In a recent article from a national respected insurance broker, I read about the demise of specific and lightly-financed Insurance Solutions for Medical Professional Liability, referred to as risk retention groups.
Full disclosure: we believe there is a place for risk retention groups in the market. Just because one of them does not make it and has to be rescued, or the policy holders have to leave them, it does not mean that all coverage is lost and all claims are exposed, resulting in the insured Physicians losing personal assets. That would only happen in the event of an open and pending claim, or if a new insurance company was unwilling to write retroactive coverage.
I believe that the reason for the article is that there are inherent risks in choosing a company that has not been proven financially strong and is independently rated as such.
A risk retention group looks and functions similarly to an insurance company that follows insurance laws of at least one state: the state of domicile. When first joining a risk retention group, the doctor typically pays an additional capital contribution that is spread out over a few years.
There is a large organization in California with over 10,000 policyholders that is financially strong, but, importantly, it is not an insurance company! The California-based fund is not governed by the rules regulating minimum capital surplus and reserves in order to respond to unreported and unforeseen claims. This is a risky business: medical malpractice insurance involves “long-tail specialties.”
Even in the short-tail predictable Specialties like acute care and anesthesia, there is a two- to three-year delay between the time the incident occurs and the check settling the claim is written. This delay accounts for the dynamic of incurred but not yet reported losses, and the fact that they’re not yet paid makes the financial challenge of running an insurance company so complicated. This delay is why companies like NorCal, The Doctors Company, Medical Protective—A-rated carriers—have managed this risk in this space for so long so well. They carefully watch their surplus and reserves.
A risk retention group, by contrast, is governed by the regulations of the state in which it is domiciled. If it is appropriately capitalized it can be a viable alternative, and that’s why we believe in them for specific medical practices. These companies generally have flexible underwriting rules and they turn around policies quickly. In some cases, risk retention groups are the only solution that allows physicians to provide the necessary certificates required of credentialing bodies.
Risk retention groups must file annual financial statements with the chartering state doctors, and then purchase insurance after careful underwriting regarding the financial capitalization. Some states do not carry the same scrutiny or standards, so it’s possible for risk retention groups to be lightly capitalized, and in the final days they may begin charging inappropriately expensive premiums to make up for the shortfall. Insolvencies can impair all the insured’s coverage, leaving you exposed if there is a pending claim.
In an article titled RRG Physicians: It’s Time To Make The Move, Ethos Insurance President David Huss argues that in these times, which he correctly observes are marked by tightening underwriting standards and gradually increasing premiums, it is predicted that the end of the soft market (which lasted a full decade) is near. In plain English, this means that physicians’ facilities and healthcare organizations have to budget for slight single-digit percentage increases in their premiums.
For ten years, companies have actually reduced premiums, while the cost of defending claims and settlement increases. Insurance carriers are budgeting accordingly, preparing to pay more claims as the number of claims per 100 doctors, as well as the average cost of settling those claims, increases. It is time for physicians currently insured by RRGs to move their med-mal coverage either to admitted companies or E&S programs. In the past year, three physician-focused RRGs have gone under: Fairway, Lancet and Oceanus. More will undoubtedly follow.
The article goes on to predict another development as well: underwriters will no longer extend prior acts over these risk retention groups.
Now is the time to consider if a standard, fully regulated insurance carrier is a better fit. While these companies previously might have declined, they may now be willing to underwrite and provide a more secure financial solution to manage your risk.
It may make sense to move your medical malpractice insurance coverage to large, financially stable insurance companies. The Doctors Insurance Agency is available to work with you to find alternative stable solutions for your health care organization, physician mid-level or facility insurance challenges.