The story of a successful captive company
When the medical liability situation in Virginia reached crisis proportions 5 years ago—steadily rising premiums with no legislative relief in site—our seven-physician group sought new avenues for insurance. Joining forces with other “high-risk” and high premium physicians, we formed our own captive insurance company.
In doing so, we used captive insurance companies located in Arizona and California that had good track records as models. Initially, we contacted interested physicians and asked each to join a professional association, which required payment of a modest application fee. Membership in the association was required to obtain insurance.
The physicians were well-known to each other and mainly in “high-risk/high-premium” specialties, such as orthopaedic surgery, general surgery, plastic surgery, obstetrics/gynecology, and urology. Each physician had an established track record and few or no medical liability claims.
We chose to base our company in the Cayman Islands, which are home to more than 700 captive insurance companies, with more than $36 billion in total assets. To do business in the Caymans, we needed to use an insurance broker or insurance manager who was domiciled there. The broker establishes the captive insurance company and establishes a relationship with a reinsurance company—in our case, Lloyds of London.
Reinsuring for potential losses
Typically, reinsurance companies operate with minimal overhead and provide stop-loss insurance above a certain minimum. Our captive purchased reinsurance above the $300,000 level. In plain terms, we self-insure for the first $300,000 per case and turn to the reinsurer for any losses above that level.
Many states require captives to meet a significant minimum capital requirement to do business in that state. In Virginia, that minimum capital requirement is $20 million—well beyond our financial commitment.
To overcome that hurdle, many captives work with a “fronting” insurer. This company, for a fee (our fee was 13 percent of total premiums), makes all necessary state filings and issues the required policy using its licenses to do business. It also collects premiums from the insured physicians and, after deducting its fee, forwards the premiums to the actual insurer (the captive). It also issues letters of insurance verification on behalf of the captive. The fronting insurer typically does not carry any risk, because it passes any losses to the captive.
Shifting to an RRG
Because the fronting insurer does not provide liability coverage and is necessary only for regulatory reasons, we are in the process of converting our captive insurance company to a risk retention group (RRG). This will eliminate the fronting fee, enabling all premium dollars to be used for reserves. Our RRG is based in Montana, a state that is particularly accommodating to RRGs.
The Caymans relationship remains unchanged. Each year, we hold an annual meeting in the islands to review the financial status of the captive, establish a budget, and plan for subsequent years.
Our insurance company is bare-bones—no employees, no office space, and no overhead. We do, however, have an experienced malpractice attorney based in our area on retainer. Because the company does not have a claims department, all inquiries go directly to him. Any of the insured physicians can call him at any time, and he encourages even the most minor inquiry. He has been very proactive and at the 4-year mark, we have had no claim losses.
At this time, our captive is solvent with approximately 50 percent of our premiums held as reserve. We are heading into our fifth year with more than 40 physicians participating; our goal is to grow to 60 physicians in the next several years. Our policy stipulates that if the physician pays full premiums for 5 years, no tail coverage is required when the physician retires. At retirement, each physician is eligible for a rebate on premiums if the physician has been claim free. In some models, that rebate has exceeded 25 percent of the total premiums paid.
In all, our participating physicians are pleased with the success of our company. The participating physicians have control over the policies and their limitations. The physicians have been successfully incentivized to avert malpractice claims.
Premiums have not increased during the initial 4 years, and no premium increases are planned for the future. Premiums for orthopaedic surgeons have remained steady ($50,000 to $75,000 annually) and are competitive with traditional insurer premiums for the required $2 million/$6 million coverage in Northern Virginia.
In summary, establishing a captive insurance company or risk retention group as an alternative to standard medical liability insurance coverage is a viable concept. Capable, experienced management is critical for success, and the physicians involved must have a track record for providing quality care and avoiding medical liability lawsuits.
Thomas B. Fleeter, MD, of Town Center Orthopaedic Associates in Reston, Va., is a member of the AAOS Medical Liability Committee. He can be reached at firstname.lastname@example.org
Editor’s note: This is the second in a two-part article on alternatives to standard medical liability insurance companies. The information contained in this article is intended for general information, and is not legal advice, nor should it be interpreted as such. For legal advice, consult an attorney.