RISK RETENTION GROUPS: THINKING LOCALLY
Is a single-state approach, like that of Indiana’s IPS, the future of RRGs?
The introduction in 1981 of risk retention group (RRG) legislation—specifically the Product Liability Risk Retention Act of 1981—led to active federal involvement in the commercial insurance marketplace. Prior to this regulation, oversight of the insurance industry had been left to individual states. The Act was driven by a nationwide shortage of product liability and completed operations coverage.
To solve the problem, Congress took the controversial position of passing an insurance law that allowed groups of people with similar risks to band together for the purpose of self-funding those exposures. Unfortunately, it took Congress so long to act that, by the time the Act became law, the insurance market was in the middle of a soft pricing cycle.
After the 1986 expansion of the Act to cover all liability risk, many national groups and associations began exploring the viability of forming risk retention groups for their members. Since the legislation allowed groups of people from all across the 50 states to participate in a single liability insurer, many national associations began to view these as viable risk transfer vehicles as well as value-added services to their members.
Over the years, risk retention groups have grown in number, as well as assets. Today, it is estimated that there are about 250 RRGs nationwide. The vast majority of these are multi-state operations, and most look to larger service providers, such as big-box brokers and international captive managers. Due to their size, these larger, 50-state RRGs typically preclude active involvement by small or mid-sized brokers and agents.
Fortunately for these smaller agents and brokers, groups and associations now find it unnecessary to develop a 50-state approach in order to be successful. Take for example Innovative Physician Solutions (IPS), a risk retention group established for Indiana doctors. IPS Chief Operating Officer Mark Tabler says that, early in the planning process, interested parties decided to limit the operation of the risk retention group to Indiana.
IPS was formed in 2004 and received its certificate of authority in 2005. Recently, the RRG has redomi-ciled in Vermont. Tabler indicates that, historically, Indiana has been viewed as a desirable insurance market, due in large part to its Patient’s Compensation Fund and liability limits, but that did not stop insurers from painting the Hoosier market with the same broad brush as Florida, California, Illinois and other high-risk jurisdictions. As a result, docs in Indiana felt more than a dozen years ago that they were carrying too much of the risk.
While the rest of the county was “enjoying” soft insurance pricing, Indiana physicians were seeing significant increases. If that was not bad enough, standard commercial insurers had left the state en masse. All of these changes put Indiana doctors in a real bind.
“It started to be real difficult, going out to our doctors with the bad news regarding their renewal premiums,” Tabler says. Further, he points out, “We knew we had to do something.” After reviewing the options, they decided that they “would help doctors self-fund their own risks.” They completed a feasibility study in 2004 and started operation in 2005. As currently structured, IPS will write all specialties, as long as their operations are limited to Indiana. Despite the market exit of many commercial insurers, IPS does have competition, mostly from another self-funded program and a handful of commercial carriers.
As a result of market changes—some driven by regulation—the number of smaller physician practices has declined. Today’s business model calls for larger practice groups. Many practices are housed inside hospitals and may actually operate as hospital employees. Over the long run, this situation will result in many hospitals getting into the insurance business.
When creating IPS, Tabler and his team had options. Some people asked why they didn’t use a trust to provide coverage. He cites several reasons. “First and foremost,” he says, “most trusts are tied to one specific hospital.” Additionally, the hospital would have control of the assets of the trust, “and that could lead to conflicts of interest in any subsequent claims activity.”
Just using a self-funding approach would end up requiring reinsurance and a front for the program, he adds. All in all, “These options were not going to provide the solution the doctors needed.”
The RRG, on the other hand, could be used to write the liability coverage without having to find and fund a fronting carrier, because IPS “would not have to be an admitted insurer,” Tabler points out. Finally, he says, “The RRG would provide us with the opportunity to do many things.”
Without question, he learned, the RRG would offer the most flexible option. It could, for example, begin writing in an adjoining state, “and all it would take is a change in our business plan,” Tabler notes, adding that flexibility is a key consideration in today’s rapidly changing healthcare market.
The Affordable Care Act (ACA) will ultimately change the entire healthcare industry. It has already changed many parts of the insurance industry. Tabler says a key component of the ACA is the assumption that all people will take advantage of the coverage. “However, a major element depended on having healthy people joining the program,” he notes, “but most have chosen not to participate.”
Some of these individuals are willing to pay the penalty, rather than buy the coverage. This has placed an inordinate amount of pressure on insurers and has led to four of the top six health insurance carriers dropping out of writing ACA coverage. Potential rate increases needed to keep the ACA afloat in 2017, Tabler points out, could cripple the program’s effectiveness.
In order to be able to effectively com-pete in this new environment, service providers may be challenged to take more of a consulting-based approach. “Service providers may need to morph their offerings to be more consultative-related,” Tabler says. “They may not survive under the business model they are using now.”
Service providers, especially captive managers, need to be providing input as to how to help the RRG go through the “mine fields” it will encounter. A steady flow of new ideas should be a requirement for all third-party service providers.
Distribution of the coverage can happen by any one of several methods. IPS does not use a direct sales force or paid commission to a third party. Tabler indicates that, currently, the firm uses referrals.
They chose to reduce the premium rather than to pay commissions. Referrals come from the member doctors themselves, as well as many third-party service providers. The RRG was designed to “benefit its members,” Tabler notes. At this point, he adds, “We are not really looking for growth. In fact, growth is a secondary goal at best.” The whole reason for forming the RRG was to reduce overall liability cost.
IPS management has learned several lessons throughout the journey. First, Tabler notes, “is the importance of using a quality captive manager.” He points out that the manager must understand the business and appreciate what the insured wants to accomplish. He also points to the importance of finding the correct domicile for the RRG. Tabler indicates that significant differences exist between domiciles, and this led to IPS redomiciling its group to Vermont.
Mid-sized agents and brokers should give thought to using this single-state strategy when assessing the viability of a risk retention group. Limited scope can make the feasibility of such a venture much more feasible and allow it to be formed and grown in a timely manner.
As Tabler notes, “The use of a risk retention group gives you a chance to be creative. It can provide a great opportunity to become a real problem solver, rather than merely an insurance seller.” The single-state strategy will allow agents and brokers who work with middle market groups and associations a chance to provide a valuable service to a wide range of buyers.
Michael J. Moody, MBA, ARM, is the retired managing director of Strategic Risk Financing, Inc. (SuRF), a firm that was established to provide consulting services to captive and other alternative risk transfer mechanisms. As a regular columnist, he continues to actively promote the benefits of the ART market by providing current, objective information about the market, the structures being used, and the players involved.