Historically, captive insurance companies have provided associations and their members with a viable source of insurance coverages. While captives have typically been pressed into service during hard insurance markets—when issues of affordability or even availability have been a concern—today, associations are looking for longer-term captive solutions. As a result, recently, group captives have been formed in response to future market conditions.

Associations are now taking a much different view of captive formations than those formed during hard markets. So, despite a prolonged soft pricing cycle, some associations are looking for ways to assist their members in establishing long-term risk financing strategies. Such is the case with the Target Markets Program Administrators Association (TMPAA).

According to Peter Foley, executive vice president of Breckenridge IS, Inc., the captive manager, “There are several good errors and omissions (E&O) underwriters in the market today.” However, he points out, program administrators (PA) continue to have a variety of issues with their E&O liability coverages. Chief among these issues is the matter of scope of coverage.

Many of today’s PAs are expanding their business models beyond just program administration; they are moving horizontally to add additional value-added services. While program admini­stration will be their primary business operation, many wish to provide other related services. Foley states these services can include such things as retail and/or wholesale operations, claims management and loss mitigation services.

As a result, he notes, “It can be difficult to put all of these activities under one policy. Sometimes traditional underwriters view these various operations with difficulty. Ideally you want to have all your E&O coverage under one common roof.”

Other issues that are of concern to TMPAA members are potential pricing penalties related to the age of the business. Foley notes that there are some members who have newer PA operations and have little to no history with their own companies. Many of these, however, “may well have run a program division for a major broker.” Similarly, some organizations “may wish to take meaningful retentions,” which might be large in relation to the size of their companies. However, they may not be able to obtain sufficient credit for this increased retention because they lack sufficient history to justify the retention.

All in all, some members are still struggling to obtain adequate E&O coverage for their operations. “Many times the underwriters will either limit coverage for specific operations or exclude them altogether,” Foley notes. In those instances, “Members are required to obtain two or more policies in order to be properly covered.” As a result, Target Markets wants to provide coverage that is designed to offer maximum flexibility for their members.

As a result of the aforementioned coverage shortcomings, as well as realizing that at some point in the future, the insurance market will harden, TMPAA has embarked on forming a risk retention group (RRG) for its members’ E&O coverage. While a final decision has not been reached, as this article is being written, with regard to the domicile, Foley says, “We have been talking to the District of Columbia Insurance Department personnel on a preliminary basis and it is our intention to locate the RRG there.” He also states that they are currently working on the feasibility study and business plan. “We want to have the RRG become a credible market, so our ultimate goal is to get the RRG rated.”

Foley also indicates that the association and its members have been discussing the formation of a captive for a number of years. And while they realize it is a soft insurance market, they believe the time is right for formation. “Let’s get positioned now,” he says, “before the market dictates our actions.” Current projections are to start up in early fall. He points out that in this way, while they may write a few accounts in late November or in December, they will “be ready to quote 12/31 and 1/1 business.”

As currently designed, the RRG will take a 50% quota share of the first million limit and 5% of the $2 million excess of $1 million layer. However, Foley says the 5% is a moving target since “we want to show our reinsurance partners we are providing quality business.” Thus this 5% figure may increase in the future.

It’s this “quality business” issue that is at the heart of the RRG. Foley indicates that the RRG is the perfect vehicle to incentivize the PA to operate with a “best practice” approach to their business. He believes that it is vital that the RRG is “able to tie together all the components of a best practice approach.” Among the key components that the RRG will concentrate on are “aggressive claims management and loss control techniques.”

In that regard, the RRG will retain professional liability experts from Wilson Elser Moskowitz Edelman & Dicker, LLP, one of the premier legal firms in the E&O market. By utilizing Wilson Elser services as well as other, ongoing loss mitigation strategies, Foley thinks that the RRG “will provide an effective method to reduce the overall loss experience of the insured group.”

More and more, progressive associations are beginning to take a much broader view of their members’ key insurance needs. Target Markets is one of the latest groups to take an active role in assisting its members in establishing a long-term alternative risk transfer approach via a captive insurance company. In order to assure the RRG’s success, TMPAA is identifying those members “who are currently operating within best practices or those that wish to move to a best practice approach,” says Foley. He points out that the RRG will offer an E&O product that “matches the needs and requirements of specific PAs, and move away from the one-size-fits-all concept.”

At the end of the day, Foley notes, “The whole program—breadth of coverage, retention options, etc.—is designed to offer the policyholders flexibility based on their specific needs.” For that reason, the RRG is not a short-term response, but rather a long-term solution for the TMPAA members’ E&O coverage needs. In this way, he says, “Members do not have to be held hostage to whatever is going on in the traditional insurance marketplace.”