Has your office seen its premiums rise eventhough it has a clean claims history? If so,this article should open your eyes to anoption for lowering your premiums andbuilding equity in a separate corporation. Professionalliability premiums are on the increase again. After aprolonged soft market, extending from the late 1980sthrough most of the 1990s, medical malpractice ratesare going up again—by 50% to 100% in some statesand in some medical specialties.
In many cases, the rate increases are long overdue.The average jury verdict award increased 60% from1996 through 1998, to $800,000. These rising costtrends are not simply due to larger awards. Defensecosts (ie, primarily defense attorney fees) doubled duringthe 1990s. Many medical malpractice writers haveseen their combined loss ratios (ie, claims + reserves +expenses .-. premium) climb 125% or more.
Another factor in the hardening market is the random,catastrophic verdict. Jury awards in excess of$1 million jumped from under 100 in 1999 to 150 in2000. These trends have caused some of the majorcommercial underwriters (eg, CNA Insurance Co andSt. Paul Travelers Cos, Inc) to implement increasesthat essentially eliminate themselves as competitivemarkets in many states.
If your group is in a specialty that has been hit hardwith increased premiums or in a state where across-the-board increases have been implemented and yourgroup has good claims experience, you may want toconsider a group captive insurance company (CIC).This is an insurance company in which insurance businessis primarily supplied and controlled by its owners,and in which the original insureds (ie, the physicianpractices) are the principal beneficiaries. Those insuredby a CIC have direct involvement and influence overthe company's major operations.
The main benefits a business enjoys through a CICinclude the following: retaining underwriting profitsand investment gains, and, through selection criteriadeveloped by the captive's own members, creating itsown market. Over a period of time, if captive lossesare controlled and fixed-cost expenses are well managed,a captive member can reduce malpractice costsby a significant percentage.
Group Member Selection
Normally, to attract reinsurance support and leveragegroup purchasing power, a group captive accountneeds to generate $2 million to $5 million in first-dollarpremiums. A few large physician organizations could dothis on their own and even create a single parent captive.
Groups can come together under a variety of scenarios.Some specialty practices have formed networksfor managed care contracting and group purchasing,with a captive insurance vehicle emerging asa natural next step. Other groups may be tied togetherthrough specialty association, geographic location,or even collegiality of their medical or administrativeleadership. Whatever the connection, the group's comfortlevel and identification with each other is a criticalingredient in getting started.
Risk Sharing and Shifting
Many individuals unfamiliar with insurance lingothink of a group captive as another risk pool with adefined layer or retention shared by all members.However, in some captive structures, each memberfunds their actuarially determined risk, thus coveringtheir own group's losses, with minimal risk shifting orsharing. One concern with a true risk pool is that a fewmembers can drive the experience of the whole group inone direction—positive or negative. With individualaccounts within your captive, each group member is primarilyresponsible for their account's own losses.
This leads to individual premium levels within thecontext of the overall captive insurance structure.Let's say each captive group is funding 20%of its primary limit through the captive. Premiums fora high-frequency/severity group will be higher thanthose having few claims. In addition, a group in astate with a patient compensation fund may put amuch smaller proportion of its premium in the captivebecause its retained amount is so low (eg, in Indiana,physicians purchase the first $250,000 from the commercialmarket, and then a patient compensation fundprovides the excess). Whatever the member mix orindividual state characteristics may be, a large malpracticeunderwriter or major reinsurer can assistphysicians in handling those differences within thecontext of their group captive.
Caveats Worth Noting
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While this article offers a peek into the workingsof an increasingly popular malpractice insurancealternative, according to Rosemary M. McAndrew ofMcAndrew Risk Management, Inc, in her article from, there are many captiveinsurance nuances that physicians should note. Forinstance, group captive insurance has many benefits,including the spread of fixed costs among several entities,risk sharing and lower volatility, direct access tothe reinsurance market, and lower operating coststhan a traditional insurer.
However, with these attributes come a few potentialcons. McAndrew notes that the losses of some participantscan cause an increased premium to all participants,and, in the event of unexpectedly high losses,can require a surplus to cover the claims. Also, there isa greater reliance on service providers to make theright management decisions for physician owner-participants.A practice considering a captive should conducta feasibility study to determine whether it isapplicable to its circumstances and needs.
According to A. M. Best Co, Inc, the largest captiveinsurance domiciles are Bermuda, the CaymanIslands, and Vermont. As with all financial tools andbusiness structuring, careful adherence to tax laws iscrucial. Be sure to work with a consultant who isknowledgeable and trustworthy when considering thisbeneficial alternative to expensive, difficult-to-obtaintraditional coverage.
For More Information
To find out more about captive insurance andother malpractice insurance tools, consult with aknowledgeable financial and/or legal advisor. Somehelpful Web sites include www.captiveguru.com andwww.captive.com. The following are a few books foryour malpractice reading pleasure:
•Captives and the Management of Risk ($59.95;International Risk Management Institute; 2002), byKathryn A. Westover, available by calling 800-827-4242 or visiting www.irmi.com.
•Safe Harbors: The Asset Protection Guide forSmall Business Owners ($19.95; Commerce ClearingHouse; 2003), by Nicholas C. Misenti, JD, CPA.
•Insurance and Risk Management Strategies forPhysicians and Advisors: A Strategic Approach($54.95; Jones & Bartlett Publishers; 2004), by DavidE. Marcinko, MD, CFP®, CMP.
is an attorney and author of
"The Doctor's Wealth Preservation Guide."He
has run a medical practice and lectured for many
state and national medical associations. For a free
asset protection, income, and estate tax reduction
CD, or for questions, call 269-469-0537 or e-mail