1. ART AND SCIENCE Plus Medical PL Symposium March 11-12, 2003 Regis Coccia, Managing Editor Business Insurance Ed Wrobel, Tillinghast-Towers Perrin Julie E. Robertson, Honigman Miller Schwartz and Cohn LLP Paul Longman, Employers Re Seamus Tivnan, Marsh Cayman Islands

2. ART AND SCIENCE Plus Medical PL Symposium March 11-12, 2003 Ed Wrobel Tillinghast-Towers Perrin phone: (860) 843 7022 fax: (860) 843 7001 email: ed.wrobel@tillinghast.com

3. 3 Why ART? The Buyers’ Perspective $1B+ in premium needs to find a home –(St Paul, PHICO, MIIX, Reliance, Reciprocal of America….) Substantial increases in rate and retention Limitations in coverage Non-renewals => Significantly greater risk retention required of smaller entities => Formalization of risk retention vehicle

4. 4 The Buyers’ Perspective “Our loss experience is better than average - we’re being painted with a broad brush”

5. 5 The Actuarial Perspective “Our loss experience is better than average - we’re being painted with a broad brush” – – Really?

6. 6 The Actuarial Perspective The captive feasibility study –Actuarial / financial analysis –Legal / regulatory / tax issues –Coverage / structure –Reinsurance

7. 7 The Actuarial Perspective Key Issues in the Current Environment –Critical Mass Economically feasible to absorb frictional costs Stability / predictability of loss costs –Capital/surplus Adequacy for smaller entities

8. 8 Margin/Surplus Levels Mean Value Probability $ 90% Confidence Level Margin $5M$8M

9. 9 Margin/Surplus Levels Mean Value Probability $ 90% Confidence Level $300K$1M Margin

10. 10 The Actuarial Perspective Key Issues in the Current Environment –Credibility of data Consistency: changing carriers Case reserve adequacy / strengthening Reliance on industry information –Impact of trends, legislative changes –Source / mechanism for funding in the event of adverse experience –Affordability

11. ART AND SCIENCE Plus Medical PL Symposium March 11-12, 2003 Julie E. Robertson Honigman Miller Schwartz and Cohn LLP (313) 465-7520 jrobertson@honigman.com

12. 12 Historically, few physician captives because: n Characteristics of physician practices: n No retained earnings/no available capital n No “institutional mindset n No long term view of insurance n No experience with risk retention n Poor access to loss history/data n Tail coverage issues n Premium deductibility issues

13. 13 “Oh, the times they are a changing” n Different practice models: n National provider groups n Bigger local groups n Employing business/financial professionals n Retained earnings and investments n More opportunity for premium deductibility n Insurance market, insurance market, insurance market!

14. 14 Premium Deductibility n June 2001 Rev Proc./Dec 2002 Rulings n Abandonment of “economic family doctrine” n 2002-89: Single parent captive/90% risk parent/10% risk 3rd parties = No Insurance n But 50% risk parent/50% risk 3rd parties = Insurance n 2002-90: Single parent captive/12 subsidiaries = Insurance n 2002-91: group captive; no one insured more than 15% stock/15% risk = Insurance

15. 15 Premium Deductibility n Rev Proc 2002-75: IRS will now begin issuing private letter rulings regarding tax treatment of captive insurance arrangements n Highly factual; likely expensive and time consuming process n If you have to ask...

16. 16 Federal Excise Tax and Reinsurance Transactions n 4% direct premium/1% reinsurance premium n Not applicable if captive makes a 953(d) election

17. 17 Premium Deductibility and Security Requirements n Must have “risk” to have insurance n Security requirements equal to aggregate limits can undermine deductibility

18. 18 Why Do Physicians Choose a Fronted Program? n State may require purchase of insurance from approved carriers or for fund participation n Example: Pennsylvania/medical malpractice insurance n State regulatory environment or attitude may affect decision n State Department of Insurance may view direct issue captive as transacting insurance within state and attempt to regulate it

19. 19 Why Do Physicians Choose a Fronted Program? n Third party insureds may feel more comfortable with commercial policy n Insureds may be required to maintain insurance from rated carrier or approved carrier under n Bond/debt/credit facility covenants n Medical staff bylaws n Managed care contracts n Other contracts

20. 20 HIPAA Privacy Rules n Health Care Providers must ensure the privacy of protected health information shared with their business associates n Impact on fronted captive programs n Policy endorsements and required elements n Passing the information “down the chain” n Can information be redacted?

