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Healthcare Captives

Healthcare Captives. Looking In The Crystal Ball. Agenda. 1. Moderator Overview. 2. Physician Captive Case Study. 3. Actuarial Perspective. 4. Captive Management. 5. Reinsurance Update. Moderator Overview SECTION 1. Lisa Wall. Captive and RRG Environment.

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Healthcare Captives

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  1. Healthcare Captives Looking In The Crystal Ball Chicago, Illinois ~ March 13 & 14, 2007

  2. Agenda 1. Moderator Overview 2. Physician Captive Case Study 3. Actuarial Perspective 4. Captive Management 5. Reinsurance Update

  3. Moderator OverviewSECTION 1 Lisa Wall Chicago, Illinois ~ March 13 & 14, 2007

  4. Captive and RRG Environment Insurance Market Impact on Formations Captives RRGs Source: Risk Retention Reporter Web site, http://www.rrr.com and AM Best Captive Directory

  5. What Makes Sense Reinsurance access? For profit owner? Pooling risk? Third party business motives? What Never Makes Sense Sharing in risk you do NOT understand No cash/debt availability Retaining more risk without the appropriate risk reward Retaining more risk without risk appetite Captive and RRG Environment Profile of captive/RRG candidate – financial benefits outweigh risks and capital utilization

  6. Physician Captive Case StudySECTION 2 Joseph Pareres Silverson, Pareres & Lombardi, LLP Chicago, Illinois ~ March 13 & 14, 2007

  7. Obstacles In Forming RRG • Must select proper Venue • Must have Capital for Investment • Must have sound Risk Management Program • Must hire Risk Manager, Third Party Administrator and Attorneys • Must be approved by the Insurance Department in State of Domicile • Must retain local counsel and comply with all State of Domicile laws and requirements • Need to obtain Reinsurance • Must have Hospitals, Medical Facilities, and HMO’s accept Insurance Certificate of RRG • Must renew Reinsurance on an annual basis • Can only issue Claims-Made Policies

  8. Benefits To Creating RRG • Avoid high risk Pool for low to average Risk Physicians • Ability to create and control Risk Management Program • Ability to select Third Party Administrator and control Claims • Ability to negotiate annually with Reinsurers and take advantage of good loss years • Ability to work closely with a single Insured base • Ability for physicians to personally benefit financially from any surplus in Capital or Reserves • Ability to control own destiny • Ability to set premiums based on Actuarial Analysis

  9. Why Form A Risk Retention Group? • Inability to obtain Insurance from an Insurance Company • Desire to manage Claims and Risk Management • Desire to keep low to average risk Physicians out of High Risk Pool • Desire to formulate appropriate Premiums and Reserves based on Actuarial Analysis • Desire to control own destiny • No other viable alternative

  10. Funding a Tail Puts money in a reserve fund each year as determined by Actuaries so if the Group ceases to do business, there will be enough money in the fund for the RRG to issue Tail coverage.

  11. Occurrence Policy $1.3/3.9M Limits of Insurance Free Excess of $1.0M pursuant to Section 18 Access to NY State Guaranty Fund Tail Coverage Guaranteed by Solvency of Insurer Claims Made Policy $1/3M Limits of Insurance No Free State Excess No Access to NY State Guaranty Fund Appropriate Funding necessary to Guarantee Tail CoverageMarket Insurance vs. Risk Retention Groups

  12. Actuarial PerspectiveSECTION 3 John Herzfeld Chicago, Illinois ~ March 13 & 14, 2007

  13. Recent Pricing / Reserving Changes • Recent rate changes for large commercial insurers • Recent reserve movements (from Schedule P)

  14. Solvency Ratio Trends • Premium to Surplus Ratios • Definition and meaning • Commercial insurers • Captives • Reserves to Surplus Ratios • Definition and meaning • Commercial insurers • Captives

  15. Recent Pricing Changes • Medical Liability Monitor Survey • Rates leveling off • Early signs of softening market

  16. Recent Reserving Changes 2005 Schedule P • Industry Aggregate • Downward development of net incurred losses for both one-year and two-year periods

  17. Solvency Ratio Trends • Premium to Surplus Ratio • Net Written Premium / Surplus Commercial Insurers Captives 2005: 0.84 0.92 2004: 0.86 0.89 • Reserves to Surplus Ratio • Net Loss Reserves / Surplus Commercial Insurers Captives 2005: 2.85 1.45 2004: 2.88 1.26

