Risk Retention Group Use Soars

Burlington, Vt.

The use of risk retention groups is surging, driven by ascarcity of fronting companies and high captive insurer prices,according to an executive with a captive management firm.

Formation of RRGs is at “an all time high,” said Gary H.Osborne, senior vice president with USA Risk Group in Montpelier,Vt., during an interview at the Vermont Captive InsuranceAssociations annual conference here.

He said that his companys managers have noticed the increase inrisk retention groups in Vermont, Bermuda and South Carolina, butthat the expansion is more apparent in some domiciles thanothers.

South Carolina, Mr. Osborne said, has overtaken Hawaii as acenter for RRGs. (According to A.M. Bests Captive Center OnlineDirectory, South Carolina has 19 RRGs.)

USA Risk Group announced that the Saint Lukes Health System RRG,which it manages, was licensed in South Carolina on July 31.

Vermont, the largest U.S. domicile, is a place “where you canstill do RRGs,” but he explained that some of the newer domiciles,such as Montana, Arizona and South Carolina, are ideal for somesmaller groups because they dont require as much capitalization asVermont,

Mr. Osborne said the domiciles have learned to be thorough intheir investigations. Early on, according to Mr. Osborne, SouthCarolina had licensed an RRG “that was a mistake.”

As a result, he said, most new domiciles are savvier, requiringmore than just a business plan. “They want to look at the NationalAssociation of Insurance Commissioners rules.” But mostimportantly, “theyre willing to work with you.”

South Carolina, he noted, has long since proved itself as areputable domicile, so much so that USA Risk Group now has anoffice in Charleston, S.C.

One of the reasons organizations are forming RRGs, he said, isthe lack of fronting companies and the higher cost of fronting. Theother driver, he said, is “complete lack of availability, similarto the way it was in the 80s.”

Doctors groups, certain trucking classes and nursing homes have“no coverage options, while RRGs have created an option,” hesaid.

In Vermont, Leonard Crouse, Vermont deputy commissioner ofcaptive insurance for the Vermont Department of Banking, Securities& Health Care Administration, sees different trends.

After a spate of medical malpractice captives and risk retentiongroups formed last year, the trend is once again “back to basics,”Mr. Crouse said. He added that more pure captives are being formedfor general liability, auto liability and workers compensationcoverages.

Still, Mr. Osborne highlighted some market conditions that hesays are conducive to alternative risk transfer solutions formedical malpractice. He related that some doctors groups havereported paying coverage as high as “$100,000 for an obstetrician.For 60 doctors that would be $6 million, and that group has neverhad more than $1.5 million in claims in a year.”

State law in Florida, he added, only requires $250,000 peroccurrence and $750,000 annual aggregate. He noted that seven oreight claimswhat you might typically see for 60 doctorswould amountto $1.5-$2 million.

A group paying $60,000 per doctor still amounts to “a veryviable program,” he said. Whats more, some of these groups “arebecoming completely self-insured” because of the expense andscarcity of reinsurance.

By being an RRG, he concluded, the “fronting need goes away andthey are still meeting the requirement that the company providingthe coverage is authorized to do business in the state.”

Mr. Osborne said that USA Risks client, Saint Lukes Hospital inKansas City, Mo., found that pricing for coverage continued torise, even though the number of claims stayed the same.

The hospital managers had an active loss control and safetyprogram and felt “it was time to take matters into their own handsbecause the marketplace was not giving them any credit for theirefforts,” he said.

The company formed an RRG and domiciled in South Carolina. Henoted that Kansas, which the hospital also serves, has a state fundthat “kicks in over $200,000.” So the group is retaining the first$200,000 in Kansas.

To cover its Missouri risk, the group purchased malpracticecoverage for occurrences of more than $250,000, with a $1 millionlimit, he noted.

“They chose South Carolina because they got a warm receptionthere,” he said. South Carolina proved to be “quite keen to take onrisk retention groups for medical groups,” and the location isconvenient.

Clayton Ingram, director of business development, alternativerisk transfer services for the South Carolina Department ofInsurance, said the three-year-old domicile, which licensed 32captives in 2002, so far has licensed 20 “good, solid captives” in2003. (Mr. Ingrams figures include RRGs.)

In Vermont, Mr. Crouse reported that 43 captives have beenformed and that 11 applications are pending, which he characterizedsaying they are “as good as gold.” According to his figures, lastyear the total number of Vermont-based captive insurers was 70. Thetotal number of captives licensed in Vermont is 640.

Mr. Crouse said the captive department has hired two newexaminers, bringing the total to 20 on staff.

“Most states contract out examiners,” according to Derek White,director of captive insurance. “Having the examiners on staff meansmore efficiency and less expense for new captives.”

He said it typically takes two staff members week to process anew captive in Vermont, whereas “anywhere else it might take amonth.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, August 18, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.