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Does size matter? Nursing home sets up captive with well less than $1 million in premium By Michael J. Moody, MBA, ARM
Over the past 20-plus years, all sizes and types of organizations have considered alternatives to the traditional insurance marketplace. In doing so, organizations are usually responding to a hardening marketplace in a particular line of coverage. One example in the recent past has been in the medical malpractice arena, where doctors as well as retirement and nursing home communities experienced market dislocations. Nursing homes in particular have experienced problems after The St. Paul Companies decided to leave this market. Adding to the nursing home market’s problems have been verdicts for large awards in both Florida and Texas, which affected the entire market. This was the picture that Phoebe Ministries (Phoebe) was facing in early 2004. Phoebe, a not-for-profit organization that specializes in health care, housing, and support services for older persons in eastern and central Pennsylvania, is a faith-based organization that is an affiliate of United Church of Christ. It has been operating continuously since 1903. Since the new millennium, however, Phoebe had watched the cost of its professional and general liability insurance coverages rise at an alarming rate. From a premium of $120,305 in 2000 to a quote of over $855,000 for the 2004 policy year, the organization had experienced first-hand how difficult a hard market can be. It should be noted that Phoebe’s average annual losses for the five prior years were $11,952. The stage is set
According to Ron Scheese, senior vice president of finance and CFO for Phoebe, “2004 was already turning out to be an interesting year, even without the insurance issues. (Phoebe was in the middle of a financial turnaround.) Once The St. Paul exited the market, not many carriers were interested in writing this line of coverage.” Despite bidding their business each year, Scheese says, “we saw nothing but larger and larger premium increases.” The organization did everything it could think of, including converting from an occurrence-based policy to a claims-made policy, to help mitigate the increases. Despite these efforts, as mentioned above, the 2004 premium quote was $855,000. Further complicating things was the fact that Phoebe had decided to refinance a portion of its debt, following a review of Phoebe’s overall expenses in early 2003. During this review, Scheese found out that one of the largest, uncontrollable expenses was the cost of the organization’s liability coverage. He voiced his concerns to Phoebe’s bond counsel, who advised him to talk to some of the counsel’s risk financing experts. As a result of subsequent meetings with the risk financing experts, Phoebe learned that it had a variety of options, including a captive insurance company. “At that point,” Scheese recalls, “we began to seriously explore options for our liability insurance program.” The fast track Scheese met with representatives of their law firm’s alternative risk division just before Thanksgiving 2003. At this point, he began to see the financial advantages of moving to an alternative risk financing approach. By mid-December, he had scheduled an educational presentation for the long-range planning committee of Phoebe’s board. As a result of the meeting, Phoebe made a commitment to complete a feasibility study, Scheese said. The study, which was concluded in February 2004, was favorable and, as a result, the decision was made to complete the formation process in time for the July 1, 2004, renewal. This obviously meant that the process had to be accelerated. For the most part, Scheese says, things fell into place quite well. After the completion of the feasibility study, Phoebe had several critical decisions to make in short order. One of the first issues was the form of the risk financing vehicle. There was agreement that it should be a captive. However, there was much discussion about the exact structure. Initially, the conversation centered on whether the captive should be a single-parent captive or a group captive. Scheese notes that, from the start, he questioned “whether we had a large enough base to do this alone.” He understood the law of large numbers and the spread of risk issues involved and was concerned about how a single-parent captive could face any variability in losses. Conventional wisdom suggested that a group solution might be the answer. However, Scheese also realized that the group solution had a downside. “We knew that we could manage our care better by developing standardized policies and practices to control it,” he notes, but Phoebe could not be certain that the same would be true for other participants in a group captive. So the decision was reached to proceed alone. Despite the fact that Phoebe had only four campuses, it chose to establish the captive as a risk retention group (RRG). Scheese notes that, “we decided on an RRG because it would give us maximum flexibility.” He says, “We could deal with the risk as it currently existed, as well as whatever risk our plans created for us in the future.” For example, Scheese observes, the RRG may be a good point of entry for future expansion opportunities. Work on the captive implementa-tion continued during the first part of 2004. During this time, Phoebe decided on domiciling in South Carolina, and resolved its next critical decision by retaining Meeting Street Captive Management (www.meetingstreetmgmt.com) to manage the captive. Scheese says that during this entire process, they were working with their local broker to obtain both a traditional insurance quote, in case they could not get the captive completed in time, as well as an excess insurance quote to come in over the captive. According to Scheese, “Our broker was very involved once we got beyond the feasibility study.” Lessons learned Phoebe Reciprocal Risk Retention Group was started on July 1, 2004. As a result of the formation process, Scheese has learned a number of valuable lessons that he believes may assist others considering a similar decision. One of the most important issues, according to Scheese, is the “value of education.” From the start, educating the various parties was a top priority and he thinks it was a key to the ultimate success of the project. Because of the proactive educational effort, support was gained along the way, and when the feasibility study came back positive “it became the linchpin that pulled it all together for us.” Another key point was how well the captive dovetailed with Phoebe’s culture of customer service. As a result of starting the captive, Phoebe has been able to “take risk management, customer satisfaction, and other customer focus goals, and blend them together through the captive.” And while Phoebe’s loss experience was exceptional, “the captive instilled the loss mitigation idea deeper into our organization,” says Scheese. While the captive has been operational for only 18 months, he says the Board is very happy from a financial standpoint. But, he notes, “They are equally pleased at how well it has helped our risk management and quality control processes. Frankly,” says Scheese, “we did not envision this in our decision-making process,” but it is providing a big payoff. And finally comes the issue of size. Many experts would think that a four-campus retirement and nursing home community that had a professional and general liability premium of $129,000 in 2000 would not be large enough to be a candidate for a single-parent captive. Some people may say that Phoebe is an excellent prospect for a group captive. And, as noted earlier, Phoebe did consider these issues. However, at the end of the day, they felt they could control their own losses. While Scheese admits to a concern about that one large claim, the excess insurance program provides him a reasonable comfort level. As far as claims frequency issues are concerned, “we know we can manage the smaller claims better than anyone else. Our whole culture is centered around customer service,” he adds. Does Scheese think you need to be big to make a single captive work? “We are not large and it’s not like you have to be huge to do this.” He says, “size is not the important part of the equation; it takes a properly designed excess insurance program and a commitment to risk management and controlling your own losses.” * |
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