RRGs Charting New Territories In Medical Stop-Loss Coverage

Medical stop-loss coverage is available in two forms–specific and aggregate–and traditionally has been provided by life and health carriers, not property-casualty insurers.

One of the reasons costs have increased for this coverage is that states have begun to assess medical stop-loss carriers.

Presumably, RRGs providing contractual liability insurance to employers would not face such assessments, as the Liability Risk Retention Act (LRRA) prohibits states from directly or indirectly regulating RRGs.

Although self-funded plans are regulated by the U.S. Department of Labor under the federal Employee Retirement Income Security Act, RRGs do not fall within the DOL's jurisdiction, and are thus regulated under the LRRA and state laws.

Moreover, according to organizers of the RRGs–each of which ran the program structures by the DOL in detail before and after they were established–the DOL determined that the structure was not a "prohibited transaction" requiring an exemption.

Two RRGs have been formed to provide medical stop-loss to their member/insureds. The insureds of each RRG are large employers that self-fund their ERISA employee medical plans.

The first RRG to form–ACBG RRG, LLC, domiciled in Vermont–provides contractual reimbursement liability coverage. The RRG, which insures large construction companies, requires that employers spend at least $750,000 a year on their employee medical benefit plans–roughly translating into companies with 150 employees.

The second entity is AD-COMP Med RRG Inc., domiciled in Montana. This RRG provides contractual liability insurance to California new automobile dealer franchises that self-fund group medical plans formed under ERISA, for liabilities above self-insured retentions.

The insureds of the RRG are participants in the Auto Dealers Compensation of California Inc., or AD-COMP. This is a private self-insurance group formed in 2002 under California law to provide workers' compensation coverage to auto dealer franchises.

While the two RRGs provide medical stop-loss coverage to their member/insureds, they have differing models.

o In the ACBG model, the employers–who are the RRG's insureds–fund a welfare employee benefit plan known as a Voluntary Employees' Benefit Association (VEBA). Employers fund the VEBA based on actuarial projections reflecting anticipated health care costs for their employee population.

If at the end of the year employee health care costs exceed the actuarial projection, the employer makes an additional contribution to the VEBA.

The employer is then reimbursed by the RRG pursuant to the contractual reimbursement liability coverage provided by the RRG.

o The AD-COMP model is similar. It issues contractual liability policies with varying limits excess of the employers' self-insured retentions but does not use a VEBA.

For AD-COMP RRG, there was another benefit, as it placed a portion of its reinsurance with the "A"-rated life and health insurer that had provided the medical stop-loss for the auto dealers prior to the RRG's formation. The RRG's organizers proclaimed that having their former stop-loss carrier as the RRG's reinsurer was a winning proposition for all.

Given the increasing costs of medical stop-loss coverage and word from RRG organizers, an increasing number of RRGs that provide medical stop-loss for employers self-funding employee medical benefit plans should emerge in the near future.

"Given the increasing costs of medical stop-loss coverage and word from RRG organizers, an increasing number of RRGs that provide medical stop-loss for employers self-funding employee medical benefit plans should emerge in the near future."

Karen Cutts