2007 Medical Professional Liability Symposium Chicago, Illinois ~ March 13 & 14, 2007 Healthcare Captives Looking In The Crystal Ball

Chicago, Illinois ~ March 13 & 14, 2007

2007 Medical Professional 2007 Medical Professional Liability SymposiumLiability Symposium

Healthcare CaptivesHealthcare Captives

Looking In The Crystal BallLooking In The Crystal Ball

AgendaAgenda

1. Moderator Overview1. Moderator Overview

2. Physician Captive Case Study 2. Physician Captive Case Study

3. Actuarial Perspective 3. Actuarial Perspective

4. Captive Management 4. Captive Management

5. Reinsurance Update5. Reinsurance Update



Moderator OverviewModerator OverviewSECTION 1SECTION 1

Lisa Wall

Captive and RRG Captive and RRG EnvironmentEnvironment

Insurance Market Impact on FormationsInsurance Market Impact on Formations

0

1,000

2,000

3,000

4,000

5,000

6,000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

5467 73 79 78 79 74 66 68 68 70 67 65 69

90

141

186

216 23

1

0

50

100

150

200

250

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Captives

RRGs

Source: Risk Retention Reporter Web site, http://www.rrr.com and AM Best Captive Directory

Captive and RRG Captive and RRG EnvironmentEnvironment

• What Makes SenseWhat Makes Sense Reinsurance Reinsurance

access?access? For profit owner?For profit owner? Pooling risk?Pooling risk? Third party business Third party business

motives?motives?

• What Never Makes What Never Makes SenseSense Sharing in risk you do NOT Sharing in risk you do NOT

understandunderstand No cash/debt availabilityNo cash/debt availability Retaining more risk without Retaining more risk without

the appropriate risk rewardthe appropriate risk reward Retaining more risk without Retaining more risk without

risk appetiterisk appetite

Profile of captive/RRG candidate – financial Profile of captive/RRG candidate – financial benefits outweigh risks and capital utilizationbenefits outweigh risks and capital utilization



Physician Captive Case StudyPhysician Captive Case StudySECTION 2SECTION 2

Joseph Pareres Silverson, Pareres & Lombardi, LLP

Obstacles In Forming RRGObstacles In Forming RRG

• Must select proper VenueMust select proper Venue• Must have Capital for InvestmentMust have Capital for Investment• Must have sound Risk Management ProgramMust have sound Risk Management Program• Must hire Risk Manager, Third Party Administrator and Must hire Risk Manager, Third Party Administrator and

AttorneysAttorneys• Must be approved by the Insurance Department in Must be approved by the Insurance Department in

State of DomicileState of Domicile• Must retain local counsel and comply with all State of Domicile Must retain local counsel and comply with all State of Domicile

laws and requirementslaws and requirements• Need to obtain ReinsuranceNeed to obtain Reinsurance• Must have Hospitals, Medical Facilities, and HMO’s accept Must have Hospitals, Medical Facilities, and HMO’s accept

Insurance Certificate of RRGInsurance Certificate of RRG• Must renew Reinsurance on an annual basisMust renew Reinsurance on an annual basis• Can only issue Claims-Made PoliciesCan only issue Claims-Made Policies

Benefits To Creating RRGBenefits To Creating RRG

• Avoid high risk Pool for low to average Risk Avoid high risk Pool for low to average Risk PhysiciansPhysicians

• Ability to create and control Risk Management Ability to create and control Risk Management ProgramProgram

• Ability to select Third Party Administrator and Ability to select Third Party Administrator and control Claimscontrol Claims

• Ability to negotiate annually with Reinsurers and Ability to negotiate annually with Reinsurers and take advantage of good loss yearstake advantage of good loss years

• Ability to work closely with a single Insured baseAbility to work closely with a single Insured base• Ability for physicians to personally benefit Ability for physicians to personally benefit

financially from any surplus in Capital or Reservesfinancially from any surplus in Capital or Reserves• Ability to control own destinyAbility to control own destiny• Ability to set premiums based on Actuarial Ability to set premiums based on Actuarial

AnalysisAnalysis

Why Form A Risk Retention Why Form A Risk Retention Group?Group?

