specializing in professional liability for bothtraditional and alternative risk transfer.

“Using the term crisis might be strong, but the individualdoctor would say clearly it's a crisis for him or for the groupthat never had to contend with the issue before,” Mr. Kramersaid.

The situation in some states is worse than others, he said,highlighting Pennsylvania and West Virginia, in particular, andnoting increasing problems in Ohio, New York, Florida and Nevada.These states have all had doctors stage walkouts “to demonstrate tothe media that they're fed up with the way they're treated.”

With insurers exiting medical malpractice coverage in somestates, medical groups have few options for liability coverage, Mr.Kramer said. He explained that insurers could no longer subsidizepremiums in an attempt to gain market sharea function of acompetitive environment.

“Unfortunately, a variable that they cannot contend withactuarially is how much money you need to reserve for a claim thathappened 10 years ago,” he said. “Because the investment income isnot as great as it once was, the desire to accept amoderate-to-poor underwriting risk is reduced.”

Doctors who have not had claims and are being non-renewedbecause their insurance company is out of business are now “forcedto find a new insurance company and establish a new relationship,”he said.

To make things worse, he said, premiums could be so large that,“it now has become a focus of their attention, whereas most oftheir attention should be on treating their patients.”

Mr. Kramer cited, as an example, a group of emergency physicianshis firm has been working with to find coverage. The group had athree-year program for medical malpractice with a national carrier,but the carrier withdrew from the medical malpractice market.

After looking at the reinsurance and insurance markets, “wefound a standard market in the United States that owns arent-a-captive, and they agreed to share the risk with our client,”he said.

Mr. Kramer said the physicians group accepted “a significantself-insured retention against every loss subject to an aggregate,”which meant the insurer would provide a stopgap measure if thegroup exceeded the estimated claims to be paid during thepolicy.

Unfortunately, however, the carrier later changed its corporatephilosophy as to what states it wanted to do business in. “Now weare back in the fire after spending a lot of time and energydeveloping the relationship,” Mr. Kramer said.

He said the group is now looking to form a risk retention group.This would enable them to escape fronting costs and to avoid “onceagain being influenced by somebody else's corporatephilosophy.”

Forming a risk retention group means it will be a U.S.-basedcompany regulated by the National Association of InsuranceCommissioners, and “that makes us feel good,” he said. “We have anactuarial firm doing our loss reserve studies. That, in turn, makesour reinsurance partners feel very good, because there has beenprofessional work done. We just didn't pick a number out of theair.”

Part of the process, he explained, includes choosing qualitypartners “who have done this before,” such as managers, bankers,actuaries and accountants.

At the end of the day, he said, “we want to know what our losseswill be and have a high degree of confidence that, in next year'sloss picture, we've already funded for expected losses.”

The risk retention group, he said, will fund for expectedlosses. “But we don't know what would happen in the future,” hesaid, explaining that reinsurance is purchased to protect the groupand its balance sheet against “that fortuitous event.”

Having an “A”-rated carrier is one of the first criteria used inevaluating a potential partner, he said, particularly forreinsurance. “We want them to be around for a long, long time.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 9, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.