Momentum Building For Medical Malpractice Captives

With medical malpractice rates skyrocketing in some states, groups of physicians, hospitals and nursing homes are looking to form captive insurers for liability coverage. U.S. domicile regulators and captive administrators report skyrocketing requests for information.

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

Mr. White said that out of 32 captives licensed this year in Vermont, four are for medical malpractice coverage, and interest is escalating. Medical malpractice captives licensed this year include two risk retention groups made up of Pennsylvania hospitals outside of Philadelphia; one pure captive for a Pennsylvania hospital group; and one risk retention group formed for a medical group in Florida.

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

Clayton Ingram, manager of business development, alternative risk-transfer services, for the South Carolina Insurance Department, said that medical malpractice inquiries are “coming out of the woodwork,”

South Carolina so far this year has licensed six captives and has 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 an insurer, which is paid a percentage of premiums to issue a policy on behalf of the captive.

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

“Smaller hospitals have a harder time getting coverage because they dont have the resources,” he said. Mr. Morris explained that hospitals serving rural populations of 1,000 to 8,000 might consist of 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 that need coverage. The Denmark Group is an insurance intermediary and consulting firm specializing in professional liability for both traditional and alternative risk transfer.

“Using the term crisis might be strong, but the individual doctor would say clearly it's a crisis for him or for the group that never had to contend with the issue before,” Mr. Kramer said.

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

With insurers exiting medical malpractice coverage in some states, medical groups have few options for liability coverage, Mr. Kramer said. He explained that insurers could no longer subsidize premiums in an attempt to gain market sharea function of a competitive environment.

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

Doctors who have not had claims and are being non-renewed because their insurance company is out of business are now “forced to 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 of their attention should be on treating their patients.”

Mr. Kramer cited, as an example, a group of emergency physicians his firm has been working with to find coverage. The group had a three-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, “we found a standard market in the United States that owns a rent-a-captive, and they agreed to share the risk with our client,” he said.

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

Unfortunately, however, the carrier later changed its corporate philosophy as to what states it wanted to do business in. “Now we are back in the fire after spending a lot of time and energy developing 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 “once again being influenced by somebody else's corporate philosophy.”

Forming a risk retention group means it will be a U.S.-based company regulated by the National Association of Insurance Commissioners, and “that makes us feel good,” he said. “We have an actuarial firm doing our loss reserve studies. That, in turn, makes our reinsurance partners feel very good, because there has been professional work done. We just didn't pick a number out of the air.”

Part of the process, he explained, includes choosing quality partners “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 losses will be and have a high degree of confidence that, in next year's loss picture, we've already funded for expected losses.”

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

Having an “A”-rated carrier is one of the first criteria used in evaluating a potential partner, he said, particularly for reinsurance. “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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Momentum Building For Medical Malpractice Captives

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