Alternative Vision Saves Millions
Steve Stoeger-Moore saved Wisconsin’s 16 technical colleges $10 million in premium over the past 10 years.
He did it by helping to create an alternative insurance system whereby the schools obtain nine varieties of coverage — including general liability, auto liability, workers’ compensation, property, violent acts, and most recently, cyber risk — via a mutual municipal insurance company.
That company is Districts Mutual Insurance (DMI). The mutual taps reinsurance markets including Gen Re and Fireman’s Fund, to obtain coverages above retention layers held by the individual colleges.
Most of the time, DMI also holds a retention layer.
The alternative insurance structure was devised in the midst of the hard markets of 2001-2003, when a few of the schools’ finance professionals wondered whether there might be a better way to go, said Stoeger-Moore.
At the time, he said, the Wisconsin Technical Colleges — which had been purchasing their needed insurance products as a consortium — were reeling from annual rate increases year after year.
“The schools had been seeing double-digit increases in premium for three straight years as of 2003, with compounded increases of 20 percent each year during ’01, ’02, and ’03 — all driven by market conditions, not losses,” Stoeger-Moore said.
In fact, he said, the schools’ loss ratio over the three-year period was just 27 percent.
“The coverages appropriate to higher education had become more and more restricted. Carriers were selectively writing various businesses, and M&A activity among insurers was taking a lot of options off the table,” he said.
“No college pays for a loss suffered by another college. And no college pays a premium based on a loss at another college.” — Steven Stoeger-Moore, president, Districts Mutual Insurance
Meanwhile rates were going up and up and up every year, Stoeger-Moore said.
The solution: DMI.
Before the mutual was formed, Stoeger-Moore served as risk manager for the Milwaukee Area Technical College, one of only a few state technical schools that had a risk manager in place.
As the market hardened, school finance officials approached Stoeger-Moore, who developed the blueprint for DMI and agreed to take on the insurer’s day-to-day operations.
“It’s an insurance carrier that has no employees,” he said.
On the other hand, via independent vendors, DMI has experts working as third-party claims administrators, accountants, and auditors, besides commercial insurance carriers like London-based Beazley, which is now partnering with DMI in underwriting a cyber breach response program.
Stoeger-Moore said that it is illegal for insurers to pool their exposures, payments, or reserve funds under Wisconsin state law.
“No college pays for a loss suffered by another college,” he said.
“And no college pays a premium based on a loss at another college.”
Stoeger-Moore has his share of fans. “Steve is really the most knowledgeable insurance technical person I’ve ever met. He created this whole thing,” said Joe DesPlaines, DMI’s business continuity and crisis response consultant.
DesPlaines said Stoeger-Moore envisioned that the mutual would offer insurance coverage as well as risk management consulting including crisis response planning, employee health and safety, and security assessments.
DMI’s budget is derived from college premium payments, said Stoeger-Moore.
Linda Joski, area vice president for Arthur J. Gallagher and Co. in Wisconsin, which brokers all reinsurance coverages for DMI, said that Stoeger-Moore is one of a kind.
“He is innovative and creative and works so well with these colleges,” she said.
Steven is also being recognized as a 2014 Responsibility Leader.
Creating His Own Solution
When the 16 institutions comprising Wisconsin Technical Colleges faced persistent problems obtaining insurance coverage suited to their unique needs, Steven Stoeger-Moore didn’t just find the solution — he created it.
Stoeger-Moore helped to establish Districts Mutual Insurance (DMI) in 2004 to represent the colleges and provide better insurance and risk management services.
Under his self-implemented “Rule of 16,” he ensures that if any school has a problem, all 16 colleges benefit from DMI’s solution. That dedication led to the development of comprehensive risk management programs — provided to each school at no cost — for electrical and fire safety inspections, emergency response planning, legal consultations, and employee health and safety consultations, among many others.
And when those programs were tested, Stoeger-Moore sprang into action. In the past 10 years, the Wisconsin Technical College System has weathered both a tornado and a major fire. Both times, he was at the scene within 24 hours of the event, providing claims and insurance guidance as well as comfort for shaken colleagues.