• Inability to obtain Insurance from an Insurance Inability to obtain Insurance from an Insurance CompanyCompany

• Desire to manage Claims and Risk ManagementDesire to manage Claims and Risk Management• Desire to keep low to average risk Physicians out Desire to keep low to average risk Physicians out

of High Risk Poolof High Risk Pool• Desire to formulate appropriate Premiums and Desire to formulate appropriate Premiums and

Reserves based on Actuarial AnalysisReserves based on Actuarial Analysis• Desire to control own destinyDesire to control own destiny• No other viable alternativeNo other viable alternative

Funding a TailFunding a Tail

Puts money in a reserve fund each Puts money in a reserve fund each year as determined by Actuaries so if year as determined by Actuaries so if

the Group ceases to do business, the Group ceases to do business, there will be enough money in the there will be enough money in the

fund for the RRG to issue Tail fund for the RRG to issue Tail coverage. coverage.

CoverageCoverage

Market Insurance vs. Risk Retention GroupsMarket Insurance vs. Risk Retention Groups• Occurrence PolicyOccurrence Policy• $1.3/3.9M Limits of $1.3/3.9M Limits of

InsuranceInsurance• Free Excess of $1.0M Free Excess of $1.0M

pursuant to Section 18pursuant to Section 18• Access to NY State Access to NY State

Guaranty FundGuaranty Fund• Tail Coverage Guaranteed Tail Coverage Guaranteed

by Solvency of Insurerby Solvency of Insurer

• Claims Made PolicyClaims Made Policy• $1/3M Limits of Insurance$1/3M Limits of Insurance• No Free State ExcessNo Free State Excess• No Access to NY State No Access to NY State

Guaranty FundGuaranty Fund• Appropriate Funding Appropriate Funding

necessary to Guarantee necessary to Guarantee TailTail



Actuarial PerspectiveActuarial PerspectiveSECTION 3SECTION 3

John Herzfeld

Recent Pricing / Reserving Recent Pricing / Reserving ChangesChanges

• Recent rate changes for large commercial insurers

• Recent reserve movements

(from Schedule P)

Solvency Ratio TrendsSolvency Ratio Trends

• Premium to Surplus Ratios Definition and meaning Commercial insurers Captives

• Reserves to Surplus Ratios Definition and meaning Commercial insurers Captives

Recent Pricing ChangesRecent Pricing Changes• Medical Liability Monitor SurveyMedical Liability Monitor Survey• Rates leveling off Rates leveling off • Early signs of softening marketEarly signs of softening market

Non Compensation Fund - 2005 Rate Changes

0

50

100

150

200

250

300

350

400

>10%decrease

0.1% to 10%decrease

no change 0.1% to 10%increase

10% to 25%increase

25% to 50%increase

50% to 70%increase

70% to 100%increase

Nu

mb

er

of

Co

mp

an

ies

Non Compensation Fund - 2006 Rate Changes

0

50

100

150

200

250

300

350

400

over 30%decrease

20% to 30%decrease

10% to 20%decrease

0.1% to 10%decrease

no change 0.1% to 10%increase

10% to 25%increase

25% to 50%increase

50% to 70%increase

70% to 100%increase

Nu

mb

er o

f C

om

pan

ies

Recent Reserving ChangesRecent Reserving Changes

2005 Schedule P2005 Schedule P Industry AggregateIndustry Aggregate Downward development of net incurred losses Downward development of net incurred losses

for both one-year and two-year periodsfor both one-year and two-year periodsSCHEDULE P - PART 2F - SECTION 2 - MEDICAL MALPRACTICE - CLAIMS-MADE

Years inWhich LossesWere Incurred ….. 2003 2004 2005

Prior 6,691 6,665 6,662 (3) (28)1996 3,501 3,478 3,448 (30) (53)1997 3,965 3,954 3,929 (25) (36)1998 4,402 4,353 4,413 60 111999 4,305 4,326 4,395 69 912000 4,601 4,542 4,549 6 (53)2001 5,077 5,182 5,219 37 1422002 5,149 5,253 5,318 65 1692003 5,380 5,230 4,993 (237) (387)2004 5,470 5,168 (303) xxxx2005 5,460 xxxx xxxxTotals (361) (144)

