Time for Property
Is it an insurance issue or a nonprofit issue? Is there an insurance market for these risks or is government intervention needed? Is Congress looking to tell the insurance industry what’s what or are lawmakers looking to facilitate a market-based solution?
The bigger question is: Whom do you trust?
At the heart of these questions is an insurance law: the Liability Risk Retention Act (LRRA). Having passed it in 1981 in response to a collapse of the product liability insurance market, Congress last amended the law in 1986 to include most commercial liability.
Since then, a vibrant subculture within the self-insurance world has grown up. In 2014, the average annual premium written by risk retention groups (RRGs) was $12.6 million. With 234 RRGs now in existence, according to the Risk Retention Reporter, that amounts to nearly $3 billion in total premium.
Despite such a success story, surprisingly, RRGs haven’t expanded further — say, to property coverages. It’s not for want of trying.
Janice Abraham, CEO of one of the biggest RRGs, United Educators, has been in her position for 18 years.
“I don’t believe the government should be in the business of insurance at all.” — U.S. Rep. Dennis A Ross, a Florida Republican
“I have been working on this for almost the whole time,” she said, referring to the fight for RRGs to retain property risk.
Right there with her has been Pamela Davis, CEO of another massive RRG provider, the Alliance of Nonprofits for Insurance (ANI). They spearhead a renewed effort to expand the LRRA to allow RRGs to underwrite property coverage.
The fight is being led in Congress by Florida Republican Rep. Dennis A. Ross, who assures constituents and insurance professionals that he’s a “strong free market person.”
“I don’t believe the government should be in the business of insurance at all,” he said. Efforts to expand the LRRA is not “the camel’s nose under the tent trying to get into the industry.”
Instead, Ross, whose brother Bill served as CFO of the Hillsboro County Boys & Girls Club, said that he appreciates the challenges nonprofits face, and hopes to create an opportunity for such groups to pool resources and focus on their primary missions, not premiums.
The pro-LRRA expansion argument is best illustrated by a plausible example: A nonprofit senior center can purchase $1 million in liability through an RRG to cover the liability to transport its seniors in a van, but that RRG cannot underwrite damage to the $20,000 van itself.
Or take the example of a college that buses its sports teams to various competitions and shuttles its students around campus. An RRG could offer the school millions in third-party liability, but not the thousands to fix the bus after a fender-bender.
That just doesn’t make sense, advocates said. Of course, their opponents tell a different story.
A primary argument for the new LRRA is that it won’t be a big change at all. The draft bill now in Congress would only allow certain groups to write coverages like property, fleet auto physical damage and business interruption: RRGs active for 10 consecutive years, with at least $10 million in capital and surplus.
Perhaps most limiting, the bill only applies to RRGs protecting 501(c)(3) organizations.
The argument: The commercial insurance market has failed these nonprofits. These community and educational nonprofits tend to be small in size and faced with unique risk.
“These are hard to cover property, auto physical damage issues that really warrant a lot of attention and a lot of risk management,” said Abraham.
Sometimes, commercial insurers are interested in these risks, Abraham said. Sometimes, they are not.
What often happens: A 501(c)(3) purchases liability insurance through an RRG, then finds it challenging to buy unbundled property from a commercial carrier. What’s more, seeking out unbundled property coverage adds operational costs to small organizations on constrained budgets.
According to Davis, 85 percent of 501(c)(3)s that would benefit from the law change have annual budgets of less than $1 million.
In United Educators’ case, schools come to the RRG year after year looking for help with this issue, Abraham said.
She went on the record — the Congressional Record — about that unmet demand when she testified to the Subcommittee of Housing and Insurance of the Financial Services Committee of the U.S. House of Representatives on May 20, 2014.
Davis said she hears from insurance brokers about these problems and the unmet demand. They tell her that only 6 percent of commercial markets would consider standalone property risks from nonprofits.
“I would love to see the market come up to [nonprofits] and say, ‘There is no need for this,’ ” Ross said, but unfortunately “games” are being played in the commercial market.
But the main takeaway from proponents is: A vote for the LRRA change is a vote that benefits communities and their nonprofits. It’s not about commercial insurance. So how can people dare oppose it?
The Other Side
Opposition is aligned against the LRRA expansion, just as it has been for the past 18 years that Abraham fought for it.
