RISKS AND REWARDS IN A RISK RETENTION GROUP

Michelle Marie Perron

MEDICAL MALPRACTICE INSURANCE IN THE STATE OF NEW YORK

I’d like to thank Tonya Dugan, CIC and Mark Creighton, MD

for their inspiration and guidance in creating this eBook.

Contents3 y Introduction

4 y Brief History

4 y Formation and Functionality

5 y Growth of NY Risk Retention Groups – 1986 to 2013

6 y Advantages and Disadvantages

7 y Financial Statements

8 y Ratio Analysis

8 y Loss Ratio

8 y Expense Ratio

8 y Combined Ratio

9 y Ratio Examples

10 y Financial

10 y Ratings

11 y Sample Base Rate Comparisons

12 y Hospital Affiliations

12 y Summary

15 y Glossary

17 y References and Resources

18 y About the Author

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STATE GUARANTY FUND

NON-ASSESSABLE POLICY

NET PREMIUMS WRITTEN

ATTACHMENT POINT

STATE GUARANTY FUND

IntroductionThank you for your interest in learning more about Risk Retention Groups. Since 2008, we

have been providing this type of coverage to physicians and surgeons throughout New York.

The reason is simple; doctors in New York are finding it increasingly difficult to maintain their

practices and Risk Retention Groups may be the solution that will protect their practices and

livelihood.

We developed this guide in response to the skepticism and questions we have received over

the years that address whether Risk Retention Groups are a viable insurance option for physi-

cians. Our goal is to provide education along with honest, unbiased facts so that you can make

an informed decision about whether this type of insurance coverage is right for you.

Within the text, you will see words in bold font. You can find definitions of these words in our

Glossary. This e-book provides the following:

y Brief History

y Formation and Functionality

y Growth of NY Risk Retention Groups – 1986 to 2013

y Advantages and Disadvantages

y Financial Statements

y Ratio Analysis

y Financial Ratings

y Sample Base Rate Comparisons

y Hospital Affiliations

y Summary

y Resources

y Glossary

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ATTACHMENT POINT

Brief HistoryIn 1986, government officials realized that several liability insurance markets were not able to

provide accessible coverage and affordable premiums. Through federal law, they enacted the

Liability Risk Retention Act (LRRA), which allowed a new type of market, called a Risk

Retention Group (RRG), to operate nationally for liability coverages, such as general liability,

medical professional liability and products liability. RRGs provide coverage for policyholders

that have like characteristics. For medical professional liability, this can mean specialty,

geographic location, and entity affiliation.

Formation and FunctionalityInterested insurance professionals create Risk Retention Groups (RRGs) by working with

actuaries to formulate rates and reinsurers that provide additional coverage that enable them

to transfer part of their risk. Upon approval, RRGs obtain a license from one state, called the

domicile, and then register in each of the states in each of the states where they wish to offer

coverage. Regulation of the RRG is provided by the state where the RRG is domiciled.

While not all RRGs are alike, they typically have a management company that provides

underwriting, claims, and risk management services. They may also have a Board of Directors

consisting of members who are dedicated and committed to keeping the RRG viable.

Since most RRGs are relatively new in the marketplace, most, but not all, require a capital

contribution by the insured party. This capital contribution builds cash for the RRG and

provides shareholder’s equity to the policyholders. In the event that capital is required,

insureds will need to review, understand and sign capital contribution agreements. These

agreements contain details of your share purchase, which may have legal and tax implications.

We highly recommend you consult with legal and accounting representation prior to signing

these documents.

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RRGS PROVIDE COVERAGE

FOR POLICYHOLDERS THAT

HAVE LIKE CHARACTERISTICS.

FOR MEDICAL PROFESSIONAL

LIABILITY, THIS CAN MEAN

SPECIALTY, GEOGRAPHIC

LOCATION, AND ENTITY

AFFILIATION.

