How a Risk-Financing Vehicle Became the Nations Largest Medical Malpractice Risk Retention Group

Copyright 2009 Insurance Communications The Risk Retention Reporter

March 2009

Vol. 23, No. 3

1501 words

How a Risk-Financing Vehicle Became the Nations Largest Medical Malpractice Risk Retention Group

Featuring Christopher D. Smith, President & CEO MCIC Vermont, Inc. (A Risk Retention Group)

Consider the challenge of managing a medical malpractice insurance company where the functions of underwriting and risk management are performed by the insured hospitals. Christopher Smith, President of MCIC Vermont Inc. (A Risk Retention Group) (MCIC Vermont), met this challenge when he joined MCICs predecessor company, Medical Centre Insurance Company, Ltd. (MCIC Bermuda), in 1995.

Since then, hes been working to transform what began in 1978 as a risk financing vehicle for a group of major university-affiliated hospitals into a full fledged insurance company. Today, Smith is CEO of the largest medical malpractice RRG in the nation, MCIC Vermont, Inc., with $280 million of premium and 11,500 physicians insured. The shareholders are some of Americas leading universities and hospitals: Columbia University, Cornell University, Johns Hopkins Hospital, Johns Hopkins University, New York Presbyterian Hospital, University of Rochester, Yale New Haven Hospital, and Yale University.

Hospitals Take Control of Their Destiny Smith inherited a system that began when a group of hospitals decided to take control of their destiny in the face of an insurance crisis. The traditional medical malpractice insurers had withdrawn from the market or priced coverage out of sight. The Universities created the Bermuda captive, MCIC Bermuda, as an insurance financing vehicle. Each hospital was responsible for its own underwriting, risk management, and claims handling. The captive was responsible for financing, reinsurance, and information technology.

How could hospitals make underwriting judgments about their own physicians? They depended on the so-called "credentialing" process. If a doctor met the professional requirements to have staff privileges at the hospital, that doctor was considered eligible. Risk management was part of continuing education in patient care rather than a stand-alone insurance service. The hospitals also managed claims.

This approach had worked over the years. However, Smith and the MCIC Bermuda Board saw the potential benefits of applying underwriting standards that would be followed uniformly and putting into effect professional risk management programs to cut losses and improve patient safety. In his judgment, moving toward a standard business model for insurance would provide shareholders, "a long-term, stable, and cost effective source of medical professional and general liability insurance."

With strong Board support, Smith began a strategic planning process that led to formation of the RRG. The process continues today. The goal is to become a full-fledged insurance company by applying the best industry standards to all the traditional insurance functions. The plan is centered on achieving "Best Practices." While the hospitals continue to be involved directly in underwriting and risk management, MCIC Vermont, the RRG, has succeeded in applying standard underwriting criteria to the "credentialing" process along with loss control programs that proved effective.

Insurance Discipline Introduced

"Over the last few years, weve brought more insurance discipline into underwriting and risk management. The institutions are using our standards to review their physicians. State-of-the-art education programs using simulators cut high-risk obstetrics claims 40 percent," Smith declared. "Were getting more hospital data to identify emerging risks and design remedial programs."

Risk management and patient safety programs are targeted at three claims-prone areas: surgery, obstetrics, and emergency room care. MCIC Vermont now has a "Patient Safety Nurse" at each hospital who works with the staff to reduce error rates. Team training has made dramatic improvements. Protocols have been established for the use of certain medicines.

Fully implementing the strategic plan will take three to five more years, according to Smith. The hospitals are accepting insurance discipline because they see results in improved patient safety, reduced claims costs, and premiums that remain below the private market. MCIC Vermont pursues what Smith calls a "no growth strategy," meaning that the only growth is internal as the hospital shareholders add to their own operations. At some point in the future, Smith said MCIC Vermont may take on more hospitals, but for now hes focused on creating benefits for existing shareholders.

Smith got into insurance by way of consulting assignments that involved alternative risk transfer programs for academic medical centers. After graduating from Virginia Polytechnic Institute in 1986, he spent four years at Arthur Anderson as a consultant in information technology. In 1990, he moved to another consulting company, Emcol, where he set up captives in almost all lines of insurance for colleges and universities.

"MCIC Bermuda was my client for five years. When I came on full-time in '95, it quickly became apparent that tax laws hampered our ability to manage the captive with U.S.-based employees. This stood in the way of developing uniform standards for underwriting, risk management, and claims," Smith related. "After a good deal of study, we decided a Risk Retention Group offered the best business model."

Strategic Plan Launched

"We formed the RRG with a Vermont domicile in 1997 and worked with the RRG Board to begin implementing the strategic plan to become a full-fledged insurance company. We put new, professional risk management programs into effect at the hospitals. All underwriters at the institutions are in the process of implementing traditional underwriting standards. Were piloting reviews of physicians. Were using data to drive loss control and discover emerging risks. Were seeing dramatic improvements with our Patient Safety Nurses and team training," he proudly declared.

How about financial results? "Profit is not a motive, but the RRG is successful financially. We continue to provide the best coverage at rates lower than the traditional market even in the highest-cost states including New York," Smith said. "My main driver is whats best for existing shareholders. The only incentive for growth would be to reduce costs, but we already have the advantage of being so big that our costs are spread over a broad base," he explained. "Sometime in the future when all the Best Practices were working on are in place, we may consider bringing in more hospitals."

MCIC Vermont provides the bulk of its reinsurance through the wholly-owned Bermuda captive, MCIC Bermuda. MCIC Vermont retains coverage limits of $100,000 per claim and $18 million aggregate in each policy year. The remaining coverage is reinsured through MCIC Bermuda. Total self-insured coverage in the two companies is some $20 to $30 million per claim depending on the medical center. An additional $200 million is purchased in the commercial market.

Three Challenging Issues

Smith identified three challenging issues he faces today: (1) Impact of declining asset values on the RRG and the endowments of its member institutions MCIC Vermont diversified into some equities in recent years; (2) Volatility in claims costs why has a million dollar case become a two million case? (3) Finding people who have the required skill sets.

Competition is not one of Smiths major challenges. "Our shareholders understand that over the long-run the RRG is the most cost effective means to obtain med mal insurance. Our patient safety programs cut claims significantly. Weve put new financial controls in place. We have low overhead. Our strategic plan is paying off," he commented.

Smith is involved in industry affairs. He has spoken at the Vermont Captive Insurance Association. Right now, however, he spends most of his personal time with wife, Lisa, seven-year old Garrett whos playing football, and six-year old Cate whos into soccer and swimming. Smith does find time to work out at the gym three or four times a week and enjoys skiing, boating, and hiking when time permits.

Christopher D. Smith, President & CEO

RRG: MCIC Vermont, Inc. (A Risk Retention Group)

Organizational Structure: Stock company owned by policyholders

RRG Member/Insureds: Universities and hospitals affiliated with universities

Education: Graduate of Virginia Polytechnic Institute in finance

Experience: Twenty years in insurance consulting and management

Proudest Achievement: Developing and implementing a strategic plan to transform a risk financing vehicle into a full-fledged insurance company

Advice to new RRGs: "Med mal is volatile. A single claim can put a small company out of business. To succeed, you need a strong base of capital. Get the best independent advice. Hire professional management."

In his words: "Our goal is to apply insurance underwriting criteria across all institutions, put in place the most advanced loss prevention and patient safety programs along with best practices in claims, all supported by data and analytics to drive decision making."

March 10, 2009