Stoeger-Moore has also worked to bolster the industry’s future by encouraging young people to consider a career in risk management. Through DMI, he creates opportunities for young people to learn about the colleges’ unique challenges and the programs created to meet them.
Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, perseverance and/or passion.
Responsibility Leaders overcome obstacles by doing the right thing over the easy thing to find practical solutions that benefit their co-workers and community.
Hospital Group Hits Milestone
Back in 1991, a group of Pennsylvania hospitals dipped their toes into the water of captives. That water happened to be offshore. Their other insurance option was the “turmoil” of the traditional market. So they decided to dive in with a class-2 insurer called Cassatt Insurance Co. Ltd. It provided members with excess professional and general liability insurance.
The group thrived — enough to encourage the formation of another captive in 1997. This time, Cassatt planted its flag firmly onshore, in Vermont, with a risk retention group (RRG) called Cassatt Risk Retention Group Inc. Coverage was for the primary level, set beneath what was then called the Pennsylvania CAT Fund, which became the Pennsylvania MCare Fund in 2002.
(Essentially, MCare, or Medical Care Availability and Reduction of Error, guarantees “reasonable compensation,” according to the Commonwealth, for persons injured due to medical negligence by paying from the fund for claims in excess of primary insurance coverage.)
The RRG today has five shareholders, nine hospitals and more than 1,200 physicians insured.
The next big step in the group’s evolution came in 2006, when Cassatt RRG Holding Co. gained a far greater role in the everyday operations of the captives and their members. The holding company assumed responsibility for claims, risk management, underwriting and finance.
“It is really a service organization to the membership,” said Eric W. Dethlefs, president and chief executive officer of the Malvern, Pa.-based holding company.
What the increased role of the holding company — and the overall development of Cassatt — demonstrates is truly an innovative progression; the ability to anticipate trends as they emerge. It’s a trait particularly handy for health care organizations, especially as of late, when issues appear to be rising faster than most organizations can understand, let alone manage.
Take the most recent examples of Cassatt’s growth. In 2012, Cassatt RRG Holding Co. launched the Cassatt Patient Safety Organization. This past October, it formed Cassatt Insurance Group Inc. — coincidentally, Vermont’s 1,000th captive formation. Both demonstrate Cassatt’s handle on 21st century health care exposures and strategic imperatives.
A Captive for Convenience
The Cassatt Insurance Group is a sponsored captive — or in other common parlance, a segregated cell captive. Vermont’s 1,000th captive is designed, Dethlefs explained, to provide insurance coverage flexibility for members as they merge and form affiliations with other hospital systems in the coming months and years, as they address the Affordable Care Act and other challenges. Many health care systems are scrambling to find such partners, Dethlefs said. (See related article Managing Change)
“The founding members believed then and continue to believe today that the sharing of risk and the sharing of best practices across the membership is something very important and one of the reasons they formed a group captive.” —Eric W. Dethlefs, president and CEO, Cassatt RRG Holding Co.
Cassatt’s sponsored captive will provide a flexible solution for the health care organizations that partner with Cassatt members. Dethlefs described the concept as each cell being similar to a new spoke off the sponsored captive’s wheel. The RRG is one established spoke. If new partners want the claims, patient safety and other benefits of Cassatt involvement, yet aren’t prepared to share in the other members’ liabilities as they would in the RRG, they can form their own cell, or a new spoke. One key benefit of segregated cell captives is that each cell’s liability is walled off.
Roughly six months into the new captive, Dethlefs said, talks are underway with several health groups.
It’s an attractive model for health care organizations, according to someone who has seen plenty of captive business models (not all 1,000 of Vermont’s, but plenty).
“It is a neat process for them to expand their services to other hospitals,” said David F. Provost, deputy commissioner in Vermont’s Captive Insurance Division. “The result is going to be better patient care.”
“The regulators in Vermont clearly understand the needs of our member hospitals, and this new company will help us to grow and to continue to provide the members and their patients with the benefits of Cassatt’s success,” said Gerald Miller, chairman of the Cassatt board of directors.
A Captive for Care
Cassatt member hospitals have enjoyed a surge of benefits from the aforementioned Cassatt Patient Safety Organization (CPSO), which has been approved by the Department of Health and Human Services’ Agency for Healthcare Research and Quality.