Growth of NY Risk Retention Groups – 1986 to 2013To give you an idea of how Risk Retention Groups have grown in popularity, we provide the

following growth chart that illustrates medical malpractice and other specialty types for risk

retention groups in New York. As you can see, the amount of non-medical malpractice risk

retention groups (marked in blue) far outpaced medical malpractice risk retention (marked in

red) groups early on until about the mid-two thousands. As of December 2013, there are 120

listed RRGs, with 61 specific to medical malpractice.

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AdvantagesAdvantages of Risk Retention Groups include:

y Affordable Pricing

y Shareholder ownership with potential dividends

y Specialized risk management programs

y Non-assessable Policy – offered by most carriers

DisadvantagesDisadvantages of Risk Retention Groups include:

y No access to the State Guaranty Fund

y No Access to free excess insurance coverage

y Traditional markets may be unwilling to pick-up Prior Acts from an RRG

y Payment of an Attachment Point if the RRG becomes insolvent and there is a claim

y Lack of longevity and experience

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Financial StatementsInsurance companies, including Risk Retention Groups, are required to file financial statements

to the National Association of Insurance Commissioners (NAIC). This data can be publicly

viewed using the following link: https://eapps.naic.org/insData/. Users can download up to five

company reports free, with a minimal charge for each report request thereafter.

For comparative purposes, here are some items that we pulled from three, 3rd Quarter 2013

financials. For these examples, we just want you to notice the differences in these numbers.

You may find definitions of these items in our glossary at the end of this e-book.

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Ratio AnalysisFinancial ratios are used to examine financial statements and help to arrive at some

conclusions on how the company is performing. Here are three insurance ratios used to

evaluate underwriting performance:

Loss RatioThe loss ratio shows the relation between the company’s loss payments and premiums earned.

The lower the ratio, the better the company is controlling and managing losses. Higher loss

ratios may indicate the need for improved risk management to reduce claims. Here is the loss

ratio calculation:

Loss Ratio = (Loss Adjustment Expenses / Premium Earned)

Expense RatioThe expense ratio is used to explain the percentage of premium used to pay all the costs of

acquiring, writing, and servicing insurance and reinsurance. Lower expense ratios indicate

increased profits to the insurance company. Here is the expense ratio calculation:

Expense Ratio = (Underwriting Expenses / Net Premiums Written)

Combined RatioThe combined ratio is a measure of profitability used by an insurance company to indicate

how well it is performing in its daily operations. A ratio below 100% represents a measure of

profitability and the level of an insurance firm’s underwriting efficiency. Ratios above 100%

indicate a failure to earn sufficient premiums to cover expected claims. Higher ratios can

occur either because of underpricing or higher unexpected claims. Here is the calculation for

the combined ratio:

Combined Ratio = (Loss Ratio + Expense Ratio)

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FINANCIAL RATIOS ARE USED

TO EXAMINE FINANCIAL

STATEMENTS AND HELP

TO ARRIVE AT SOME

CONCLUSIONS ON HOW THE

COMPANY IS PERFORMING.

Loss Ratio = (Loss Adjustments / Premiums Earned)

Expense Ratio = (Underwriting Expenses / Net Premiums Written)

Combined Ratio = (Loss Adjustment Expenses + Premium Earned)

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Financial RatingsA.M. Best Company was founded in 1899 and has become the source in the insurance industry

that provides full-service credit ratings for worldwide insurance companies. Reviewing A.M.

Best ratings and analysis are a means of assessing the financial strength and creditworthiness of

risk-bearing entities and investment vehicles.

Similar to A.M. Best Company, Demotech, Inc. provides Financial Stability ratings to risk re-

tention groups. You can find these ratings, along with definitions and additional information,

at http://www.demotech.com/. Current ratings, along with any change, are important to know

and your agent should disclose this information upon inception of the policy and upon each

renewal.

