Setting Up A Self-Insurance Vehicle

This is one area where you are well advised to do it right or not at all. If you cant afford to do it right, find some partners in the same boat as you and aggregate your assets and exposures to form a vehicle.

You will also want the most talented professionals available to help you put together a feasibility study or business plan.

There are insurance implications, regulatory implications, tax implications, legal implications, public relations implications, investor relations/SEC implications for public companies, and numerous othersand within each of these areas are countless subsets.

One option is forming a monoline, single state insurance company, which involves complying with numerous home-state regulatory issues.

The process for forming a monoline property-casualty insurer domiciled and doing business in a single jurisdiction is a function of assessing the feasibility of an underlying plan of operation and submitting a conforming application.

A majority of jurisdictions use the Uniform Certificate of Authority Application created by the National Association of Insurance Commissioners and supplemented by state-specific requirements. The application is used for pure captives, reciprocals and some other methods of risk retention.

Very similar requirements apply to the state of domicile for a Risk Retention Group. If there is to be an offering to raise capital, there will likely be SEC and state security requirements. These issues only delve into one aspect of forming a companythe insurance regulatory requirements.

A complete application generally consists of the following:

Application form and filing fee.

Demonstration of minimum capital and surplus requirements or such level of capitalization actuarially determined to meet expected or adverse claims experience based on projected premium and adjusted for underwriting expenses and investment income. States generally will not allow a premium to surplus ratio of greater than 3:1 (generally less than 2:1 for medical malpractice lines; typically 1:1 for start-up programs).

Submission of a statutory deposit as required by state law to be held under the joint control of the applicant and the regulator for the benefit of policyholders.

Evidence of an acceptable name.

Plan of operation. This requires a narrative describing the intended business plan; pro forma financial projections (generally three years); a completed questionnaire addressing sales and marketing, product lines, competitive analysis; underwriting and policy issuance plans; Claims administrationpayment and reserving; and proposed reinsurance structure and compliance with 10:1 rule (may not underwrite any one risk or hazard in excess of the 10 percent of capital and surplus).

Holding Company System Information if the applicant is intended to be part of a holding company including debt to equity information.

Evidence of consent to join required rating, guarantee or other state mandated associations.

Public company disclosures if the parent has filed a registration statement with the SEC.

Complying custodial agreements if the applicants investments are to be physically held by another entity.

Biographical affidavits and fingerprint cards for proposed officers, directors, and key managerial personnel (a management team with the requisite skills and experience to operate such a company).

Proposed organizational documents for the applicant.

Appointment of regulatory official to accept service of process.

Investment guidelines compliant with admitted asset provisions.

Depending on structure and source of capital, federal or state security requirements may apply.

In some jurisdictions it is useful to provide a regulatory briefing to the insurance regulator prior to submission of an application to identify unique or problem areas that should be anticipated in a filing.

While this list of requirements may seem overwhelming, those of us who work in this environment deal with these issues regularly and are not intimidated. By getting experienced help in the beginning, institutions and physicians can greatly increase the likelihood of both getting the project off the ground and more importantly, surviving to be a real resource when the next crisis hits.

The organizations that started properly and have prudently managed their own risk-bearing vehicle in either of the first two medical malpractice insurance crises are not experiencing the same problems today as the balance of the health care community.

Now is the time to take control of your future and begin the process. Though it may be a long, expensive and cumbersome course to take, it can pay great dividends for several decades.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 26, 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.