“It’s not a one-and-done kind of thing. It’s continual,” Dethlefs said.
The CPSO can, for example, conduct risk assessments. It brings in experts in a given medical field that represents a high degree of liability exposure — say, obstetrics or surgery — and works with them to analyze the current practice and delivery of care. They learn what they are doing well, and where they could improve.
Another function of the patient safety organization is protected knowledge sharing. Chief medical officers, chiefs of obstetrics and other leaders from member hospitals can gather around a meeting room — a “safe table,” as designated by the federal government — and essentially compare patient safety notes.
Dethlefs called the patient safety organization “just as important, or maybe even more important” than the insurance underwritten by the captives.
“The founding members believed then and continue to believe today that the sharing of risk and the sharing of best practices across the membership is something very important and one of the reasons they formed a group captive,” Dethlefs said.
Indeed, the same rationale went into leveraging the holding company for in-house claims and risk management in 2006. The holding company now has four case handlers and one director making up the claims staff, representing more than 125 years of collective professional liability experience, he said.
They investigate each case, evaluate liability and damages, and make recommendations on whether to settle or litigate. The claims personnel are capable of following a claim from the initial incident to the case disposition, working in conjunction with member hospital staff and in-house counsel. They will even attend trials. The results of hands-on claims management pay for themselves.
“We have a very, very good, solid record in terms of favorable loss development,” Dethlefs said.
Cassatt’s holding company also employs a patient safety staff consisting of an administrative director, a medical director and other staff members.
All of this investment was a conscious decision that Cassatt could be capable of managing its members’ exposure better than third-party vendors.
“We had the belief that if we internalized these functions of claims, risk, finance and underwriting, and held people accountable, results would be better,” Dethlefs said.
A Captive for Copying?
Cassatt’s growth — particularly the patient safety organization and the sponsored captive — are not mere symptoms of ACA implementation, though the dynamic nature of health care risk today has a lot to do with it.
“Changes in health care — and particularly in the economics of health care (including the advent of the Affordable Care Act and other legislation and initiatives) — require hospitals to find better, more efficient ways to deliver consistent, high-quality care,” said Laurence M. Merlis, president and CEO of member Abington Health.
“Cassatt is an indispensable partner for Abington as it addresses both challenges: cost and quality. Through its first-class patient safety and risk management work and innovative solutions to insuring our risks, Cassatt plays a major role in ensuring that Abington remains a center of excellence in health care in the Philadelphia region,” he said.
Collective risk management has been a long-term view of the member companies.
“Cassatt was created more than 20 years ago in response to the member hospitals’ need for a high-quality, cost-effective liability insurance solution,” said Miller, Cassatt’s board chairman. “The members’ continued attention to and investment in Cassatt has resulted not only in what we believe is a superior insurance program but also in Cassatt’s capability to provide first-class patient safety and risk management services to the member hospitals.”
Developments since then have been improvements on that theme and responses to current trends.
Although Cassatt’s model may well be considered innovative and worthy of imitation by others facing the current turbulence — we’ll leave that to the experts to determine — Dethlefs doesn’t think it’s particularly innovative. “I think it’s getting back to the basics of doing things correctly and holding folks accountable,” he said.
Complete coverage from R&I’s 2014 Vermont report:
Construction’s New World
Get off a plane at Logan Airport and cross the harbor toward Boston and you will see construction cranes, a lot of them.
Grab an Amtrak train from Philadelphia into New York and pulling into Penn Station, you will see more construction cranes, many more of them. The same scene repeats in Denver, Los Angeles, San Francisco and Chicago.
All that steel and cable in the skyline signifies a construction industry that is growing again, after having the rug pulled out from under it in the Great Recession of 2008-2010.
The cranes these days look the same as cranes looked in 2008, but the risk management and insurance environment in construction is anything but the same now.
A variety of factors are now in play that have drastically changed construction risk underwriting, according to Doug Cauti, a senior vice president and chief underwriting officer with Boston-based Liberty Mutual’s construction practice.
Doug Cauti characterizes the current construction market.
Talent and Margins
For one thing, according to Cauti, the available talent pool in construction is nowhere near what it was pre-recession.
