Over the past few years, economic and regulatory forces have incentivized some health care providers to employ more financially austere measures to lower operating costs. Medical malpractice insurance risk retention groups cater to these individuals and organizations. Thanks to lower capital requirements and less regulations at the state level, risk retention groups are able to quickly enter a state’s professional liability market and offer insurance premiums lower than traditional medical malpractice carriers’.
What Is a Medical Malpractice Insurance Risk Retention Group?
A risk retention group is an insurance company formed by a group of professionals for the purpose of providing liability insurance to its members. All policyholders must be from the same industry to ensure similar risk exposure profiles. Risk retention groups can be structured as corporations or limited liability companies, and domiciled in one state but able to insure members nationwide. The groups are usually treated as captive insurance companies, but are regulated as traditional insurance carriers in states without captive law. Although they typically don’t prioritize profits, risk retention groups nevertheless have enjoyed rapid growth in the last decade. The Liability Risk Retention Act, passed in 1986, aimed to increase liability insurance availability and lower premiums in a market suffering from exorbitant costs and decreased benefits at the hands of traditional carriers. The tides have turned, as risk retention groups now dominate the malpractice insurance market and account for the majority of underwritten policies.
Benefits of Forming or Joining a Risk Retention Group
The main advantage of medical malpractice risk retention groups is more control over insurance premiums. Each state has different laws and regulations regarding insurance companies, so traditional, state-licensed and regulated insurance carriers are bound by the rules of their states. Risk retention groups enjoy federal regulation passed in the Liability Risk Retention Act that preempts state rules. Groups can utilize this competitive advantage by domiciling and getting licensed in a state with lenient requirements, then insuring members practicing in states with more stringent regulatory environments, undercutting state-bound traditional carriers along the way. Forming a risk retention group is cheaper and easier than creating a traditional insurance company, but it still requires a significant initial capital investment, management, legal counsel, and expertise on capitalization, and actuarial analysis and compliance. Joining an existing risk retention groups affords the existing benefits without the added risk and hassle of making one from scratch.
Potential Risks and Downsides to Consider
Although traditional insurance providers are bound by higher state-mandated costs, they also enjoy increased security that non-domiciled risk retention groups cannot provide. For example, state insurance officials may require carriers to pay into a financial relief fund, thus raising carriers’ operating costs and premiums. However, in the event that one of the paying organizations becomes insolvent, the state-appropriated funds are available for use. If a non-domiciled risk retention group becomes insolvent, both policyholders and claimants are out of luck. In the event of insurance provider insolvency, malpractice trials are stayed, potentially for years, leaving compensation-seeking plaintiffs high and dry. Another related concern is risk distribution. Although recent statistics display a decrease in the dollar amount for claims, suggesting a trend of lower market risk and subsequent acceptability of pursuing a low-premium strategy, risk retention groups may be too optimistic. By charging low premiums, capital surplus may prove insufficient in paying out future claims, resulting in insolvency. Furthermore, risk retention groups are able to woo perceived lower-risk clients, leaving the high-claim physicians to traditional insurers and leading to adverse selection. These combined factors, as well as states’ general annoyance at their regulatory impotence, has sparked new legislative dialogue pertaining to increased regulation that may threaten the existence of risk retention groups as we presently know them.
Financial Stability Ratings and Liability Coverage for Employment
Medical malpractice insurance risk retention groups are reluctant to seek ratings by A.M. Best, a rating agency that evaluates traditional insurers, because it is expensive and time-consuming. Most prefer to be rated by Demotech, which releases a comparable financial stability rating based on the risk retention group’s risk portfolio and cash flows. Hospitals may not accept a risk retention group policy as proof of liability insurance when considering employment.
Medical malpractice risk retention groups have the potential to reduce insurance costs, but current risk factors and the uncertain regulatory environment of the market must be considered. Choosing a liability insurance provider is a decision that has potentially long-term legal and financial ramifications, so prudence, attention to detail, and an honest assessment of personal and organizational needs are paramount during deliberation.