  18. Feasibility Studies What’s in a Feasibility Study? • Proposed Structure/Coverages • Captive type, ownership, domicile • Capitalization • Lines of business, limits, retentions • Fronting, reinsurance • Pro forma Financial Projections • Expected and adverse scenarios • Losses, expenses, premiums • Capital and solvency ratios

  19. Feasibility Studies (cont.) How is it used? • Included in captive application • Regulators use to assess application • Potential owners and/or participants • Use to investigate various options (coverages, retentions, domiciles, etc) • When is it needed? • For the captive application • Earlier if being used to investigate various options surrounding captive formation

  20. Feasibility Studies (cont.) Who prepares? • Actuary • Captive Manager • Broker

  21. Captive ManagementSECTION 4 Jeff Kenneson Chicago, Illinois ~ March 13 & 14, 2007

  22. 25 Years of Captives • Single Parent Captives to Risk Retention Groups • Corporations to Reciprocals • LLC’s & Not-For-Profits • Wealth Management Vehicle

  23. Insurance Reasons For Formations • Carriers leaving the market • Voluntarily – St. Paul Insurance Co. • Insolvencies • Pricing/retention levels • Stacking of collateral • Perceived heavy profit taking by traditional carriers

  24. Regulators – Friend or Foe? • Captive section – friendTraditional section – foe • Risk Retention Act of 1986 • National Association of Insurance Commissioners (NAIC) • Competitive domicile atmosphere

  25. Ongoing Issues – What To Expect • Sarbanes Oxley • Government Accounting Office report • New Domiciles

  26. Reinsurance UpdateSECTION 5 Simon Hudson Chicago, Illinois ~ March 13 & 14, 2007

  27. A Meeting Of The Minds • Reinsurance availability • Matching the captive to suitable reinsurers • The intermediary provides options • Recent physician captive success story • Building the partnership

  28. Reinsurance Market Availability Availability depends on whether the market is hard or soft • Reinsurance has always been available • The cost of reinsurance capital varies

  29. Matching The Captive To Suitable Reinsurers • Some captives: know what they want • Determined their risk appetite; have a plan in place • Others: need step-by-step help • Not all reinsurers prepared to do this • Specific reinsurers specialize in this sort of relationship • Key considerations for the captive • Limits required • Risk appetite • Multiple reinsurance options available

  30. The Intermediary Provides Options Help the captive understand all the options • Flat rate • Swing-rated deals • Commutation-type deals • Profit commissions • Cede commission deals • Excess cessions • Excess of loss

  31. Success Story: Building A Partnership • How one health care captive benefited from an innovative reinsurance program • Formed at peak of hard re/insurance markets in 2003 • Feeling the pain of rate increases • Physicians familiar with one another’s practices • Committed, cohesive group • Completed full 12-month feasibility study prior to start of underwriting

  32. Building a partnership The Limits Required First step: • Select retention at $200,000 $200K Retention

  33. Building a partnership The Limits Required Provide for standard limits: • $1M per claim, $3M policy aggregate • Extended reporting • Broad coverage $1M $800K XS $200K $200K Retention

  34. The Limits Required Building a partnership $3M Excess of loss: • Larger groups, higher specialty docs needed $3M limits • Cede to captive of 12.5% $2M XS $1M $1M $800K XS $200K $200K Retention

  35. Reinsurance Structure Building a partnership Traditional “flat” rated program • Subject premium: $5 million • 50% rate – no up or down adjustment • Premiums to be charged: • First year $2.5 million • Second year $2.5 million

  36. Reinsurance Structure Building a partnership “Swing” rated program – loss scenarios • Losses at 15% or less (minimum rate) • Total premium paid: $750,000 • $1.25 million returned to the captive • Losses at 40% (provisional rate) • Total premium paid: $2 million • No return to the captive • Losses at 55% or higher • Total premium paid: $2.75 million, plus $750,000 paid to reinsurers

  37. Building a partnership Swing Rated Program: The Results Reinsurance premium calculation for the captive’s loss experience/premiums: 2003 2007 Adjusted Flat rate $2,500,000 $2,500,000 Swing rate $2,000,000 $1,550,000 $950,000 Savings for captive owners

  38. Building a partnership Recommendations Reinsurance broker’s primary role: • Demonstrate all reinsurance options • Seek the right business partners • Strong technical credentials • Honest and straightforward • Explore, discuss every detail • The right option can reward good experience

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