ART AND SCIENCE Plus Medical PL Symposium March 11-12, 2003 Regis Coccia, Managing Editor Business Insurance Ed Wrobel, Tillinghast-Towers Perrin Julie

ART AND SCIENCE

Plus Medical PL SymposiumMarch 11-12, 2003

Regis Coccia, Managing Editor Business InsuranceEd Wrobel, Tillinghast-Towers Perrin

Julie E. Robertson, Honigman Miller Schwartz and Cohn LLPPaul Longman, Employers Re

Seamus Tivnan, Marsh Cayman Islands

ART AND SCIENCE


Ed WrobelTillinghast-Towers Perrin

phone: (860) 843 7022 fax: (860) 843 7001email: [email protected]

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Why ART?The Buyers’ Perspective

• $1B+ in premium needs to find a home– (St Paul, PHICO, MIIX, Reliance, Reciprocal of

America….)

• Substantial increases in rate and retention• Limitations in coverage• Non-renewals

=> Significantly greater risk retention required of smaller entities

=> Formalization of risk retention vehicle

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The Buyers’ Perspective

“Our loss experience is better than average - we’re being painted with a broad brush”

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The Actuarial Perspective

“Our loss experience is better than average - we’re being painted with a broad brush”

– – Really?

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• The captive feasibility study– Actuarial / financial analysis– Legal / regulatory / tax issues– Coverage / structure – Reinsurance

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• Key Issues in the Current Environment– Critical Mass

• Economically feasible to absorb frictional costs • Stability / predictability of loss costs

– Capital/surplus• Adequacy for smaller entities

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Margin/Surplus LevelsMean Value

Probability

$

90% ConfidenceLevel

Margin

$5M $8M

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Margin/Surplus LevelsMean Value

Probability

$

90% ConfidenceLevel

$300K $1M

Margin

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• Key Issues in the Current Environment– Credibility of data

• Consistency: changing carriers• Case reserve adequacy / strengthening• Reliance on industry information

– Impact of trends, legislative changes– Source / mechanism for funding in the event of

adverse experience– Affordability

ART AND SCIENCE


Julie E. RobertsonHonigman Miller Schwartz and Cohn LLP

(313) [email protected]

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Historically, few physician captives because:

Characteristics of physician practices: No retained earnings/no available capital No “institutional mindset No long term view of insurance

No experience with risk retention Poor access to loss history/data Tail coverage issues Premium deductibility issues

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“Oh, the times they are a changing”

Different practice models: National provider groups Bigger local groups Employing business/financial professionals Retained earnings and investments

More opportunity for premium deductibility Insurance market, insurance market, insurance

market!

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Premium Deductibility

June 2001 Rev Proc./Dec 2002 Rulings Abandonment of “economic family doctrine” 2002-89: Single parent captive/90% risk parent/10% risk

3rd parties = No Insurance But 50% risk parent/50% risk 3rd parties = Insurance

2002-90: Single parent captive/12 subsidiaries = Insurance

2002-91: group captive; no one insured more than 15% stock/15% risk = Insurance

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Premium Deductibility

Rev Proc 2002-75: IRS will now begin issuing private letter rulings regarding tax treatment of captive insurance arrangements

Highly factual; likely expensive and time consuming process

If you have to ask . . .

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Federal Excise Tax and Reinsurance Transactions

4% direct premium/1% reinsurance premium Not applicable if captive makes a 953(d)

election

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Premium Deductibility and Security Requirements

Must have “risk” to have insurance Security requirements equal to aggregate

limits can undermine deductibility

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Why Do Physicians Choose a Fronted Program?

State may require purchase of insurance from approved carriers or for fund participation Example: Pennsylvania/medical malpractice insurance

State regulatory environment or attitude may affect decision

State Department of Insurance may view direct issue captive as transacting insurance within state and attempt to regulate it

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Why Do Physicians Choose a Fronted Program?

