Thriving RRG for dentists born out of adversity
EDIC boasts retention rate of 99%, expanded services
By Michael J. Moody, MBA, ARM
Initially, the federal Risk Retention Act was limited to coverage for products liability and completed operations. However, as a result of the 1986 amendment, the law was expanded to all liability coverages. Over the intervening years, an average of 250 +/- risk retention groups (RRGs) have made up this important segment of the alternative risk transfer (ART) market.
Despite the ability to write any type of liability coverage via an RRG, the majority have been established to write professional liability. Today, there is a good spread of business sectors that have take advantage of the federal legislation. However, one segment of business dominates the RRG landscape, that being health care. Currently health care RRGs account for about 60% of the total RRGs that are in use.
Disappearing market creates need
Many health care RRGs were pressed into service by state medical or dental societies, largely due to the withdrawal of the traditional insurance market in the mid-1980s. The withdrawal by traditional insurers provided a sense of urgency that was needed to boost the formations of RRGs in the early stage of the federal act.
When the traditional market abandoned the medical malpractice business in 1986, the Massachusetts Dental Society was one of the victims. In essence, the majority of the dentists in the state were forced into the state's Joint Underwriting Authority (JUA) program. The JUA had been established several years prior to this because many Massachusetts physicians had no commercial insurance alternatives. The dental society remained with the JUA until 1992, according to Charles P. Hapcook, DDS, President and CEO, Eastern Dentists Insurance Company (EDIC).
Hapcook points out that dental society members were doing quite well financially in the JUA, having managed to obtain a surplus of $20 million in under six years. However, he also says that the Society was aware of what had been occurring in other state JUAs, where the state had been raiding their JUAs' surplus. Thus the Society began exploring ways to “liberate” their portion of the JUAs' surplus. Hancock says that one of the more attractive alternatives was to form a risk retention group. After working with several risk management consultants in preparing a feasibility study, the Society decided to form an RRG in 1992.
They were able to obtain $12 million from the JUA, along with a $1 million LOC from the Society, which served as the initial capital and surplus for the RRG. EDIC, a current A.M. Best rated B++ regional insurer, has grown and matured over the past 20 years, says Hapcook and, along the way, they found a number of ways to provide value-added services for a number of stakeholders.
Some of the lessons are uniformly applicable to any successful captive operation. For example, when asked about what Hapcook thinks is the most important advantage of captive ownership, he says “stability.” He points out, “We have all seen a number of carriers that jump in and out of this business over the years, but at the end of the day, the carriers don't care about their insureds.” EDIC on the other hand has taken the position that “we never said we would be the cheapest, but we would be there for the long haul. We try to charge a fair rate, but one that would allow us to stay in the market year in and year out. We went out of our way to make certain that the Society's members did not have to experience what they did in the 1980s, when we were forced into a state pool.”
A second and equally important advantage, Hapcook notes, is that “we operate this captive purely for the benefit of dentistry.” In that regard, EDIC does not have any outside stockholders to worry about. Accordingly, any dollars that are generated by the company are funneled into one of four areas:
• Kept for surplus, thus guaranteeing the long-term stability of the company
• Sent back to insureds in the form of a return of premium
• Support for dental schools in the company's region via scholarship funds, sponsored student events, and risk management training for the students
• Dental Societies through several co-sponsored events throughout the year.
“We are constantly making certain that any excess money goes directly back into dentistry,” says Hapcook.
Since its founding in 1992, EDIC has initiated its fair share of changes. Starting in 2000, it increased its territory to include Pennsylvania, New Jersey, and New York. It was further expanded last year with the addition of Virginia. At this point, the RRG does not foresee any additional territorial expansion. “We have always approached expansion cautiously,” Hapcook says. However, he notes, “We are certainly not closed to opportunities.” As a matter of fact, the company has found other ways to expand.
Prior to its withdrawal from Massachusetts, CNA had been offering a package policy to dentists that included the medical malpractice coverage as well as a BOP and workers compensation coverage. Many of the dentists who had previously been covered by CNA were requesting that EDIC find some way to offer these additional coverages. In order to satisfy this need, EDIC started its own insurance agency and worked out a deal with The Hartford to provide the BOP and workers compensation coverages. Hapcook points out that their purpose is to try to develop a “one stop shop” for the dentists. This was further strengthened by the formation of a second agency that offered life, AD&D and long-term care insurance products. He notes that all commissions that are collected through the agencies go directly into the RRG.
Today, a number of new health care RRGs are being formed. Formations are typically either hospitals or other health care institutions wishing to insure their attending physicians or group practices that are banding together to provide a method of insuring their med mal exposures. The formation of group solutions such as RRGs is not rocket science, but the new RRGs would do well to look to EDIC's model that has allowed it to provide coverage for more than 20 years.
In EDIC's case, they have followed several critical success factors that have allowed them to continue to offer a stable market to their insureds.
From the start, EDIC was viewed as a winner because Dr. Hapcook, the Massachusetts Society's president at the time, was in charge of the day-to-day operations of the RRG. Members knew that if Dr. Hapcook was willing to give up a 20-year-long practice, there was a good reason for it. And by developing an underwriting philosophy that subscribes to the idea that the RRG will not always be the lowest cost product, but that it is here for the long haul, it set the tone early on. It also developed value-added services such as a specifically designed risk management programs that help the insureds reduce their overall loss experience. EDIC limited its product to medical malpractice for the dental profession, or as Hapcook says, “We stuck to our knitting.” And being able to provide a Best B++ rated insurer on a consistent basis has met with the approval of many Northeastern dentists.
But at the end of the day, as they say, the proof is in the pudding. Most people will recognize that to maintain a 99% retention rate, in this market or any market for that matter, is more than ample proof of EDIC and its management's success.
Michael J. Moody, MBA, ARM, retired as the managing director of Strategic Risk Financing, Inc. (SuRF), a firm that had been established to advance the practice of enterprise risk management. As a regular columnist, he continues to actively promote the concept of enterprise risk management by providing current, objective information about the concept, the structures being used, and the players involved.