Federal Insurance Legislation—Can It Help Me?

Sara Carpenter, CPA
CFO, Doctors & Surgeons National Risk Retention Group, Lawrenceville, GA

Why Federal Insurance Regulation?

Normally, insurance companies are regulated by the states. As a result there are hundreds of statutes and rules affecting companies that operate in multiple states. The National Association of Insurance Commissioners (NAIC) issues guidance to standardize insurance laws, but states are not required to follow its recommendations. As might be expected this results in increased costs as companies design multiple products to comply with diverse and sometimes conflicting state regulations and formalities.

For the most part the Federal Government has not interfered in state insurance laws, leaving the regulation of the industry to state regulators. Non interference has worked adequately during soft markets in which insurance is easy to find.

Impact of a “hard market”

During “hard” markets in which insurance coverage is difficult to obtain, the federal government has stepped in to allow an insurance company to operate in many states as long as one state agrees to license the company and be its primary regulator. The last time this occurred was in the mid 1980s when Congress was besieged by requests from industry and local governments who were unable to find affordable liability insurance. When Independent truckers circled Congress to demonstrate their discontent, Congress finally took action that changed the liability insurance industry irrevocably.

The last hard market in medical malpractice insurance happened in 2001 when St. Paul suddenly decided to stop offering insurance to doctors. The company found that premiums were not covering claim costs and they were losing money. Thus thousands of doctors insured with St. Paul found themselves without liability insurance.

Here are some examples of Federal insurance legislation passed during hard markets:

1981 Product Liability Risk Retention Act.

This Act was passed to expand the market for product liability insurance, which is issued to manufacturers to protect against product defects.

1986 Liability Risk Retention Act. (LRRA)

The 1981 Act was amended to expand the market for professional liability insurance, but it excluded workers’ compensation, homeowners and auto insurance. Under the Act, risk retention groups that met certain licensing requirements of one state could operate nationwide, exempt from any other states’ requirements. The Act allowed groups with similar risks to form risk retention and risk purchasing groups.

The risk retention group must also be owned by its insureds. Membership in the risk retention group is limited to persons engaged in similar businesses or activities with similar liabilities. The Act requires a risk retention group to prepare a feasibility study or plan of operation detailing coverage, deductibles, limits, rates, and rating classification systems for each line of insurance the group intends to offer. The feasibility study or plan of operation must be filed with the group's licensing state and with every state in which the group intends to operate.

Likewise, the Act requires risk retention groups to file annual financial statements with its licensing state and all other states in which it operates. Financial data submitted by the risk retention group must be certified by an independent public accountant and must include a statement of opinion on loss and loss adjustment expense reserves made by a member of the American Academy of Actuaries or a qualified loss reserve specialist.

In summary the Act requires the insured members to be in a similar industry (examples are doctors, attorneys and other professionals) and to be the owners of the risk retention group either through direct stock purchases in the group, or membership/ ownership in an association or corporation that owns the risk retention group and whose sole purpose is to provide insurance to its owner members exclusively.

1983 Multiple Employer Welfare Arrangements (MEWA) under the Employee Retirement Income Security Act (ERISA)

A MEWA provides employee health insurance and other benefits to members of an association that are linked by a common thread like employment or profession.

Resolving federal versus state conflicts

Federal laws have not been welcomed by state insurance regulators, who are understandably uneasy about companies over which they have no regulatory power. Over the years the companies that are formed under federal statutes have found operating in multiple states requires cooperation with state regulators. Companies that take this route have, for the most part, been successful. These companies follow sound insurance principles approved by the NAIC. These sound principles include partnering with “A” rated reinsurers, selecting well known actuarial firms with experience in their line of business, and hiring experienced and respected management teams. Companies regarded favorably by rating agencies like Demotech (the primary rating agency for Risk Retention Groups) are also well received.

How can these federally regulated companies help doctors?

The Federal Risk Retention Act and its amendments have dramatically increased the availability of insurance. As a result, doctors have lots of choices when deciding from whom to buy their insurance.

The problem with more choices, of course, is more potential for confusion. The choices include:

• Publicly traded insurance companies, such as Medical Protective and The Doctors Company
• Doctor-owned insurance companies usually run by the State Medical Associations, these includes companies like MAG Mutual in Georgia and PMSLIC in Pennsylvania. Some of the doctor owned companies are being acquired by publicly traded companies like The Doctors Company.
• Risk retention groups owned by the insureds, such as Doctors & Surgeons National Risk Retention Group
• JUAs- joint underwriting associations formed by states to provide insurance coverage as a last resort.

