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RRG realities The National Catholic RRG boasts strong results over almost two decades By Michael J. Moody, MBA, ARM Risk retention groups (RRGs) have been attracting a lot of attention recently. Over the past few years RRGs have been helping groups when they incur affordability and availability issues. More recently, they have moved center stage due to the release of a GAO study late last year. Historically, these creative risk financing vehicles have been helping insureds begin to move away from the traditional insurance market and take control of their own destiny. While many believe that RRGs were first allowed to be formed as a result of a 1986 federal legislation, that is not really correct. The original RRG legislation was actually signed into law in 1981. But RRGs found limited applicability in the early years; it took a major revision to the original law in 1986 to open the door to increased usage. The purpose of the 1986 amendment was to expand the law from products liability and completed operations to all liability exposures. The intervening 20 years have seen significantly high utilization. Today, the Risk Retention Reporter indicates that there were a total of 234 RRGs as of July 2006. Growth over the past few years has occurred despite a perceived market softening in most liability areas; 21 new RRGs have been formed since the first of the year. Premium growth has also risen over the past year. According to the Risk Retention Reporter, RRGs accounted for gross written premiums of about $2.5 billion in 2005, which represents an 11.5% gain over 2004. Much of the gain in RRG formations over the past three or four years has been attributable to availability and affordability issues associated with the medical malpractice coverage area. But health care is by no means the only industry segment forming RRGs. Other segments that have turned to RRGs include nursing homes, truckers, contractors, nonprofit institutions, etc. Further growth in these areas appears to be tied to market conditions within the specific sector. Reasons for RRGs All of the current 234 RRGs started out with the same basic idea—they could do a better job than the insurance industry at reflecting their loss control efforts in pricing. And while this is a noble goal, can an RRG better the insurance industry? That is a good question. And there is an easy way to determine if, in fact, RRGs can fulfill their owners’ visions. One of the best ways is to review existing RRGs to see if they are meeting their owners’ needs. While any number of RRGs can be used as a case study, it may be helpful to review one of the first RRGs to use the 1986 law. One of the first groups to take advantage of the revision legislation was The National Catholic Risk Retention Group, Inc. (TNCRRG), which opened its doors in mid-1988. As with many entities in the mid-1980s, the Roman Catholic Church was being subjected to very hard market conditions. These conditions included significant (and often drastic) premium increases, substantially reduced limits, coverage restrictions, and a general lack of underwriter interest. The insurance crisis soon spread to dioceses and religious institutions across the country. As a result of these insurance problems, the Church put together a steering committee to study potential alternatives to mitigate the problems. After about 18 months of review, the committee was leaning towards establishing a group captive. About this time, the committee’s legal counsel indicated that they believed that President Reagan would soon sign a revised RRG law that would extend the 1981 Act to include any liability in the RRG. Based on this new information, the committee decided to form an RRG; and on October 2, 1987, TNCRRG was licensed in Vermont. By May 1988, TNCRRG had collected sufficient capital and had a sufficient number of shareholders to fulfill Vermont’s requirements for establishment of operational authority. The RRG was set up to write excess liability coverage for four main coverage areas: general liability, auto liability, broad errors & omissions (including D&O), and sexual misconduct. The excess policy was drafted to attach over a $250,000 underlying layer. This $250,000 layer may either be covered by a primary policy issued by a traditional insurer, or it could be self-insured by the shareholders themselves. Coverage from the RRG can be written on either an occurrence basis or claims-made basis, and can provide up to a $14.75 million limit. Keys to success The above information provides specifics regarding coverage details as well as some basic background on why the RRG was formed. But the real question is: What about the original mission of the steering committee and later the shareholders? Has the mission been accomplished? And if so, how did they go about this? One of the people who has been involved with TNCRRG from the very beginning is Michael J. Bemi, president and CEO of TNCRRG. Bemi was involved with the initial feasibility study as well as the steering committee’s work. Bemi points out that the RRG has not merely survived, but has actually prospered since forming the company. He attributes this success to several key factors. Keep your eye on the ball One of the most important factors is refining core competencies or, as Bemi says, “keeping your eye on the ball.” This factor is really made up of several critical aspects as follows: Sound underwriting. This starts even before the actual underwriting. As Bemi explains, “It began with a soundly capitalized company which established a surplus cushion to sustain