Third party insureds may feel more comfortable with commercial policy

Insureds may be required to maintain insurance from rated carrier or approved carrier under Bond/debt/credit facility covenants Medical staff bylaws Managed care contracts Other contracts

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HIPAA Privacy Rules

Health Care Providers must ensure the privacy of protected health information shared with their business associates

Impact on fronted captive programs Policy endorsements and required elements Passing the information “down the chain” Can information be redacted?

ART AND SCIENCE


Paul LongmanEmail : [email protected]

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Art & Science - A Reinsurer’s Perspective

By definition, ART Customer is:

Seeking options to conventional insurance and/or 100% risk transfer

Wishes to retain a “predictable” level of risk Seeks to transfer “unpredictable” level of risk: per

occurrence or aggregate Reinsurer usually provides excess coverage

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What we look for……. “Size Matters!”

Single entity or strong affiliation/relationship between members

Commitment to long term risk financing solution Desire and ability to retain an appropriate level of

loss Strong financials

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What we look for……. “Size Matters!”

Commitment and resources to Risk Management/Loss Prevention Program

Creditable historical loss data Competent claims handling via in-house staff or TPA. Clear/unambiguous coverage forms - “clear

understanding of what is covered”

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What we look for……. “Size Matters!” Actuarial Projection of expected losses Acceptable funding mechanism for expected

losses

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Captive documentation Business Plan Articles of Incorporation/Articles of Assoc.. Bylaws Verification of Capitalization Certificate of Incorporation Certified copy of Certificate of Authority (USA) or

Certificate of Registration (offshore)

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Comments on fronting: Rating and viability of front is crucial

Universe of willing fronting companies has shrunk

Front fees vary significantly - policy issuance and required servicing are major factors. Servicing can be done by customer, broker, fronting co. or others

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Comments on fronting: Risk ceded back to customer from fronting co. or

reinsurer usually must be fully collateralized

*some companies require collateralization = to the full aggregate exposure

*others will require collateralization = to expected losses + a provision for adverse development

*acceptable collateralization: ever-green LOC or trust agreement

ART AND SCIENCE


Seamus TivnanMarsh Management Services Cayman Ltd.

Tel 345 949 7988 Fax 345 949 7849Email [email protected]

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Art & ScienceCaptive Options

Risk Retention Group Reciprocal Captive Insurer

Pure Group / Association Segregated Cell

Domiciles United States Offshore

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Art & ScienceWhy Cayman?

Largest Domicile in the World for Healthcare 199 healthcare captives with $1B in premium and

$4.3B in assets First Class Infrastructure Proven Reputation Accessibility Doing Business in Cayman

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Art & ScienceSo you think you want a captive?

Why? Affordability Availability Accessibility

Or

Attract ability

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Art & ScienceSo you think you want a captive?

Minimum Size Premium, capital

Costs To consider, establish and operate

Administration Home office, plus Director and Officer obligations

Long term commitment

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Art & ScienceSo you still want a captive?

The Regulator – that’s the easy part Fronting

Do you need it? Can you find it or even afford it?

Reinsurance Do you need it? Can you find it or even afford it?

Funding It may be more expensive Pay more premium or more capital?

Taxation ‘Exists’ in all domiciles

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Art & SciencePhysician Groups – Why they do not start and why they fail?

Tax Deductibility & Structure Strength in numbers Segregated Cell Approach Funding – be it premium or capital Funding – retro element, good or bad? Fronting Commitment – to begin and continue Old programs struggle as members leave

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Art & ScienceCaptive Go Ahead

Timing Select domicile Select partners – actuary, attorney, auditor, banker,

manager, tpa Select Board of Directors File Application – with fee Capitalize Company and hold first meeting

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Thank You

?

Documents

ART AND SCIENCE Plus Medical PL Symposium March 11-12, 2003 Regis Coccia, Managing Editor Business Insurance Ed Wrobel, Tillinghast-Towers Perrin Julie