Alt. Market Blasts Proposed HUD Restrictions

Captives, RRGs cautiously optimistic that modifications will be made

A proposed federal rule that would create perhaps insurmountable hurdles for alternative market insurers of professional liability for long term care facilities generated a stack of formal comments more than an inch thick to the U.S. Department of Housing and Urban Development.

A total of 28 responses were sentall but one against implementing H04-01. HUD told National Underwriter it is now considering the comments and that “the time frame for publication of revised guidelines is within the next 60 days.”

The rule, which was published Jan. 6, creates more stringent insurance and financial reporting guidelines for long term care providers wishing to qualify for government-insured mortgages through the “Professional Liability Insurance for Sec. 232 Programs.” It requires that insurers for nursing homes, including captives, have an “A” rating from A.M. Best, be licensed by the insurance commissioner in the state where the facility is located, and meet minimum policy coverage requirements of $1-to-$3 million. The maximum deductible allowed would be $25,000 per occurrence.

The rule could cripple alternative risk-transfer facilities such as captives and risk retention groups formed when coverage in the traditional insurance market becomes scarce or too expensive, according to those responding to HUDs invitation to file formal comments. Of the 27 responses to HUD opposing the regulation, eight were from alternative market players, six were from the insurance industry, six came from the long term care community, five were mortgage lenders, one was an insurance regulator (Lawrence H. Mirel, insurance commissioner of Washington, D.C.a captive domicile) and one was from an unidentified association.

The sole supporter of the new regulation to file comments was from the insurance industry, but the respondent did not identify his company affiliation.

Robert H. “Skip” Myers Jr., a partner with Morris, Manning & Martin, LLP in Washington, D.C. and general counsel for the National Risk Retention Association, said it is “pretty clear that these proposed changes don’t reflect what’s going on in the industry, and the comments really show that. You get 27 comments against and one in favor.”

What the comments point out, he said, is that “this A-rating requirement is not realistic because about 50 percent of the financing going on for these health care facilities are from alternative market facilities, risk retention groups or captives, or other arrangements that don’t have a rating. So just off the starting line you’ve got a non-functional requirement.”

He said the minimum policy coverage requirements also are unrealistic in terms of what is going on in the marketplace.

If the proposal goes into effect, he emphasized, “50 percent of the facilities will automatically be disqualified. What that means is you would have to go to HUD for a waiver, and you can’t do that at the regional levelyou have to come to Washington. It’s just not going to work.”

HUD previously told NU that the intent of the notice was to “clarify and to provide additional guidance concerning professional liability insurance coverage for mortgage underwriting and asset management activities.”

All respondents were against the proposal except for Gary D. Hackley of Chicago, Ill., who did not reveal his company affiliation and could not be located for further comment. In his formal response, Mr. Hackley noted that despite the pleas of certain representatives from the long term care industry and related RRGs to have the requirements suspended and ultimately modified, this “must not be allowed to happen.”

He stated that his more than 25 years in the insurance business has provided “ample witness to the folly of allowing industry groups to self-insure exposures that are critical to their ability to continue in business, but whose failure to pay claims falls on their clients who are least able to bear the burden of loss.”

All others commenting were strongly against the proposal. Gordon Smith, who did not identify his company affiliation, noted that “four years ago when I opened an assisted living facility in Birmingham, Ala., my insurance premium was $18,000 for $1-to-$3 million in coverage with a $25,000 deductible. Today I have available to me one insurer who charged me $99,000 for the same coverage with a $100,000 deductible.” The respondent lamented that “if your suggested insurance coverage becomes a requirement, then we have no choice but to close our doors now.”

Washington, D.C. Insurance Commissioner Mirel noted in his comments that his department regulates over 20 captiveshalf of which are RRGs. “Captive insurers play an important role in the liability insurance market for health care facilities,” he wrote. “Approximately half of all such facilities are insured through the alternative risk-transfer market. Therefore, captives, RRGs and surplus lines carriers will be unable to comply with Notice H 04-01, and therefore unable to provide coverage to any facility that wants to obtain Section 232 financing.”

He added that the system of state insurance regulation established by the federal McCarran-Ferguson Act “depends substantially upon the regulatory competence of the state of domicile of the insurer. Captives, RRGs and U.S.-chartered surplus line insurers are all regulated by U.S. states. We take our obligation to protect the public seriously, and we think that HUD should be able to rely on our certification that an insurer is solvent and capable for purposes of Section 232 financing.”

Wendy S. Fisher, who chairs the National Risk Retention Association, commented that NRRA believes these requirements “would eliminate approximately half of the health care and nursing facilities from the ability to obtain Section 232 financing.”

Although the responses were overwhelmingly against the proposal, Mr. Myers said he is only “cautiously optimistic” about convincing HUD to make all the suggested improvements. “It’s hard to get the government to change sometimes,” he noted. “You just never know what will happen. I’m cautiously optimistic because the weight of the commentary is so thorough.”

Industry associations that responded against the proposal included the Captive Insurance Companies Association, the Vermont Captive Insurance Association, the National Risk Retention Association, the South Carolina Captive Insurance Association, the Self-Insurance Institute of America, and the Captive Insurance Council of the District of Columbia.

Reproduced from National Underwriter Edition, June 4, 2004. Copyright 2004 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.