Critical Issue Report
RRGs hit a roadblock
California order appears to fly in the face of the federal act
By Michael J. Moody, MBA, ARM
U.S. employers have been fighting a losing battle for the past 20 years. And, unfortunately, it is an extremely important battle: that of continuing to provide cost-effective health care coverage for their employees. For the most part, over that period of time, employers have had to contend with a health care inflation rate that has outstripped the general CPI anywhere from 200% to 500%. As a result, employee health care programs are fewer in number, and those that do survive force employees to pay an increasing percentage of their own heath care costs.
Captives to the rescue
In an attempt to find ways to reduce the cost of employee health coverage over the past 10 or 12 years, risk managers and human resource managers have frequently discussed the possibility of including employee benefits within a captive insurance company and the strategies for doing so. Industry experts point to numerous advantages from such a marriage, notably expense savings, better program control, enhanced potential for tax deductibility and portfolio diversification.
Despite all of the efforts to date, there has been only limited success. While one of the major roadblocks has been reduced via the imple-mentation of the Department of Labor’s EXPRO expedited review process, few organizations have availed themselves of this approach. And even the dozen or so companies that have included employee benefits in their captives have typically limited the coverages to group term life and/or long-term disability. Few captive owners appear to believe that employee health coverage belongs in their captives. As a result, few people think that the captive will offer much opportunity for employers to reduce their overall employee health expenses.
Help from an old friend
Since the captive does not appear to offer any meaningful cost reduction prospects, most employers have continued to depend on an established cost-cutting method: self-insurance. Self-insurance has been widely used by both large and small employers and has proven its worth over the past several decades. Self-insurance of employee health benefits is a relatively easy option to implement that can, in fact, offer an employer meaningful savings as well as significant flexibility with the actual funding of the program. And the real beauty of the self-insured alternative is that it is just as effective for mid-sized employers as it is for Fortune 500 companies.
While there are numerous aspects to a self-insured health program, one of the key components is the “stop-loss” coverage. Stop-loss coverage is designed to provide insurance protection for high-level claims. Coverage is written to provide predetermined insurance protection to the employer for both the large single loss (the specific portion) as well as for numerous smaller claims that exceed an annual projection (the aggregate portion). By utilizing the stop-loss coverage, the employer can limit its exposure. For the most part, stop loss coverage has been readily available at competitive rates. However, there has been significant hardening of the stop-loss market, and employers are beginning to feel the increased pricing pressures.
According to the 2006 Stop-Loss Survey published by Tillinghast, premium increases averaged 14% from January 2005-06; and these results are consistent with the 14% to 15% increases over the prior three years. However, they pale when compared with the 2002 year, which had average increases of 32%. Looking forward, the news gets no better. Tillinghast is projecting double-digit increases in rates for the next few years as well. While there are a number of reasons for these increases, one factor is the ebb and flow of capacity provided by reinsurers and managing general agents that are active in this market. During the 1980s there were an estimated 45 sources of stop-loss coverage. This number increased to well over 200 in the 1990s. However, we are again at a low point with regards to participation in this market, which is today characterized as the lowest in over 30 years. As a result, many self-insured employers are actively searching for ways to lower their medical stop-loss premiums.
A novel approach
Over the past several years, one concept that has surfaced is using a Risk Retention Group (RRG) to provide high-level claims protection for employee health coverage. However, it is important to note that when using an RRG, the coverage is not the traditional form of stop-loss coverage. In order to comply with the provisions of the federal 1986 Liability Risk Retention Act, the coverage must be structured so as to provide a contractual liability policy to the employer that guarantees reimbursement of its costs at various attachment points. Interest in this approach has been heavy, and several RRGs have been formed to take advantage of this unique structure.
The first RRG formed to provide this coverage was the American Construction Benefits Group (ACBG), which was licensed in Vermont in 2005. An article on this program titled “Financing Small Group Health Benefits in a Captive” appeared in the March 2007 issue of Rough Notes. Subsequent to the formation of the ACBG RRG, a second captive was licensed in Montana in April 2007. The captive, known as Ad-Comp Med RRG, was formed to provide contractual liability coverage for a group of California auto dealers. One of the most important provisions of the federal RRG legislation is that the RRG needs to be licensed in only a single state, but it can transact business in all 50 states. It’s this state preemption that has led to the increased use of RRGs through-out the country and is a central pillar to their success.
Pursuant to the terms of the federal law, Ad-Comp advised the California Department of Insurance that it intended to do business in the state. California is unique among the states in that they require a 60-day notice prior to the RRG’s beginning operations. At that point, the California Department denied the RRG’s registration and went one step further by bringing a cease and desist order against the RRG. The C & D order is an administrative injunction that basically says that the RRG cannot do business in the state. As a result, the RRG has gone to the U.S. District Court to obtain a restraining order and at the time this article is written, things are pretty much at a standstill with regard to the operation of the RRG.
However, that is not to say there is no activity with regard to the scope of this action. For one, the National Risk Retention Association (NRRA) is very interested in this case. In fact, as Robert “Skip” Myers, legal counsel for the NRRA, points out, “There are a lot of significant issues that are being tested here. First and foremost, the case involves a very basic question,” Myers notes, “Does a non-domiciliary state such as California, have the ability to question the judgment of the domiciliary state that issued a charter to the RRG?” And while “this is quite an involved case, with a number of issues,” he adds, much of it revolves around the question of what is “liability” as defined by the federal law?
Myers says that there is even a question as to whether California has the authority to issue a C & D order in this case. This whole approach is incorrect, he points out. The federal law would suggest that they do not have authority to do this. In order to be consistent with the Act, the Department should have to go to court and get an injunction. “California just can’t just make the RRG stop if it doesn’t agree with the RRG’s chartering state.” And while the NRRA is not a party in this case, the organization understands the importance and is filing an “amicus curiae” brief with the court. Myers says that there are quite a few issues that could ultimately affect any RRG, so they will need to be clarified, thus the interest from the NRRA.
Conclusion
Once again, a creative approach for the utilization of the 1996 Liability Risk Retention Act has been found. The original purpose of the federal legislation was to offer companies the opportunity to preempt state insurance laws so as to streamline the process and lower the cost of coverage. Many self-insured employers have had to suffer double-digit price increases for their stop-loss coverage over the past half dozen years; and now that a potential solution has been found, it appears that at least one state wants to serve as an additional impediment. So, as a result, much additional time and effort, to say nothing of money, will be spent trying to preserve a right that has been granted to employers by the federal government. Maybe this is just additional evidence that the state regulation of insurance has outlived its usefulness.