Exec. Says Risk Retention Group Use Soars

By Caroline McDonald

NU Online News Service, April 9, 12:29 p.m. EDT,Burlington, Vt.?The use of risk retention groups issurging, driven by a scarcity of fronting companies and highcaptive insurer prices, according to an executive with a captivemanagement firm.

Formation of RRGs is at "an all time high," said Gary H.Osborne, senior vice president with USA Risk Group in Montpelier,Vt. He was interviewed at the Vermont Captive InsuranceAssociation's annual conference here.

He said the increase in risk retention groups has been noticedby his company?s managers in Vermont, Bermuda and South Carolina,with the expansion seen more in some domiciles than others.

South Carolina, Mr. Osborne said, has overtaken Hawaii as acenter for RRGs. Of South Carolina's 52 captives, Mr. Osborne saidhe believed 24 are RRGs.

USA Risk Group recently announced that the Saint Luke's HealthSystem RRG, which it manages, was licensed as South Carolina's50^th captive on July 31.

Vermont, the largest U.S. domicile, is a place "where you canstill do RRGs," he said, but he explained that some of the newerdomiciles, such as Montana, Arizona and South Carolina, are idealfor some smaller groups because they don't require as muchcapitalization as Vermont,

Mr. Osborne said the domiciles have learned to be thorough intheir investigations. Early on, according to Mr. Osborne, SouthCarolina had licensed an RRG "that was a mistake."

As a result, he said, most new domiciles are savvier, requiringmore than just a business plan. "They want to look at the NationalAssociation of Insurance Commissioner's rules," he said. But mostimportantly, "they're willing to work with you."

South Carolina, he noted, has long since proved itself as areputable domicile, so much so that USA Risk Group now has anoffice in Charleston, S.C.

One of the reasons organizations are forming RRG's, he said, isthe lack of fronting companies and the higher cost of fronting. Theother driver, he said, is "complete lack of availability, similarto the way it was in the 80s."

Doctors groups, certain trucking classes and nursing homes have"no coverage options, while RRGs have created an option," hesaid.

Mr. Osborne related that some doctors groups have reportedpaying coverage as high as "$100,000 for an obstetrician. For 60doctors that would be $6 million, and that group has never had morethan $1.5 million in claims in a year."

State law in Florida, he added, only requires $250,000 peroccurrence and $750,000 annual aggregate. He noted that seven oreight claims?what you might typically see for 60 doctors?wouldamount to $1.5-$2 million.

A group paying $60,000 per doctor still amounts to "a veryviable program," he said. What's more, some of these groups "arebecoming completely self insured" because of the expense andscarcity of reinsurance.

By being an RRG, he concluded, the "fronting need goes away andthey are still meeting the requirement that the company providingthe coverage is authorized to do business in the state."

Mr. Osborne said that USA's client, Saint Luke's Hospital inKansas City, Mo., found that pricing for coverage continued torise, even though the number of claims stayed the same.

The hospital had an active loss control and safety program andfelt "it was time to take matters into their own hands because themarketplace was not giving them any credit for their efforts," hesaid.

The company formed an RRG and domiciled in South Carolina. Henoted that Kansas, which the hospital also serves, has a state fundthat "kicks in over $200,000," so the group is retaining the first$200,000 in Kansas.

To cover its Missouri risk, the group purchased malpracticecoverage for occurrences of more than $250,000, with a $1 millionlimit, he noted.

"They chose South Carolina because they got a warm receptionthere," he said. South Carolina proved to be "quite keen to take onrisk retention groups for medical groups," and the location isconvenient.

Mr. Osborne said this RRG was also set up as a reciprocal.Reciprocals are set up so that any profits are passed back tomembers of the RRG. The group is "taxed at the hospital's level, soyou don't have a federal tax issue. So that's another benefit thatis fairly recent," he said.