“When the economy went into its downturn, a lot of talent left the business and hasn’t returned,” Cauti said.
Cauti said recent conversations with large contractors in Ohio and Pennsylvania confirmed once again that contractors are facing a workforce that is either aging or very inexperienced. That leads to safety management and project quality concerns at just the moment in time that construction is rebounding.
Doug identifies one of the top risk management issues facing construction firms today.
Workers compensation risks in construction, already a problematic area, are seeing an impact from that dynamic.
Contractors are also facing much more competition. In the past, contractors might have bid on 10 jobs to get one, now they have to bid on 50 or 60 jobs to get one. That’s putting pressure on margins.
“There are a lot of contractors out there competing for business,” Cauti said.
“Margins are going up but not at the same rate as the industry’s recovery,” he added.
Financing and Risk Transfer
Another factor impacting the way construction risk is being underwritten is the size of projects and the way they are being financed. Construction’s recovery from the recession might be slow and steady, but the size of projects requiring risk management and insurance has increased substantially.
In 2010, there were 85 projects under contract nationally that were worth $1 billion or more, according to Cauti. One year later, the percentage of projects of that value or higher had grown by 30 percent, and the trend continues.
A lot of those projects are design-build, a relatively new approach to construction that Liberty Mutual has grown comfortable underwriting over the years. But design-build is still an additional complication, blurring the traditional lines of responsibility.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery.”
– Doug Cauti, Chief Underwriting Officer, Liberty Mutual National Insurance Specialty Construction
Given the funding demands of these much larger and more valuable projects — many of them badly needed public sector infrastructure improvements — public-private partnerships, otherwise known as P3s, are now coming into vogue as a financing option.
But deciding how risk should be allocated, underwritten and transferred in this new arrangement between contractors, the state, and private partners is a relatively new and untested science.
As a thought leader in the underwriting of the design-build approach – and the more traditional design-bid-build – Cauti said construction experts within Liberty Mutual are growing their knowledge to stay in step.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery,” he said.
That means attending relevant industry conferences like the annual IRMI Construction Risk Conference where Liberty Mutual has maintained a significant presence, and engaging in dialogues with contractors and government officials, and maintaining clear and active lines of communications with brokers.
Doug discusses emerging approaches to construction.
Legal and Regulatory
Another change that is creating challenges for construction risk underwriting, according to Cauti, stems from what’s happening in United States courtrooms.
Across the country, how a court interprets coverage can vary widely, especially in the area of construction defect.
“In the past, many jurisdictions viewed construction defect simply as shoddy workmanship and they had to go back and redo it,” Cauti said.
But now, on a state by state basis, courts are ruling that a construction defect is an accident under certain circumstances that may be covered by a contractor’s general liability policy.
In 2014 alone, according to Cauti, Supreme Courts in West Virginia, Connecticut and North Dakota ruled that construction defects can sometimes be considered accidents.
Cauti said doing business with a carrier that pursues contract clarity whenever possible – and that possesses an experienced claims team that can navigate the wide variety of state interpretations – is absolutely essential to the buyer.
Having claim teams not only dedicated to construction but also to construction defect, adds a lot of value to a carrier’s offering.
Doug outlines another top risk management issue facing construction firms in today’s booming market.
Now, as never before, contractors are relying on experienced construction insurance teams to help them address these complexities.
Insurers need to have the engineering expertise to analyze a project, to make sure the right contracting team is in place and to insure that risk exposures are being properly assessed. Another key in a construction insurance team, according to Cauti, is the claims department.
A Strategic Approach
The legal and financing changes that are taking place in the construction market, from a risk transfer standpoint, aren’t going to get ironed out overnight.
Cauti said it could be 10 years until the construction and insurance industries fully understand the complications of public-private partnerships and integrated project delivery, these approaches gain traction, and the state-by-state legal decisions that are causing so much uncertainty can be digested.
In the meantime, an engaged, collaborative approach between carriers, brokers, contractors, and their financing partners will be necessary.
Doug discusses how his area can provide value to project owners and contractors.
For more information on how Liberty Mutual Insurance can help assess your construction risk exposure, contact your broker or Doug Cauti at firstname.lastname@example.org.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.