RISK GROUP ENTERS RUNOFF

NASHVILLE, Tenn.-Members of a risk retention group with dwindling premium volume expect that converting to a purchasing group will continue to offer them a viable risk financing alternative.

That is the hope of about 120 non-profit, community medical clinics in California, which belonged to the Tennessee-based Clinic Mutual Insurance Co. Risk Retention Group.

While CMIC began a runoff April 1, nearly all its former clinic members joined the newly organized Clinic Purchase Group Inc. in Tennessee, whose members are insured by NORCAL Mutual Insurance Co. of San Francisco.

The transition was prompted primarily by a federal law change that reduced the liability of several large members, reducing their need for high coverage limits, said Carolyn Greene, senior vp of Willis Corroon's national health care practice group in Nashville, Tenn. She serves as general manager for the risk retention group and will oversee administration services for the purchasing group.

The soft market for medical malpractice coverages also was a factor for both the risk retention group and the insurer to enter into the new arrangement.

The conversion is expected to help NORCAL diversify its business by expanding its client base. A.M. Best Co. cited lack of diversification when it downgraded its rating for NORCAL and other medical malpractice insurers last year to A from A+.

The members of CMIC risk retention group consisted primarily of independent clinics in California, which are 501(c)(3) corporations under the Internal Revenue tax code.

Since 1987, they have purchased professional liability, general liability and non-owned auto coverage through the group.

At year-end 1995, the risk retention group's gross premium was $5.28 million and total admitted assets neared $8.89 million, while policyholders surplus was $1.6 million, according to The Risk Retention Group Directory & Guide 1996. However, its unpaid loss adjustment expense had increased 60% to nearly $2.5 million.

The operations of the group changed after federal authorities extended broader legal protection to about 30 of the group's federally funded clinic members as a result of the Federal Tort Claims Act, signed into law in late 1995.

The change meant that "the clinics and their employees are viewed as federal employees" and the federal government would provide some protections, including defense services, Ms. Greene said.

As a result, the large clinics' need for coverage shrunk dramatically. They had previously purchased broad malpractice coverage, which contributed about 60% of the risk retention group's $6 million in gross written premium. However, they now need only minimal gap coverage, which costs considerably less.

"With the change in our large policyholders' needs, this transition seems to be the most financially prudent move," said Ms. Greene.

That is especially true because operational changes, too, have been "fairly seamless" for members, she said.

NORCAL will issue identical policies with equivalent or higher limits, while using the risk retention group's applications and policies. In addition, there will be continuity in service providers, which include Willis Corroon, LAI Insurance Agents of Oakland, Calif., and Chapman & Associates in Pasadena, Calif.

Experts say a provision that allows the risk retention group's board of directors to serve as an advisory committee to NORCAL, and oversee the risk retention group's runoff, is particularly helpful.

"They did the best thing for their members. They really preserved the experience they had and put it into a large company's book," said Karen Cutts, managing editor/publisher of the Risk Retention Reporter in Pasadena, Calif. "Everybody benefits from keeping the business distinct."

"The value of a risk retention group converting into a purchasing group is that the risk retention group may be warehousing the risk," said Jon Harkavy, vp and general counsel of USA Risk Services Inc. in Arlington, Va. Should another hard market occur, the risk could be pulled out of mothballs and the risk retention group revived, he said.

The advantages of the change benefit the insurer as well as the risk retention group.

It benefits NORCAL by helping it diversify its operations, said John Andre, assistant vp of the property/casualty division of A.M. Best.

NORCAL was one of seven medical malpractice insurers that saw its rating by A.M. Best Co. rating downgraded last June to A from A+ because of "significant uncertainty in the medical malpractice marketplace and the company's limited insurance market focus, as it primarily writes professional liability coverages for physicians in California," said Hope Maxwell, a Best's analyst.

An insurance company with "a narrow product line and geographic concentration" is "highly exposed" to adverse market conditions and regulatory changes, especially in light of evolving managed care issues, which create uncertainty, according to Ms. Maxwell.

NORCAL disagrees somewhat with Best's analysis but acknowledges that inclusion of the Clinic Mutual's $4 million in premium will help a little to diversify its operations, said Ken Smole, NORCAL vp. In addition, "We are going to consider expanding the program to find out if there are other clinics in other states that might be interested," he said.

In 1995, NORCAL had total admitted assets of $632.8 million and policyholder surplus of $212.5 million.

Late last year another risk retention group arranged for its members to covert to a risk purchasing group.

Pest control companies that are members of S.E.C.U.R.E. Underwriters Risk Retention Group agreed late last year to voluntarily dissolve the Maryland-based group and arrange to obtain coverage through a purchasing group operated by Legion Insurance Co. of Philadelphia.

The risk retention group was profitable from a loss-ratio standpoint, but appeared to be losing money because of the large loss reserves required under statutory accounting rules, said Dan Reardon, a former risk retention group executive who now is president of companies that provide reinsurance and general services to the program.

The purchasing group, called S.E.C.U.R.E. Assn. Inc., offers the same type of general liability coverage, including pollution and contamination on a full occurrence policy form. It also offers a variety of related coverages, including errors and omissions liability insurance for real estate inspections.

"The policyholders got the identical or better coverage for the same premium without the concerns or the liabilities of owning an insurance company," Mr. Reardon said.