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All risks are not created equal But some are more equal than others By Dennis H. Pillsbury As George Orwell explains in his satirical novel Animal Farm, which I apologize for paraphrasing in the title, egalitarianism is extremely hard, if not impossible, to achieve. And the same thing is true in the area of risk transfer. Homogenous groups have always been somewhat of a fiction. But, since the federal government required such groups in order to qualify as a risk retention group, a large number have emerged to take advantage of the legislation. But, as anyone involved in such formations is aware, the differences in risks or risk appetites can create a host of problems that need to be addressed, including the self-insured retention level, the level at which the stop loss reinsurance kicks in, the strictness of underwriting guidelines, and so on. The same problems occur when one is attempting to form a group captive. Caitlin-Morgan, an MGA based in Carmel, Indiana, had already overcome the aforementioned hurdle when it successfully formed a health care RRG—the Midwest Insurance Coalition Risk Retention Group—in Arizona, primarily for its nursing home clients in Indiana. The RRG took advantage of the favorable legal and regulatory climate in Indiana. The advantages of the RRG included: • Isolating Indiana health care facilities from insurance rates that reflected less favorable loss conditions in other parts of the country. • A strong risk management program that both helps to prevent losses in the first place and to mitigate losses that do occur through a variety of techniques including careful documentation of risk management procedures. • Utilization of the Indiana Patients Compensation Fund to cap professional liability exposures. The Midwest Insurance Coalition had also established a risk purchasing group for all its members so that, in addition to accessing the RRG for those who qualified, the members also could gain the advantages of scale when accessing the traditional market. A novel idea The success of the RRG attracted other health care professionals from other states as Caitlin-Morgan expanded its marketing reach. However, the necessary homogeneity that was partially attributable to the favorable climate in Indiana resulted in some risks not fitting the criteria to be part of the RRG. Sean Murray and Chris Murray, founders of Caitlin-Morgan, had heard Dennis Silvia, CPCU, AAI, MA, president of Cedar Consulting, Chagrin Falls, Ohio, discuss his idea of a homogeneous segregated cell captive that would utilize the structure to account for the differences in risk and risk appetite while still bringing all members of the group into the captive. Segregated cell captives started as a way to isolate certain unsavory risks from other participants in a captive, risks that for political or other reasons had to be placed in the captive. For example, an important member of an association could not be left out of the captive, but was not a financially sound risk. So the risk would be placed in a segregated cell and then moved into the full group once it had proven itself. In the meantime, however, the member in the cell was fully responsible for its own losses, and that certainly didn’t adhere to the concept of spreading the risk. “When you looked inside the segregated cell structure, you realized it was void of strategic functionality, despite its imposing facade,” Dennis says. However, the structure itself was interesting and Dennis began to think of innovative ways it could be used that made financial sense. He was convinced that segregated cell captives “could become imposing structures both inside and out.” The key was to approach the captive from a strategic standpoint and make it fit with the structure of the group that was going to use it. “Every group has its own unique structure,” he continues. “Its captive should be complementary to this uniqueness rather than trying to be all things to all members. For example, groups with different sized businesses might segregate the businesses according to comfortable retention levels. Small businesses might choose to be in a cell with an SIR of $50,000, while larger companies might opt for $250,000. Jumbo accounts might want even higher retention levels.” He adds that the structure also allows each cell to find a fronting carrier and reinsurer that has an appetite for the particular type of business in the cell. “You can use different fronts for each cell, so you can better match the appetites of the front and reinsurer.” Sean Murray points out that in the case of Midwest Insurance Coalition, “we had doctors and nursing homes as members. There are fronting companies out there that would consider nursing home risks but wouldn’t touch physicians. And the opposite is true. When we heard about Dennis’s concept, we realized this was the perfect solution for our need to provide additional coverages to members of the Coalition and also to provide coverage to members from other states.” The captive will be based in Bermuda and will be owned by the Midwest Insurance Coalition Risk Purchasing Group. Chris Murray says the offshore domicile was chosen because it provides “more flexibility. We will be able to discount reserves and have better access to reinsurance markets in Bermuda.” He points out that the Bermuda captive may allow for an increase in the premium to surplus ratio, which can free up a substantial amount of capital. He goes on to note that, “this is not being done for tax reasons. The tax benefits that existed in the past are not necessarily available today. The goal is to provide a stable, flexible market that spreads the frictional costs over members, resulting in lower costs.” Sean adds, “Initially, we envision two cells—one for nursing homes and one for Indiana physicians. Although there may be other cells for physicians from other states, and one very large nursing home is considering going into its own cell so it can have a higher SIR level.” “As the captive develops and grows,” Dennis says, “we anticipate adding a reinsurance supercell where there is risk sharing at the top layer. This could create tax efficiencies that would benefit all participants in the captive. We also plan on offering various excess layers from which cells can pick and choose.” Sean concludes, “Medical malpractice laws vary greatly by state, making the risk profile for doctors in different states quite unique. The segregated cell structure allows us to provide for these differences by providing higher excess layers to those doctors in states where that is needed and a variety of other options, including reinsurance written on either a quota share or facultative basis.” * For more information: |
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