Captives' group appeal
RRG for long-term care facilities succeeds with "claims-paid" policy
By Michael J. Moody, MBA, ARM
While we are in the middle of a soft market today, and it may be hard for some to remember, just a few years ago there were still a number of industry segments that were having problems finding adequate liability coverage at affordable rates. However, none were more severely hit than those involved with medical professional liability. It was the difficulty in this market segment that brought about the proliferation of new risk retention groups (RRG) that has occurred over the past few years.
But even in the broad, general market area of medical professional liability, some risk segments proved to be more difficult than others. Long-term care (LTC) facilities was one of the difficult ones. Many LTC facilities throughout the county were limited in their coverage options and few were available at reasonable costs. However, as is the case with most industry segments, it was the smaller operations that had the most difficulty securing needed coverages.
Filling a need
One of the people who observed the problem firsthand was Robert Bates, president of Magnolia LTC Management Services, Inc., of Santa Rosa, California. Bates, who has been involved in the LTC industry for more than 20 years, was hearing from his associates that they were having trouble finding acceptable coverage options. At that point, which was early 2002, he began to review the available options to deal with the problem. One early option that came to his attention was to form a risk retention group (RRG) for mid-sized, independent owner/operators of long- term care facilities. The group that Bates was interested in would include traditional LTC facilities for the elderly, as well as skilled nursing facilities, intermediate care facilities, assisted living facilities, congregate care operations and residential care facilities.
The key, according to Bates, was finding owner/operator entities that had no more than 10 separate facilities and better than average loss experience. He was not interested in any publicly owned facilities, because they are typically seen as having “deep pockets” by the plaintiffs’ bar. As he started to investigate the possibility of the RRG, a referral from a friend led him to Risk Services, LLC, an established captive manager. Risk Services had done a number of medical professional liability RRGs; however, it had not worked on any LTC group programs. But based primarily on initial discussions, the two organizations decided to move forward with the establishment of the RRG.
Several prospective members were identified, and Continuing Care Risk Retention Group, Inc. (CCRRG), began to take shape. In October 2003, CCRRG was licensed in South Carolina and began writing coverage shortly thereafter. The RRG’s game plan from the start has been to be an attractive alternative for mid-sized LTC operations. The founders realized early on that they would need to develop a strategy that emphasized proactive risk management and offer an insurance product at a competitive price. And, according to Bates, they needed to develop a marketing strategy that “was going to use a rifle shot rather than a shotgun.” Thus, he points out, “We had a very narrow focus about whom we would market to, or accept as, members.”
Unique approach
While there are a number of unique features to the CCRRG program, none is as noteworthy as the policy form used. This patent pending policy form, known as a “claims-paid™,” policy is a hybrid between the traditional occurrence policy and a claims-made policy. The claims-paid policy is designed to reflect a premium that is based on estimated costs for claims, defense, and administration that are paid over the next 12 months. Obviously, this is in sharp contrast to the traditional occurrence policy, as well as the claims-made policy form that bases its premium on including estimates for payments over the life of the policy. Reserving under the claims-paid policy becomes much less important because the annual premiums are based on actual cost and projected cost at each annual renewal rather than estimates for years into the future.
The policy form was introduced by the Cooperative of America Physicians, Inc./Mutual Protection Trust (CAP/MPT) and has been used by them since 1977. CCRRG has an exclusive license from CAP/MPT, a strategic partner of CCRRG, for use of the claims-paid policy form for all LTC facilities. CAP was impressed with Bates’ commitment to risk management and resident safety and was pleased to come aboard and share its intellectual property with this new entity. Use of the claims-paid policy helps to foster a long-term relationship between the insureds and CCRRG, says Bates. The policy is unique in that it shifts the triggering mechanism from the reporting of the incident as under the occurrence and claims-made policies, to when the claim becomes due.
However, it’s not just the policy form that is unique about CCRRG. One of the other major features of the program is the requirement regarding the commitment to risk management. Bates points out that “true risk management needs to be linked to day-to-day operations,” and CCRRG does this in several ways. It starts from the very first involvement with its prospect. He says that every facility must go through an underwriting/risk management visit prior to obtaining a quote. In addition to the actual quote, the prospect is given a list of recommendations prior to binding.
CCRRG utilizes a firm known as “My InnerView” as an integral part of its risk management program. My InnerView is one of the leading providers of quality management tools for LTC facilities and maintains the industry’s largest database of employee and customer satisfaction metrics. As part of the risk management effort, each facility is required to complete a monthly questionnaire that provides detailed information about the overall quality management and risk management programs. The results of the questionnaire serve as the basis for the facility to prioritize and focus its efforts on creating environments that maximize stakeholder satisfaction. In addition, CCRRG member facilities participate in both a family and employee satisfaction survey on an annual basis. These unique risk management tools have resulted in significantly reduced loss experience.
Several other aspects of the program differentiate CCRRG from its competitors. By design, it has limited the number of states in which it is approved. Currently the RRG is is active in about 14 states and approved in about 40 and does not expect to move beyond 40 states. “We are limiting the number of states where we want to be involved,” says Troy Winch, vice president and director of captive insurance for Risk Services, LLC. This is principally due to underwriting reasons. “Some states have such active plaintiffs’ bars that it is difficult to operate there,” Winch notes.
In addition, CCRRG is distributed via brokers in the 14 states in which it currently operates and is looking for brokers in additional states where it is planning to expand. Typically, it will have from two to five brokers in each state. Broker selection is extremely important to the success of the program. As Bates notes, “Not only do the brokers have to effectively explain the risk retention group concept, but they also have to educate prospects on the ‘claims-paid’ aspects of the policy.” Winch agrees, “The brokerage network is a critical aspect to the overall success of the program.”
Current program
Since the program was introduced in October 2003, it has grown about 9% per year and has enjoyed excellent retention levels, according to Bates. Today, CCRRG has a premium volume in the $8 million neighborhood, with 66 members who have a total of about 100 facilities in 14 states. A significant percent of the growth is coming from referrals from other members of the group.
Like everyone, CCRRG is aware that there is a soft market today, but it has tried to design a program that is a long-term vehicle where the owners can control their own destiny. The RRG has been actively reducing the amount of “potential assessment” that is required. Initially, it was five times the annual premium, but currently, it is one times annual premium. There is no “joint and several liability” provision, and should a member leave prior to assessment that member is not subject to the assessment. Additionally, Bates notes that there has never been an assessment and that CCRRG has been expanding the policyholder service offerings as well as making risk management enhancements based on member feedback. Also, he says, CCRRG made a dividend distribution to the members last year of $250,000.
CCRRG is another example of how a homogenous group captive can be established to serve the needs of its members. As usual for a group program such as this, in order to succeed, the program needs to have some “glue” to hold it together. In that regard, CCRRG has several unique features to assure its long-term viability. The “claims-paid” policy form gives it a distinctive marketing feature. Commitment to risk management and the long-term nature of the risk retention group are also important marketing features. All in all, CCRRG appears to have an excellent program and demonstrates once again how well group programs that are designed to respond to a single market segment can provide specialized programs for members. *