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Right Answer, Right Time

Dick Goff, chief executive of The Taft Companies, explains how ART can provide an effective solution to a hard market in benefits stop-loss.
From the December/January 2007 Issue of Captive Review
Copyright© Captive Review, all rights reserved. Reprinted with Permission.

Sometimes a solution occurs just before a problem is identified, and is there waiting for you when you need it. A current consumer market example would be the choices of hybrid automobiles that were readily available just as the price of gasoline went through the roof this year.

A Real Problem

In the insurance world, we hear about reduced availability of stop-loss insurance for ERISA-approved self-insured employee group medical plans. Even in the hard market of the past few years, stop-loss profit margins tightened up as a result of increased loss ratios. The number of managing general underwriters has contracted from around 300 to fewer than 50, and there has been predatory pricing by some large traditional insurers such as the Blues.

All these developments taken together pose a real problem for self-insured sponsors of self-insured employee group medical plans as they shop for stop-loss protection.

But here is the good news- they can now look to an alternative risk transfer evolution that combines captives with risk retention groups (RRGs) that enjoy US federal preemption from burdensome state regulation.

Simply stated, and RRG is used to insure specific and aggregate coverage for an ERISA-approved self-insured group medical plan. That is the new ‘alternative’ in ART that provides these advantages:

• it can be a replacement for ERISA-approved self-insured group medical stop-loss insurance
• it can be enjoyed by members of a profession or trade either through their association or in homogeneous groups formed for that purpose
• it requires licensing only in its original state of domicile
• it can’t be confused for ‘health insurance’ by any states that are supporting their high-risk pools from assessments on stop-loss insurance provided by life, accident and health (A&H) companies.

RRG Advantages

Earlier this year the first RRG was formed to protect against the contractual liability for an employer’s excess costs of a self-insured group medical plan. It was, in effect, stop-loss insurance but with tremendous financial and legal advantages over traditional stop-loss coverage. That new company, American Construction Benefits Group (ACBG), a Vermont RRG, is headquartered in Dallas, Texas, and serves members wherever they operate.

“This is a new creative way to help manage healthcare costs.” Says Bill Thompson, principal and consulting actuary of Milliman. “The company’s members are all companies in the construction industry that self-insure their employee benefits.”

The company’s founder, Steve Heussner, said in a press release that he was: “very frustrated by the skyrocketing costs of employee health benefits. My solution was to create ACBG.”

Creative Solution

Federal law requires RRG insureds to also be owners of the company. Each owner-member of ACGB self-insures their own employee group medical coverage under ERISA, and together they pool to insure the contract liability of their benefits programs under another federal law, the Liability Risk Retention Act (LRRA) by forming the RRG.

Under LRRA, an RRG may operate in all states once it is licensed in its state of domicile. That federal pre-emption of state control is the rock that the risk retention industry is built upon.

The creative aspect in this new RRG is viewing excess healthcare costs as contractual liability coverage- which is a form of liability coverage available to RRGs under the federal law.

The American Risk Retention Coalition (ARRG), a function of the Self-Insurance Institute of America (SIIA), is now working with Congress to expand the LRRA into additional types of coverage such as property and excess workers’ compensation.

In the example of the ACBG, member-owners continue to self-insure their employee benefits up to self-chosen levels of loss. Through the RRG they insure a second layer of loss, and the RRG buys reinsurance for catastrophic coverage.

“This is one mechanism to use alternative risk transfer for employee benefits.” says Milligan’s Thompson. “Others are being adapted for different levels of risk retention.”

Keep Control

A common theme among all such approaches is that owner-insureds of the RRGs will maintain control over their reinsurance premiums and can realize both financial and tax benefits form their ownership.

An RRG may be structured so that reinsurance attaches at various points, depending on each member’s appetite for risk. Larger companies may opt to insure up to, say, $250,000 per employee while smaller companies may be averse to risks above $10,000. The variable factor is the premium each member-owner will pay to the RRG.

This kind of flexibility makes health benefits liability RRGs very attractive to self-insuring companies. I asked Thompson why it had not been done before.

“I don’t know the reason,” he said. “It’s just that nobody had done it.”

Insuring casualty liabilities through an RRG is a more familiar use of the structure. In fact, many of the same members of the ACBG also belong to another company, the American Construction Insurance Group, which is an RRG that provides coverage for various other liability coverages.

Vital Exemption

A key benefit of RRGs is that they will fly under the radar of the many states that are now assessing taxes on traditional stop-loss policies to support their high-risk healthcare pools. As casualty insurers providing contractual liability coverage and operating under the LRRA, they are exempt from state assessments.

SIIA chief executive Jim Kinder has long argued that stop-loss insurance is not health insurance because it indemnifies employers against the losses of their overall healthcare plans and does not cover individual employees for medical treatments. That argument rings just as true for the RRG approach to covering excess healthcare losses as contractual liabilities.

Thompson of Milliman told me that he believes that many trade and professional groups will be drawn to RRGs for this purpose. RRGs would work very well for larger-size companies such as those engaged in construction, manufacturing or distribution, just to name a few.

And, properly structured, benefits liability RRGs could serve members of any homogeneous group.

Since ACBG was formed, I have been intimately involved in the development of three RRGs that are intended to be domiciled in Montana that provide employers contractual liability coverage through a separate captive that serves as the first insured layer of traditional self-insured employee group medical stop-loss coverage:

• AD-COMP MED® will serve automobile dealers with ERISA-approved group medical plans and specific aggregate coverage under a general liability form specific to contracted liability coverage. The RRG will buy reinsurance from its own segregated cell captive that allows for regional rating schedules and allows mega dealers to assume higher optional risk retention levels.
• an RRG is being formed by a group of state credit unions to insure specific and aggregate coverage for self-insured employee medical coverage in the same way. This group already self-insures its members’ workers’ compensation insurance- specific and aggregate excess coverage will now be provided by its segregated cell captive. The cell will take the next $500,000 after the pool’s retention, moving traditional reinsurers up.
• a third RRG designed to insure excess employee benefits coverage is a national non-denominational church group headquartered in Florida. This group will also employ the excess workers’ compensation feature through a segregated cell captive.

These little companies in the vast spaces of the American West (where the population of the sate of Montana is roughly equivalent to that of Birmingham, England) are making a major impression on the reinsurers in London and Bermuda markets.

It will be interesting to learn whether US service providers to self-insurers such as MGUs and third-party administrators are equally as alert to the possibilities of this new form of stop-loss insurance.

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