us if we should have any underwriting issues. We wanted to have sufficient funds to weather any storm.” Proper rate selection is another important part of underwriting, and Bemi notes they have an independent actuary that completes a segregated cost analysis for each of the RRG’s multiple rate bases, every three years. Finally, he points out that one of the secrets to TNCRRG’s success is broad coverage. “We have designed our products to offer the broadest coverage in the industry.” If following a claim resolution, there was any question regarding coverage, Bemi says, “We try to then clean up any policy wording ambiguities so that maximal coverage is provided to the shareholder.” To illustrate this point, he notes, “If the industry is restricting coverage for some reason, we see this as a possible growth opportunity.” Quality claims/litigation management. Since TNCRRG manages its own claims, the major emphasis here deals with litigation planning and management. This is mostly centered on an educational endeavor that requires the RRG’s claims manager to visit any new shareholder within the first 90 days of coverage. Bemi points out that a meeting is scheduled with local claims and legal advisers to explain how the RRG’s claims operation works and what is required of local people. Additionally, TNCRRG’s claims people will perform a claims audit, if the local shareholder requests it, plus TNCRRG presents educational workshops on claim matters for its shareholders and their advisers. Effective risk control standards/measures. This is where the RRG really distinguishes itself, according to Bemi. “Unlike most excess insurers, we do a good deal of loss control since we are huge believers in it.” In this regard, over the past few years, they have become nationally known leaders in the prevention of child sexual abuse. In addition, they have developed specific programs for violence prevention in schools, employment practices liability prevention and prevention/mitigation of Internet threats. Well-planned investment program. A well-defined investment policy was written and adopted early in the RRG’s development process. The board established an investment approach that incorporated both equity and fixed income components and the results are reviewed quarterly and adjusted as necessary. Effective board governance protocol. This is a key to the long-term success of TNCRRG. It primarily deals with the fact that every new shareholder is required to contribute 10% of its premium as paid-in capital. This, in turn, essentially revolves around the idea that they must have “skin in the game,” Bemi says. “There can be no ownership without capitalization.” Communicate Another key success factor is communications. Bemi’s management style is one that favors consistent communication. He says, “It is important that you communicate all the news, both good and bad, clearly.” In that regard, TNCRRG provides communications in a wide variety of formats including an annual report, two distinct newsletters, two Web sites, shareholder bulletins, etc. In addition to the shareholders and other service providers, another group that Bemi maintains a high level of communication with is the Vermont regulators. “It is important to keep open communications with them and seek their advice and counsel as needed,” he believes. One of the unique communications approaches that the RRG has established is the “Board outreach to stakeholders” program. This is a formal process where the Board members constantly check to see if the RRG is meeting the needs and desires of the owners. The program’s uniqueness, according to Bemi, is that the Board completes this process itself. “This then establishes shareholder to shareholder communications, and the feedback has been excellent,” Bemi notes. Another issue that was dealt with early in the development of the RRG was how TNCRRG would deal with local agents. Bemi says that TNCRRG will work with local agents (paying a commission) or they will go direct depending on the shareholders’ desires. He says they “recognize the value the local agent can bring, so if the agent has a relationship with the shareholder, the RRG will do nothing to interfere with that relationship.” In fact, they have developed an annual conference for shareholders to which agents, brokers and other interested parties are invited, and that is designed to cover company operations, emerging issues and details regarding the RRG’s various risk management programs. The above noted strategies are just a portion of the programs that TNCRRG has implemented to assure its continued survival and growth, regardless of the insurance marketplace. And while the RRG only has 67 shareholders/insureds, their exposures are for the most part quite large. For many of its shareholders, the RRG is providing coverage for nursing homes, churches, schools, colleges/universities, free medical and dental clinics and Catholic Charities under a single policy. Over TNCRRG’s history, they have lost only one shareholder. They have, for the most part, remained viable in the marketplace by providing extremely broad coverage at competitive rates, with associated high quality services. In support of that strategy, they have developed “best in breed” risk management programs that are nationally and internationally recognized for their cutting edge content. Additionally, they realize that the company is owned by the insureds and they do whatever it takes to maintain good working relationships. Bemi adds, “It is far easier to succeed, once you understand these basics.” * |
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