21. ART AND SCIENCE Plus Medical PL Symposium March 11-12, 2003 Paul Longman Email : Paul.Longman@ercgroup.com

22. 22 Art & Science - A Reinsurer’s Perspective By definition, ART Customer is: n Seeking options to conventional insurance and/or 100% risk transfer n Wishes to retain a “predictable” level of risk n Seeks to transfer “unpredictable” level of risk: per occurrence or aggregate n Reinsurer usually provides excess coverage

23. 23 Art & Science - A Reinsurer’s Perspective What we look for……. “Size Matters!” n Single entity or strong affiliation/relationship between members n Commitment to long term risk financing solution n Desire and ability to retain an appropriate level of loss n Strong financials

24. 24 Art & Science - A Reinsurer’s Perspective What we look for……. “Size Matters!” n Commitment and resources to Risk Management/Loss Prevention Program n Creditable historical loss data n Competent claims handling via in-house staff or TPA. n Clear/unambiguous coverage forms - “clear understanding of what is covered”

25. 25 Art & Science - A Reinsurer’s Perspective What we look for……. “Size Matters!” n Actuarial Projection of expected losses n Acceptable funding mechanism for expected losses

26. 26 Art & Science - A Reinsurer’s Perspective Captive documentation n Business Plan n Articles of Incorporation/Articles of Assoc.. n Bylaws n Verification of Capitalization n Certificate of Incorporation n Certified copy of Certificate of Authority (USA) or Certificate of Registration (offshore)

27. 27 Art & Science - A Reinsurer’s Perspective Comments on fronting: n Rating and viability of front is crucial n Universe of willing fronting companies has shrunk n Front fees vary significantly - policy issuance and required servicing are major factors. Servicing can be done by customer, broker, fronting co. or others

28. 28 Art & Science - A Reinsurer’s Perspective Comments on fronting: n Risk ceded back to customer from fronting co. or reinsurer usually must be fully collateralized * some companies require collateralization = to the full aggregate exposure *others will require collateralization = to expected losses + a provision for adverse development *acceptable collateralization: ever-green LOC or trust agreement

29. ART AND SCIENCE Plus Medical PL Symposium March 11-12, 2003 Seamus Tivnan Marsh Management Services Cayman Ltd. Tel 345 949 7988 Fax 345 949 7849 Email Seamus.Tivnan@marsh.com

30. 30 Art & Science Captive Options n Risk Retention Group n Reciprocal n Captive Insurer n Pure n Group / Association n Segregated Cell n Domiciles n United States n Offshore

31. 31 Art & Science Why Cayman? n Largest Domicile in the World for Healthcare n 199 healthcare captives with $1B in premium and $4.3B in assets n First Class Infrastructure n Proven Reputation n Accessibility n Doing Business in Cayman

32. 32 Art & Science So you think you want a captive? n Why? n Affordability n Availability n Accessibility n Or n Attract ability

33. 33 Art & Science So you think you want a captive? n Minimum Size n Premium, capital n Costs n To consider, establish and operate n Administration n Home office, plus Director and Officer obligations n Long term commitment

34. 34 Art & Science So you still want a captive? n The Regulator – that’s the easy part n Fronting n Do you need it? Can you find it or even afford it? n Reinsurance n Do you need it? Can you find it or even afford it? n Funding n It may be more expensive n Pay more premium or more capital? n Taxation n ‘Exists’ in all domiciles

35. 35 Art & Science Physician Groups – Why they do not start and why they fail? n Tax Deductibility & Structure n Strength in numbers n Segregated Cell Approach n Funding – be it premium or capital n Funding – retro element, good or bad? n Fronting n Commitment – to begin and continue n Old programs struggle as members leave

36. 36 Art & Science Captive Go Ahead n Timing n Select domicile n Select partners – actuary, attorney, auditor, banker, manager, tpa n Select Board of Directors n File Application – with fee n Capitalize Company and hold first meeting

37. 37 Thank You ?