Here is a snapshot of Demotech’s A’ Rating Definition for the sample carrier (#3) we mentioned

earlier:

A’ (A Prime), Unsurpassed

Regardless of the severity of a general economic

downturn or deterioration in the insurance cycle,

insurers earning a Financial Stability Rating of A’

(A prime) possess Unsurpassed Financial Stability

related to maintaining surplus as regards policy-

holders at an acceptable level.

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BEST RATINGS AND ANALYSIS

ARE A MEANS OF ASSESSING

THE FINANCIAL STRENGTH

AND CREDITWORTHINESS OF

RISK-BEARING ENTITIES AND

INVESTMENT VEHICLES.

Sample Base Rate ComparisonsTo show you how affordable coverage can be through a Risk Retention Group, here is an

example of Orthopedic Surgery. As you can see, this particular traditional market does not

provide a differentiation between Excluding or Including Spine rates.

Sample Base Rate Comparisons - Orthopedic Surgery

Carrier: Sample Traditional Market Hours: Full Time Limits: $1,300,000 / $3,900,000 Specialty: Orthopedic Surgery Territory: Suffolk County

Carrier: Sample RRG 1 Hours: Full TimeLimits: $1,300,000 / $3,900,000 Specialty: Orthopedic Surgery - Excluding Spine Territory: Suffolk County

Carrier: Sample RRG 2 Hours: Full TimeLimits: $1,300,000 / $3,900,000 Specialty: Orthopedic Surgery – Including Spine Territory: Suffolk County

Note: 1. These are base rates only without any applicable discounts (such as claims free, part-time, risk management training).2. The traditional market provides only one classification for orthopedic surgery.

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Hospital AffiliationsHospital Risk Management and Credentialing Departments keep track of physicians’ licensure,

DEA registrations, certifications as well as medical professional liability insurance. While hospi-

tals readily accept physicians’ coverage from the traditional markets, not all hospitals accept all

or any Risk Retention Groups. Your agent should research your hospital affiliations and by-laws

prior to offering coverage to you.

SummaryWe have found risk retention groups to be a beneficial market for some physicians when

considering professional liability coverage. We feel, however, that Risk Retention Groups are

not for everyone. Our experience has shown us the following types of candidates may be best

suited for coverage with a Risk Retention Group:

y Physicians who are declined coverage, including non-renewed, from the

traditional insurers.

y Physicians who no longer qualify within the traditional marketplace (such

as those trying to come out of Medical Malpractice Insurance Pool (MMIP)

– the pool).

y Risk Retention Groups that provide coverage solely for a specialized class

(such as plastic surgeons, emergency physicians, etc…)

y Physicians who belong to a large medical group facility or health care

system that owns their own Risk Retention Group. Examples of these are

Winthrop Physicians Reciprocal Risk Retention Group and North Shore LIJ

Physicians Insurance Company Risk Retention Group.

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When considering a Risk Retention Group for your medical professional liability insurance

coverage, we recommend working with your broker to:

y Provide comparative options to your current coverage, which should include:

• Information on company’s formation, structure, board of directors and services

• Coverage clauses, such as the Consent to Settle Clause

• Financial statements and ratings

• Capital contribution requirements

• Premium, additional costs and payment options

y Review your hospital affiliations by-laws to see which Risk Retention Groups

they accept and what policy limits they require.

y Assist you in applying for coverage, including pre-filling applications,

obtaining loss runs, sending in thorough formal submissions, working with

underwriting to negotiate on your behalf.

Perron Insurance Services’ practice is dedicated to helping physicians obtain the ideal coverage

for their needs, whether it is in a traditional market, risk retention group, or through surplus

lines. We have saved our clients tens of thousands of dollars annually, and even some of them

from closing their successful practices.

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PERRON INSURANCE SERVICES’

PRACTICE IS DEDICATED TO

HELPING PHYSICIANS OBTAIN

THE IDEAL COVERAGE FOR

THEIR NEEDS, WHETHER IT IS

IN A TRADITIONAL MARKET,

RISK RETENTION GROUP, OR

THROUGH SURPLUS LINES.