On one side of the opposition is the National Association of Insurance Commissioners (NAIC).
“These are hard to cover property, auto physical damage issues that really warrant a lot of attention and a lot of risk management.” — Janice Abraham, CEO, United Educators
The insurance regulators have never been fond of risk retention groups, as one insider in the captive insurance industry put it, perhaps in large part because the 1981 law and its 1986 addendum are two of only a few instances when the feds have intervened in state-based regulation.
In the last serious effort to reform the LRRA, a two-year attempt that ran aground in 2013, opposition from the NAIC was cited as one major reason the bill didn’t pass.
News reports at the time focused on the NAIC’s belief that RRGs are more prone to insolvency than commercial carriers.
For their part, commercial carriers might argue that RRGs aren’t on an even playing field. Once formed, RRGs are regulated only by the insurance department in the state in which they are domiciled (not in every state they write business).
Another argument might be that they aren’t as safe for consumers. RRGs are not subject to state guarantee funds in the event they go belly up.
Beyond these two distinctions and the fact that they can only write liability, RRGs are also a unique form of captive because only owners can contribute capital, only policyholders can be owners.
Independent insurance agents, represented by the Independent Insurance Agents & Brokers of America (Big I), also oppose expanding LRRA.
Jen McPhillips, its senior director of federal government affairs, said concerns include consumer protection and the fact that RRGs have no experience writing property, but the primary objection is the failure to demonstrate a market using empirical data.
“The traditional marketplace is there and is willing to take on the risk,” she said.
Whereas the original LRRA was passed in response to a clear crisis in coverage, no such crisis exists today.
Independent insurance agents, represented by the Independent Insurance Agents & Brokers of America (Big I), oppose expanding LRRA.
However, data does support the contention that RRGs serve their policyholders well.
In A.M. Best’s “2015 Captive Review,” the rating agency found that risk retention groups outperformed commercial counterparts in loss adjustment expense, underwriting expense and combined ratio, among others. They did not outperform them in policyholder dividends.
The review’s authors were also quick to mention the other benefit of the RRG structure — dividends and surplus buildup are returned to policyholders. Between 2009 and 2013, that amounted to $638 million for rated RRGs.
Also, RRGs are known to provide members with tailored risk management and loss-control services.
“Because RRGs serve a single industry, they are able to develop and share best practices including risk management initiatives, which isn’t common among commercial carriers,” wrote Christina Kindstedt, senior vice president of Willis’ Global Captive Practice for the Americas, in a blog calling for the LRRA expansion passage.
To insurers that voice concerns about RRGs not “playing on a level playing field,” David Provost, deputy commissioner for Vermont’s Captive Insurance Division, said: “Most RRGs are playing on a field that you abandoned.”
Vermont, it should be noted, is the No. 1 home for RRGs in the world; one-third of all groups are domiciled in Vermont, and they bring in two-thirds of all RRG-related premiums.
The Chances of Passage
Beyond the insurance industry lobbying against the bill in Washington, D.C., another hindrance is the overall inertia in the Capitol.
“Ask Congress,” said Abraham when asked why an LRRA expansion hasn’t passed. It “would be foolish to be overly optimistic” about the bill’s passage this year, she said.
As of early July, Ross had not yet presented the bill to the Subcommittee on Housing and Insurance, waiting on industry groups to provide market information.
Davis is optimistic and determined. Even if it doesn’t pass this year, she is “absolutely determined to get this through.”
“It certainly would help our schools and it would certainly help our small nonprofits in our communities,” she said.
A Narrow Slice
Business interruption is one of the most complicated exposures that companies face. And it takes so many faces: Does it cover supply chain interruption? Is it due to political upheaval, or a cyber event?
When it’s part of a standard property policy, business interruption coverage requires a physical event, like a fire or earthquake, to trigger coverage. When business interruption coverage is placed in a captive, however, the terms and conditions can be specialized to each individual organization.
If an organization wants business interruption coverage without the need for it to be triggered by a physical event, or if it wants coverage to begin immediately instead of dealing with a waiting period, a captive allows the organization to do so.
Experts believe, though, that globalization and supply chain risks amidst a world in upheaval may increase attention to the potential benefits.
