Using RRGs To Fund Stop-Loss Exposures In Self-Funded Medical Plans
By Karen Cutts
The Liability Risk Retention Act, enacted during the hard market of the 1980′s, responded to the "liability crisis" confronting commercial insurance buyers faced with unavailability and unaffordability of liability insurance.
After the legislation passed, some contended that only liability arising from tort exposures could be insured by risk retention groups and purchasing groups, while others argued that Congress fully intended liability exposures stemming from contractual agreements to be included in the Act's definition of "liability."
The issue has become largely moot, as currently some 20 percent of operational RRGs provide contractual liability for obligations arising under service contracts issued by automobile dealers, warranties issued by homebuilders, and debt cancellation agreements issued by banks and other financial institutions.
Consultants at Watson Wyatt Insurance & Financial Services Inc. have proposed the use of RRGs to insure the contractual liability arising from self-funded medical plans to cover both specific stop-loss and aggregate stop-loss exposures.
Typically, self-funded medical plans formed under ERISA require the plan sponsor, such as the employer, to pay for the medical costs of its participants, in this case the employees. The sponsor's risk of financial loss increases when a plan's detrimental experience requires the employer to pay out more than it takes in.
As a result, many self-funded plans insure their contractual liability exposure through stop-loss insurance to provide coverage for catastrophic claims. With premiums for medical stop-loss increasing by an average of 20 percent to 50 percent in today's hard market, employers may want to consider use of an RRG to fund their stop-loss coverage.
While RRGs providing medical stop-loss for self-funded medical plans have not, as yet, been formed under the Liability Risk Retention Act, the legislation appears to allow for such RRGs, and the time may be ripe for forming them.
Reproduced from National Underwriter Edition, April 7, 2003. Copyright 2003 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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