GLOSSARY

GLOSSARY

GlossaryAttachment PointThe attachment point defines when the reinsurance will apply to a claim. For example, one of

our carriers carries a $250,000 attachment point. If the insurance carrier becomes insolvent and

an insured has a claim, the insured would need to pay the $250,000 prior to reinsurance picking

up payment on the claim.

Gross Premiums WrittenThe total premium written and assumed by an insurer before deductions for reinsurance and

ceding commissions.

Loss Adjustments Expenses (LAE)The cost of investigating and adjusting losses. LAEs need not be allocated to a particular claim.

If they are allocated to a particular claim, they are called “allocated loss adjustment expenses”

(ALAE); otherwise, they are unallocated loss adjustment expenses (ULAE).

Net Admitted AssetsAssets whose value is included in the annual statement of an insurer to the state commissioner

of insurance.

Net Premiums EarnedThe amount of total premiums collected by an insurance company over a period that are

earned based on the ratio of the time passed on the policies to their effective life. This pro-rat-

ed amount of paid-in-advance premiums are “earned” and now belong to the insurer.

Net Written PremiumsWritten premium less deductions for commissions and ceded reinsurance.

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Non-Assessable PolicyAn insurance policy that will not be charged for financial short falls of the company.

Policyholders SurplusThe difference between an insurer’s admitted assets and liabilities—that is, its net worth. This

figure is used in determining the insurer’s financial strength and capacity to write new business.

Prior ActsWith claims made policies, Prior Acts refers to the time prior to the inception date of a policy,

where there may be a retroactive date that will pick up that exposure or where there is a need

for coverage to pick up that exposure. If the insured does not have a retroactive date and the

insurance company does not wish to pick up any prior exposure, then the insured would not

have prior acts coverage.

Retroactive DateThis is the first inception date of a claims-made policy where the insurance carrier will respond

to claims filed for professional services rendered from this date forward.

State Guaranty FundState law requires insurance commissions to provide a guaranty fund to protect policyholders

should their insurance company become insolvent and unable to meet its financial obligations.

Note that the State Guaranty Fund does not protect risk retention groups since they are not

licensed in the state.

Underwriting Expenses(1) The cost incurred by an insurer when marketing their products, including meetings with

the insureds or brokers, actuarial review of loss history, or physical inspections of exposures.

(2) Expenses deducted from insurance company revenues (including incurred losses and

acquisition costs) to determine underwriting profit.

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References and Resources

Risk Retention Reporter

The gateway to the risk retention and purchasing group marketplace

http://www.rrr.com

N.Y. ISC. LAW § 5904: NY Code - Section 5904:

Risk retention groups not chartered in this state

http://codes.lp.findlaw.com/nycode/ISC/59/5904

International Risk Management Institute (IRMI)

http://www.irmi.com/

US Business Reporter

http://www.activemedia-guide.com/busedu_insure.htm

Investopedia

http://www.investopedia.com/

A.M. Best Company

Provides worldwide news, credit ratings and financial information for insurance industry

Demotech

The financial stability rating organization for Risk Retention Groups

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About the Author

Michelle Marie PerronMichelle Perron is the Principal of Perron Insurance Services, a recognized authority on medical

malpractice insurance, and a licensed medical malpractice insurance broker. She combines 22

years of medical insurance experience with her compassion for protecting the best interests of

her health care clients. Offering malpractice coverage through traditional markets, risk retention

groups, and surplus lines, Perron Insurance Services has saved their clients tens of thousands of

dollars annually, which in some cases has prevented successful practices from having to close.

To follow Michelle:

Email: mperron@perronservices.com

Blog: http://www.perronservices.com/blog/

Website: http://www.perronservices.com/

Twitter: https://twitter.com/PerronServices

Facebook Page: https://www.facebook.com/PerronInsuranceServices

Google+: https://plus.google.com/u/0/+MichelleMariePerron/posts

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