But that doesn’t mean that it’s a popular way to transfer the risk. BI coverage is only a narrow slice of the captive market at this point. Experts believe, though, that globalization and supply chain risks amidst a world in upheaval may increase attention to the potential benefits.
“We do see it, but it’s rare,” said Ellen Charnley, managing director, and global sales and marketing leader of Marsh’s captive solutions practice.
“That doesn’t necessarily mean it will always be the case, but it’s not common to date.”
Charnley said that of the more than 1,250 captives in a recent Marsh benchmarking report, the brokerage has “literally a handful of clients” that write supply chain or business interruption risk in their captive.
One company that does see the value, said Darren Caesar, senior executive vice president and chief commercial lines officer at HUB International, is a large telecom client.
The telecom, which has a large number of offsite facilities, uses the captive to insure up to the first million in BI coverage, as well as excess coverage. It took the step when underwriters were unreceptive to covering the exposure, he said.
“In my experience and my colleagues’, we’ve only seen that captive used for business income and business interruption loss,” said Caesar.
In most cases, he said, business interruption coverage is “either a super-high exposure or it’s very low, and therefore, it’s not really germane to a captive,” he said.
An Unpredictable World
The sticking point for many organizations is that business interruption is unpredictable, hard to calculate and difficult to price.
For multinational organizations, though, it’s an unpredictable world. Of the top 10 global risks cited by the World Economic Forum for 2015, three of the top four most likely risks were related to geopolitical instability: interstate conflict, failure of national governance, and state collapse or crisis. The other, ranked No. 2, was extreme weather events.
Protecting against political violence is not a traditional use of captives, but interest is growing, said David Anderson, senior vice president, director, global business development credit, and political risk, Zurich.
“I think multinational firms are clearly more worried about the world than in the past.” — David Anderson, senior vice president, director, global business development credit, and political risk, Zurich
“Few do it, but there are a lot more who want to talk about it,” he said, noting that events in Ukraine, North Africa, Latin America and the Middle East have sparked concern.
“I think multinational firms are clearly more worried about the world than in the past,” he said.
“Obtaining political risk coverage in places like Ukraine can be difficult. There is some capacity available for certain projects in high risk areas, but it can be challenging,” Anderson said.
“Using captives for these types of exposures and partnering with insurers on the broader portfolio, customers can efficiently achieve prudent risk management.”
A company’s risk transfer strategy, said Charnley, depends on how sensitive the organization’s balance sheet is.
“If the loss is easily absorbed, I don’t see the need to fund into a captive. If the exposure is significant, I do think there is value to funding this over time, to smooth the volatility over time.”
It also adds visibility for senior leadership of the risks that are retained by the organization, she said. A captive can also assist a corporation which has multiple business units by providing specific coverage to match each unit’s risk appetite.
One difficulty in planning for a captive, she said, is that companies really can’t use historic losses to determine this risk. The exposure is “too volatile.”
Captives should always be thought of as a long-term strategy, said Steven Bauman, senior vice president, head of capital services, Zurich global corporate North America.
Generally, he said, companies “have to plan strategically to grow into the risk. They should start slowly and step up the risk; take up more risk each year and build up. You wouldn’t want to expose your captive in a first year scenario to a fairly significant business interruption loss.”
“You wouldn’t want to expose your captive in a first year scenario to a fairly significant business interruption loss.” — Steven Bauman, senior vice president, head of capital services, Zurich global corporate North America.
Once the captive is making an underwriting profit and investment income, and has built up its capital, it can afford to take on more risk in their captives around different lines of business, he said.
He also suggested partnering with insurers or other risk-bearing entities to cover some of the risks, since they are low frequency/high severity exposures.
“It comes down to the potential volatility,” he said. “Doing it with a captive means finding capacity to share the risk.”
Jeffrey Kenneson, senior vice president, business development, R&Q QuestManagement Services Ltd., said his firm has a sponsored captive that covers business interruption losses, with some members “paying multiple millions of dollars” for the coverage.
The mostly U.S.-based captive members run the gamut from law firms, a motorcycle manufacturer and a movie studio to a pharmaceutical company, architectural firm and fitness center, among others.
Instead of general business interruption coverage in smaller captives, what he has seen is BI coverage that has “morphed into some other coverages that you see more frequently,” such as loss of key vendor or loss of key employee.
