Nontraditional malpractice insurance

September 15, 2008

Malpractice insurance: Experts give pros and cons of alternatives to traditional liability insurance: risk retention groups and captives.

Are ob/gyns being held captive by the traditional medical malpractice insurance market-place? The Medical Liability Monitor's annual rate survey analyzes premium rates state-by-state, comparing them for three physician specialties; internal medicine, general surgery, and ob/gyn. It shouldn't surprise you that, with very few exceptions, ob/gyn rates are the highest in each state.

Another key trend in the 2007 rate survey is that most of the states (New York being a noted exception) show flat-to-slightly lower renewal rates (2007 vs. 2006). This is in sharp contrast to the double- and sometime triple-digit rate increases earlier this decade that forced some physicians out of the profession and others to practice with no or minimal insurance.

History has proven time and time again that the current market/rate stabilization will eventually give way to deteriorating underwriting profits and thus earnings instability. Other factors could accelerate the return to an unstable insurance market: low interest rates, underperforming investment portfolios, and overall uncertainty in the economy. One of the key objectives of structuring an alternative risk management and funding program is to gain greater control over and knowledge of the elements that impact the insurance program's profitability and to stabilize rates.

How traditional insurance works

Traditionally, hospitals and medical professionals purchase medical liability insurance from commercial insurance carriers. They remit premiums to a carrier in exchange for the carrier's promise to pay claims on the provider's behalf should an incident occur. If there are no claims or claims frequency and severity remain low, the medical professionals seldom share in the profits generated from their so-called "positive loss experience," i.e., their better claims history. At best, they may get a credit towards next year's premium, but seldom is it based solely on the good claims record of the individual physician or the group they're associated with.

In contrast, premiums will typically climb whenever individual or group claims become more frequent and severe. Furthermore, premiums may rise, despite their own good loss history, based on the experience of the insurance industry as a whole. And even more so based on the industry's experience in their respective states. This is because the carriers need to charge everyone more to compensate for a few insured clinicians who have below average claim histories, meaning they have more claims than the industry average for their specialties. Thus, the system inadvertently penalizes medical professionals who have better claims histories.

In addition, the states regulate insurance rates for commercial insurance carriers. Some states have attempted to keep medical liability insurance premiums artificially low to avoid burdening medical professionals. But over the years, the volume and severity of claims skyrocketed, driving many carriers out of business and keeping others teetering on the brink of financial insolvency. Low interest rates and less investment income added to the financial problems of certain carriers. Medical liability claims have slowed down over the past 18 months, but loss severity continues to rise. All these issues will continue to affect the cyclical nature of the insurance industry and thus the frustration levels of ob/gyns and other clinicians.

How alternatives work

Fortunately, there are alternatives. Chief among them are: self insurance trusts (which are not insurance companies), and captives and risk retention groups (RRGs).

Self insurance trusts. These are trusts a parent company sets up through which it maintains loss reserves. The premium payments that payers' make into the trust are not tax deductible.

Captives. These are wholly owned subsidiaries established to underwrite some of the risks of their parents, subsidiaries, or customers. Captives have a single parent/owner and their regulations vary from state to state.

Risk retention groups. RRGs are insuring entities that can be set up under the 1986 Federal Risk Retention Act. An RRG, which is a form of captive, must be a group with similar exposures and located in the United States. But the Federal Act supersedes state regulations.