Captive & ART Review Article of the month

• CCRRG at present has 58 members, representing 105 locations and 10,195 beds in 11 states
• Licensed in 2003, CCRRG grew by 50% in 2004 on an annualised basis
• CCRRG grew by 100% in 2005 and expects to grow by 25% in 2006, as the market has softened and CCRRG is continuing to expand in other states where the premium is significantly less
• CCRRG is registered in 43 states, and at the moment writes business in 11 states
• Focus for the near future is Mid-Atlantic, Midwest and Texas.

When Magnolia LTC Management Services' risk retention group, GCRRG, was formed, Texas was considered by many in the public liability and general liability (PL&GL) market that insured long-term care (LTC) as something of a pariah.

After Florida it was probably the next state that most carriers, conventional or otherwise, would avoid.

When changes in medical malpractice liability limits became effective in Texas on 1 September 2003, that all changed.

These amendments, part of a comprehensive tort law overhaul, limited the non-economic damages for medical malpractice cases.

These limits varied depending on whether the insured was a single long-term care facility or group of facilities and varied if a wrongful death verdict was rendered.

"The important thing for CCRRG is knowledge that there was a cap which applied to non-economic damages, be it singular or multiple," says Robert Bates, board member of CCRRG and president of Magnolia LTC Management Services.

"This is significantly different from many other states, for example in California should a plaintiff allege and then prove an 'elder abuse' claim, the state's Medical Injury Compensation Reform Act (M1CRA) limits of US$250,000 may not apply," he says

Texas dealt with this by incorporating the tort reforms into its constitution, making it a statutory protection.

"This made for a dramatically different environment for professional and general liability," says Bates. Accordingly CCRRG and a number of new carriers, as well as other RRGs, rushed to exploit this new market.

Patience pays off

CCRRG and its reinsurance partner elected to wait and see if the plaintiffs' bar was able to successfully challenge these changes.

"When it appeared there had been a meaningful and lasting change, CCRRG approached its board of directors and reinsurers to enter into Texas using the same marketing, risk management and underwriting criteria," says Bates.

Permission was granted and CCRRG contracted with Milliman, USA to provide Texas specific rates and the CCRRG board approved entry into Texas in May of 2006 at its annual board meeting. During this same time frame CCRRG submitted an application to the Texas Department of Insurance which was approved in June of 2006.

Bates himself has more than 20 years' experience as an administrator, director of risk management and operations for a number of LTC operations.

"As a result 1 recognised there was insufficient recognition for the 'good' LTC operator," he says. "The traditional market did not give appropriate recognition to the smaller 'quality' operator that was not subject to the same issues as the larger publicly-owned and operated chains with emphasis on meeting quarterly earning statements and satisfying stockholders.

"Recognising that the above factors were not adequately addressed by the conventional or alternative market we decided to explore options that acknowledged the fundamental difference in risk of the smaller, independently-owned owner/operators while at the same time providing a high degree of services and support.

"The conventional market came in and left the state/market based on their needs, often frustrating the operator who may have been with that carrier for some time."

Teething trouble

Obtaining a licence proved to be more problematic than originally anticipated, says Bates. CCRRG was proposed to be domiciled out of South Carolina, which took the review process of CCRRG extremely seriously. Due to the problematic nature of how they perceived LTC in general, at time of formation, and due to the unique nature of the Claims Paid™ policy form, there were a number of questions that had to be addressed with a corresponding number of meetings.

"At the end of the day, they were supportive of CCRRG, and CCRRG has met all regulatory requirements of South Carolina and has enjoyed a good relationship with them," he says.

Due to CCRRG's desire to not be limited to one state from the beginning, it forced a greater in-depth review than might have occurred otherwise, but CCRRG felt an important aspect of the programme was to have a spread of risk and not be dependent on any one state and the vagaries of its litigation climate or price.

"One positive result of the delay was that CCRRG was able to secure reinsurance from six reinsurers months prior to its application being approved. South Carolina indicated it was one of the first times they had seen the reinsurance already in place prior to a licence being finalised."

The concept of CCRRG started in late 2002. Staff were hired, office space was rented, reinsurance was secured, the policy form was developed and CCRRG went live in September 2003, upon licensure by South Carolina. Its first insured was 1 October 2003.

One of the more difficult issues to resolve, especially in the short term, was raising the necessary capital, a task in which CCRRG was eventually successful but one that took longer than had been anticipated.

CCRRG initially needed US$500,000 of contributed surplus, with the regulatory authorities requiring US$2.5m in surplus allowed to occur over a period of time with regular reports to South Carolina.

Each insured member is an owner, with one vote for every location insured.

Insured member/owners pay premium, contribute surplus and share in profits or losses based on performance of CCRRG to date. The claims paid policy form allows an accurate and timely projection of expected 'cost' per programme/calendar year.

All insureds are required to indicate their intent to non-renew 90 days prior to renewal and CCRRG is required to indicate renewal pricing prior to 30 days of renewal.

CCRRG has had several states question the Claims Paid™ policy form. Wherever that has occurred it has been able to address any concerns or answer any questions resulting in approval of every state CCRRG has desired to register and do business in.

"A key component for CCRRG is competitive pricing, even taking into account dues, surplus requirements and, of course, premium," says Bates.

"The programme manager refers to this as the total 'out of pocket expense' and traditionally this total cost is somewhat less than the traditional claims made carrier premium only cost. CCRRG believes that this saving, especially when considering that a significant percentage of this out of pocket cost is 'surplus', is financially a very good proposition to a CCRRG insured," explains Bates.

Investment success

The typical CCRRG member has earned between 18% and 20% return on investment when applying CCRRG profits to their capital or surplus investment while at the same time CCRRG's premium alone is significantly less than its competitors.

An additional component to CCRRG's ongoing success had been no increase in premium, outside of normal step up factors for the last four programme years. CCRRG is not anticipating any additional increase in its programme cost for the upcoming programme year as well.

It claims its low-risk pool arises from stringent underwriting claims history, which itself comes from consistent and proactive risk management.

"CCRRG, as part of its original business plan, projected a lower-than-industry average of claims per thousand beds.

"This was predicated on more stringent underwriting criteria, non-publicly traded companies, and more direct services initially and ongoing to the members of CCRRG," says Bates.

CCRRG's percentage of claims per thousand beds is significantly less than CCRRG's own projections and dramatically less than the LTC industry in general, he adds.

Ultimately a number of useful lessons were learned in the process of setting up the Texas operation and Bates offers a number of tips to others considering a similar move:

Securing the reinsurance for CCRRG was critical and doing so in advance of licensure was helpful to CCRRG

Anticipating the issues that the regulatory authorities may have in advance of the application could have expedited the process so finding out what the issues are, or may be, prior to the application may help in the process Have a unique product of service

Enter the market at the right time

Make your business plan conservative

Pick your partners carefully

Finally, have lots of money and patience.