Regardless of coverage, however, there must be a legitimate insurance risk, as opposed to a general business risk, he said.
For example, if a key vendor is unable to do business with an insured due to a factory fire, that would be a covered risk. If the vendor simply decides to break ties with the insured, such a loss would not be considered insurable, he said.
For the largest P&C captives, he said, he has not seen a great deal of interest in using captives for business interruption. “That’s a very narrow topic,” Kenneson said.
Risk Management Benefits
One of the ways a captive can help organizations is through the focus on resiliency and risk management, said Hart Brown, vice president and practice leader, organizational resilience, HUB International.
Because coverage in captives can be tailored to an organization’s specific needs, it helps better control costs and offers more control over risks.
He noted that risk management conversations related to building in operational redundancy and financial resilience tend to take place more often when captives are involved.
“When a captive comes into play, the company can write policies very specific to what the company needs in that time of crisis. … Claims can be very straightforward. We can reduce a lot of those challenges about how to recoup some of those financial issues that are lost and continue to be lost,” Brown said.
“You can pretty much write whatever you want in it,” Marsh’s Charnley agreed.
“That’s the beauty of a captive.”
The only caveats are that the captive must gain approval of the domicile regulator and the IRS.
“I do anticipate growth in the next few years in this style of risk,” she said.
“Not business interruption on its own, but among the bucket of trade credit risk, cyber risk [and] ERM risk. … Larger organizations seem keen to retain more risk these days.”
The first step to considering whether a captive should be formed for BI coverage, or whether such coverage should be added to an existing captive, is to identify the exposure and determine whether it could be mitigated by other means, such as through contracts or better vendor management, said Caesar of HUB International.
Then, companies must quantify the cost of the risk transfer and determine whether it makes sense to fund all or part of the exposure through a captive.
That’s not an easy task because of the unpredictability, since you need “some level of statistical probability you can work with in managing your own capital,” Brown said.
He also noted that business interruption coverage does not have “a very high acceptance within the market,” even without the use of captives entering the conversation.
Why? “I think it’s how companies prioritize their risk. Some are not able to look at the risk to prioritize and address the financial impact,” he said.
“It’s a difficult conversation to have unless they can get an assessment done and get a real sense of the financial impacts and decide which risks to retain and which not to retain.
“Because we know that the coverage is complex for business interruption and business income,” Caesar said, “the captive can be a very beneficial mechanism to transfer that risk. It can be very broad versus what you would get in the marketplace.”
Still, with pricing so soft in the insurance marketplace, and more insurer flexibility on terms and conditions because of that, it may be cheaper and easier to purchase insurance on the open market instead of forming a captive, or adding the line to an existing captive.
“If you could obtain large limit coverage in the open market for a very low price,” Kenneson said, “it wouldn’t make sense to put this through your captive. If you own your own captive, you are putting the captive’s equity at risk, and if you can get large limits in the open market at a very low premium, why take the risk yourself?”
Managing Patient Safety in a New Health Care World
Much like regular screenings, exercise and a healthy diet, patient safety in health care institutions should be thought of as preventive medicine.
“Patient safety aims to relieve the burden of fixing mistakes by taking steps to prevent them from happening in the first place,” said Aileen Killen, head of casualty risk consulting, AIG.
With the right strategies and protocols in place, human error in delivering patient care can, to some degree, be factored out, mitigating the risk of things like falls or medication mistakes. And the outcomes-based reimbursement model enforced by the Affordable Care Act provides extra incentive to improve patients’ overall experience and reduce readmission rates.
Some challenges stand in the way, though, of achieving better safety.
For one thing, increased consolidation in the industry has brought risks associated with integrating disparate safety cultures and ensuring continuity of care if patients are moved to a new doctor. The trend of shifting more care out of main hospitals to ambulatory sites instead also creates concern that those outpatient facilities are not up to the same safety standards as larger organizations.
Finally, advancing technology — while offering great promise to eventually make health care more efficient and error-free — presents significant risks in its implementation while doctors, nurses and other health care professionals learn how to best use it.
Lexington Insurance, a member of AIG, is meeting the demand for more innovative tools to navigate the changing environment with a suite of safety assessment programs that identify problem areas and provide recommendations for improvement.