Incurred Net Loss and Loss Expenses Reported at Year End ($Millions)

Two Year Development

One Year Development

Solvency Ratio TrendsSolvency Ratio Trends

• Premium to Surplus RatioPremium to Surplus Ratio Net Written Premium / SurplusNet Written Premium / Surplus

CommercialCommercial InsurersInsurers CaptivesCaptives

2005: 2005: 0.84 0.84 0.92 0.92 2004: 2004: 0.86 0.86 0.89 0.89

• Reserves to Surplus RatioReserves to Surplus Ratio Net Loss Reserves / SurplusNet Loss Reserves / Surplus

CommercialCommercial InsurersInsurers CaptivesCaptives

2005: 2005: 2.85 2.85 1.45 1.45 2004: 2004: 2.88 2.88 1.26 1.26

Feasibility StudiesFeasibility Studies

What’s in a Feasibility Study?What’s in a Feasibility Study? Proposed Structure/CoveragesProposed Structure/Coverages

• Captive type, ownership, domicileCaptive type, ownership, domicile• CapitalizationCapitalization• Lines of business, limits, retentionsLines of business, limits, retentions• Fronting, reinsuranceFronting, reinsurance

Pro forma Financial ProjectionsPro forma Financial Projections• Expected and adverse scenariosExpected and adverse scenarios• Losses, expenses, premiumsLosses, expenses, premiums• Capital and solvency ratios Capital and solvency ratios

Feasibility Studies (cont.)Feasibility Studies (cont.)

How is it used? Included in captive application

• Regulators use to assess application

Potential owners and/or participants• Use to investigate various options

(coverages, retentions, domiciles, etc)

When is it needed?• For the captive application• Earlier if being used to investigate various

options surrounding captive formation

Feasibility Studies (cont.)Feasibility Studies (cont.)

Who prepares?Who prepares? ActuaryActuary Captive ManagerCaptive Manager BrokerBroker



Captive ManagementCaptive ManagementSECTION 4SECTION 4

Jeff Kenneson

25 Years of Captives25 Years of Captives

• Single Parent Captives to Single Parent Captives to Risk Retention GroupsRisk Retention Groups

• Corporations to ReciprocalsCorporations to Reciprocals

• LLC’s & Not-For-ProfitsLLC’s & Not-For-Profits

• Wealth Management VehicleWealth Management Vehicle

Insurance Reasons For Insurance Reasons For FormationsFormations

• Carriers leaving the marketCarriers leaving the market Voluntarily – St. Paul Insurance Co.Voluntarily – St. Paul Insurance Co. InsolvenciesInsolvencies Pricing/retention levelsPricing/retention levels

• Stacking of collateralStacking of collateral

• Perceived heavy profit taking by Perceived heavy profit taking by traditional carrierstraditional carriers

Regulators – Friend or Foe?Regulators – Friend or Foe?

• Captive section – friendCaptive section – friendTraditional section – foeTraditional section – foe

• Risk Retention Act of 1986Risk Retention Act of 1986

• National Association of Insurance National Association of Insurance Commissioners (NAIC)Commissioners (NAIC)

• Competitive domicile atmosphereCompetitive domicile atmosphere

Ongoing Issues – Ongoing Issues – What To ExpectWhat To Expect

• Sarbanes OxleySarbanes Oxley

• Government Accounting Office Government Accounting Office reportreport

• New DomicilesNew Domiciles



Reinsurance UpdateReinsurance UpdateSECTION 5SECTION 5

Simon HudsonSimon Hudson

A Meeting Of The MindsA Meeting Of The Minds

• Reinsurance availabilityReinsurance availability

• Matching the captive to Matching the captive to suitable reinsurerssuitable reinsurers