Risk retention sponsors

A risk retention group is usually formed by a sponsoring organization for a specific purpose. For example, a hospital may offer insurance to its doctors through its own risk retention group. The hospital may pay for or offer the insurance at reduced rates to attract doctors and their patients. Some examples of hospital owned risk retention groups include:

• Controlled Risk Insurance Company of Vermont, A Risk Retention Group, owned by the Risk Management Foundation of the Harvard Medical Institution
• Mountain Laurel Risk Retention Group, owned by Jefferson Hospital System in Pennsylvania

Risk retention groups have also been formed for particular medical specialties. Some examples of companies, which are rated “A” and “A-“ by A.M. Best include:

• Ophthalmic Mutual Insurance Company, A Risk Retention Group
• Preferred Physicians Medical Risk Retention Group (for Anesthesiologists)

Other risk retention groups are broader in scope and offer coverage to many specialties to capitalize on the insurance principles of large numbers and spread of risk. Examples of Demotech “A” rated companies include:

• Oceanus Risk Retention Grou
• Doctors & Surgeons National Risk Retention Group

Why is a rating important?

Rating by an independent third party gives assurance that the company is in a stable financial condition.

What is the difference between all these companies?

Companies vary widely and doctors need to look at more than price.

Here are some examples of issues to watch for:

• If a hospital offers cheap coverage it may be looking to push liability on to the doctors avoiding their responsibility to provide an independent defense.
• An insurance carrier may settle a claim without policy holder consent and then report the results to the NPDB (National Practitioner Data Bank). Doctors do not like receiving letters in the mail informing them of a claim settlement to which they did not agree. These unapproved settlements have damaged many skilled doctors’ reputations.
• The insurance company may offer risk management so insubstantial that it has little impact on the practice and provides less protection.
• The insurance company may not offer additional services like asset preservation plans, which can be of great value in providing a litigation proof defensive shield.

What are the strengths of risk retention groups?

Risk retention groups have practicing physicians on their boards that are uniquely positioned to understand the problems doctors face. Some risk retention groups have risk management programs that make real differences in preventing and containing lawsuits. A select few offer a “white-glove” service that includes free wide ranging legal advice and CMEs.

Some risk retention groups aggressively defend their doctors to discourage predatory litigation. A medical malpractice lawsuit is usually filed by a plaintiff attorney hired on contingency. This means the plaintiff lawyer only gets paid when he has a favorable settlement (favorable to the attorney and his client). Plaintiff attorneys may take from 25 to 50% of the settlement. Thus plaintiff attorneys are eager to file lawsuits when insurance is involved because they know the company represents the “deep pocket” that will pay the claim.

Some companies manuscript polices for unique circumstances. (e.g. multiple locations, non clinical staff etc.)

Doctors insured by risk retention groups can benefit through distributions and/or lower premiums when the group is profitable.

What are the weaknesses of risk retention groups?

Risk retention groups may be smaller than conventional insurance companies, which may have stronger balance sheets. Risk retention groups partner with “A” rated reinsurers to address this issue.

Risk retention groups are not covered by state guarantee funds in the event of insolvency. “A” rated reinsurance addresses this problem.

How can risk retention groups protect doctors from litigation?

Risk retention groups work to make sure that doctors are protected from the major causes of lawsuits, which may typically arise from lack of informed consent and failure to diagnose a condition.

For example, the patient may allege that the doctor did not fully disclose the risks of treatment. This issue may be overcome with a strong informed consent form and procedure designed by the risk retention group.

The failure-to-diagnose allegation may be overcome with strong documentation procedures designed by experienced risk retention group physicians in similar clinical fields.

Should you consider a risk retention group for your insurance?

Risk retention groups are no longer the new kids on the block. The industry has a twenty-five year history and merits consideration.

A risk retention group should meet your specific needs. Make sure you choose a company that understands your specialty and has strong risk management and asset preservation programs that protect you personally and professionally. Then you will be able concentrate on practicing medicine without fear of reprisal.

Sara Carpenter, CPA, has been involved in physician and hospital owned medical malpractice and health insurance companies for over twenty five years. Sara worked with Deloitte and Touche as a small business consultant. She owns her own consulting company which advises doctors and hospitals on insurance matters. An expert in insurance company financial management, Sara works with the Finance and Audit Committees of various insurance companies to insure sound financial management, including the selection of appropriate investments and the analyzing and procuring of “A” rated reinsurance. Sara has a Masters in Professional Accountancy from Georgia State University and is a Certified Public Accountant licensed in Georgia and North Carolina.