Assessing Safety Culture
The first step in overcoming any challenge is assessing the situation in order to create the best strategy.
“Every health care organization should aim to become a ‘high reliability organization,’ or HRO,” said Brenda Osborne, division executive, health care, Lexington. “It’s a term borrowed from the airline and nuclear power industries, in which any employee has the right to shut down operations if they spot a safety issue.”
Lexington’s Best Practice Assessment tool allows organizations to compare their own protocols against evidence-based best practices and identify weak spots in their safety culture.
“We survey employees and ask if they feel free to speak up to people in authority,” Killen said. “If they can all say yes, you’re on the road to a safety culture. Then we drill down into specific high-risk areas.”
Clients can conduct specific assessments for error-prone areas like the emergency department, obstetrical department and operating room.
We give organizations recommendations on how they can improve in areas where they are deficient, and we can benchmark their performance against the best practice as well as against other institutions that have done the same assessment,” Killen said.
Those benchmark comparisons are key for securing leadership buy-in. Executives often need to see what other institutions are doing in order to feel confident in their decisions to make changes or invest more heavily in patient safety measures.
If another competitive hospital has better staffing ratios, for example, benchmark stats will show that and support the C-suite’s decision to hire more nurses to achieve a similar ratio.
“What it basically does is give the risk management, patient safety and quality improvement staff a roadmap for which areas to focus their activities for improving patient safety and risk management at their organization,” Killen said.
Acquisitions and Physician Employment
The flurry of merger and acquisition activity in the health care industry creates new risks for large hospital networks that acquire physicians’ practices. The integration of different patient safety and risk management practices can prove difficult.
“You have to take multiple approaches and mindsets and meld them into one fluid organization,” Osborne said. “That has a big impact on physicians’ ability to treat patients and deal with the appropriate hand-offs.”
“Patient hand-off is one of the biggest safety challenges,” Killen said. “Assigning a patient’s care to a different doctor leaves room for gaps in communication, which is so critical to making the correct diagnosis and keeping a medication schedule.”
Lexington’s Office Practice Assessment tool scores acquired practices on 14 different domains, including risk management and patient safety, communication, infection control and prevention, incident reporting and medication safety, among others. Recommendations are provided for any domain that scores less than a perfect 100 percent.
“We’ve been able to go in and help these growing organizations benchmark each of these acquired physician offices to show where they are at in terms of their safety protocols,” Osborne said. “It helps risk managers know where they need to start.”
Another major challenge for patient safety is the movement of care away from main hospitals to ambulatory care settings, an area that previously did not concern hospital-based risk managers very much.
“Historically, there has not been a big focus from a patient safety standpoint on outpatient services,” Osborne said. “The office practice assessment that AIG’s been doing for the last two or three years has actually put us out in front. Few other resources out there can assist hospital-based risk managers in dealing with outpatient-type services.”
“Now more people are thinking about safety in ambulatory areas, and we have more knowledge and experience there,” Killen added.
The same office assessment tools that survey physician practices can also be applied to ancillary services like ambulances, blood banks, and outpatient surgery centers, though benchmarking is not yet available for these sites.
Adapting to new technology is an ongoing challenge for health care risk managers.
“Everyone thought electronic health records were going to solve all our patient safety issues, but they’ve come with some unintended and dangerous consequences,” Killen said. Employees may accidentally order medications for or even discharge the wrong patient, for example, if they have multiple records open at once.
The upside to technology advancements, though, is more streamlined documentation and more opportunities for communication between doctors and patients via telemedicine, which is slowly growing in popularity for remote and elderly patients.
“When we’re underwriting, we look at these areas of growth in technology and the many ways it can be applied,” Osborne said. “We consider all the pros and cons.”
Lexington’s dedication to improving safety in health care shines through in their thorough assessment tools, expert recommendations, and attention to insureds’ changing risk management needs.
“Our unique tools help insureds identify risks and minimize potential claims,” Killen said.
“These services are homegrown and developed by a lot of very knowledgeable people over a period of time,” Osborne said. “They’re not available out in the market, and only Lexington insureds have access to them.”
For more information about Lexington Insurance’s risk management services for the health care industry, please visit www.lexingtoninsurance.com.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.