• The intermediary provides optionsThe intermediary provides options

• Recent physician captive success Recent physician captive success storystory

• Building the partnershipBuilding the partnership

Reinsurance Market Reinsurance Market AvailabilityAvailability

Availability depends on whether the market is hard or soft Reinsurance has always been available The cost of reinsurance capital varies

Matching The Captive To Matching The Captive To Suitable ReinsurersSuitable Reinsurers

• Some captives: know what they wantSome captives: know what they want Determined their risk appetite; have a plan in placeDetermined their risk appetite; have a plan in place

• Others: need step-by-step helpOthers: need step-by-step help Not all reinsurers prepared to do thisNot all reinsurers prepared to do this Specific reinsurers specialize in this sort Specific reinsurers specialize in this sort

of relationshipof relationship

• Key considerations for the captiveKey considerations for the captive Limits requiredLimits required Risk appetiteRisk appetite Multiple reinsurance options availableMultiple reinsurance options available

The Intermediary Provides The Intermediary Provides OptionsOptions

Help the captive understand all Help the captive understand all the optionsthe options Flat rateFlat rate Swing-rated dealsSwing-rated deals Commutation-type dealsCommutation-type deals Profit commissionsProfit commissions Cede commission dealsCede commission deals Excess cessionsExcess cessions Excess of lossExcess of loss

Success Story: Building A Success Story: Building A PartnershipPartnership

• How one health care captive benefited from an innovative reinsurance program

• Formed at peak of hard re/insurance markets in 2003 Feeling the pain of rate increases

• Physicians familiar with one another’s practices• Committed, cohesive group• Completed full 12-month feasibility study prior

to start of underwriting

The Limits RequiredThe Limits Required

First step:First step:• Select retention Select retention

at $200,000at $200,000

Building a partnershipBuilding a partnership

Retention$200K


Provide for Provide for standard limits:standard limits:

• $1M per claim, $3M $1M per claim, $3M policy aggregatepolicy aggregate

• Extended reportingExtended reporting

• Broad coverageBroad coverage


$800K XS $200K

Retention

$1M

$200K


Excess of loss:Excess of loss:• Larger groups, Larger groups,

higher specialty higher specialty docs needed docs needed $3M limits$3M limits

• Cede to captive Cede to captive of 12.5%of 12.5%


$2M XS $1M

$800K XS $200K

Retention

$3M

$1M

$200K

Reinsurance StructureReinsurance Structure

Traditional “flat” rated program

• Subject premium: $5 million

• 50% rate – no up or down adjustment

• Premiums to be charged: First year $2.5 million Second year $2.5 million


Reinsurance StructureReinsurance Structure

““Swing” rated program – loss scenariosSwing” rated program – loss scenarios

• Losses at 15% or less (minimum rate)Losses at 15% or less (minimum rate) Total premium paid: $750,000Total premium paid: $750,000 $1.25 million returned to the captive$1.25 million returned to the captive

• Losses at 40% (provisional rate)Losses at 40% (provisional rate) Total premium paid: $2 millionTotal premium paid: $2 million No return to the captiveNo return to the captive

• Losses at 55% or higherLosses at 55% or higher Total premium paid: $2.75 million, plus $750,000 Total premium paid: $2.75 million, plus $750,000

paid to reinsurerspaid to reinsurers


Swing Rated Program: Swing Rated Program: The ResultsThe Results

Reinsurance premium calculation for the Reinsurance premium calculation for the captive’s loss experience/premiums:captive’s loss experience/premiums:

20032003 2007 Adjusted2007 Adjusted

Flat rateFlat rate

Swing rateSwing rate

$2,500,000$2,500,000 $2,500,000$2,500,000

$2,000,000$2,000,000 $1,550,000$1,550,000

Savings for Savings for captive ownerscaptive owners

$950,000$950,000


RecommendationsRecommendations

Reinsurance broker’s primary role:• Demonstrate all reinsurance options• Seek the right business partners• Strong technical credentials• Honest and straightforward• Explore, discuss every detail• The right option can reward good

experience


Documents

2007 Medical Professional Liability Symposium Chicago, Illinois ~ March 13 & 14, 2007 Healthcare Captives Looking In The Crystal Ball