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U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
Commission File Number: 0-25505
[LOGO]
NCRIC Group, Inc.
District of Columbia 52-2134774
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1115 30th Street, NW, Washington, D.C. 20007
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(Address of principal executive offices) (Zip Code)
202-969-1866
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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
Common Stock par value $.01 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained in this form, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, computed by reference to the average of the closing bid and ask
price of such stock on the Nasdaq SmallCap Market on February 28, 2001 was
approximately $10.0 million.
The number of shares outstanding of the Issuer's Common Stock, the issuer's
only class of outstanding capital stock, as of February 28, 2001 was 3,725,355.
Documents Incorporated by Reference
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
I. Portions of the NCRIC Group, Inc. Proxy Statement for the 2001 Annual
Meeting of Shareholders are incorporated by reference into certain items of
Part III.
TABLE OF CONTENTS
PART I. Page
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Item 1. Business of the Company........................................ 1
Item 2. Properties..................................................... 41
Item 3. Legal Proceedings.............................................. 41
Item 4. Submission of Matters to a Vote of Security Holders............ 41
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters........................................................ 41
Item 6. Selected Financial Data........................................ 42
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 44
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.... 66
Item 8. Financial Statements........................................... 68
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 101
PART III.
Item 10. Directors and Officers of the Registrant....................... 101
Item 11. Executive Compensation......................................... 101
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 101
Item 13. Certain Relationships and Related Transactions................. 101
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................... 101
PART I
Item 1. Business of the Company
Background
NCRIC Group, Inc., a District of Columbia corporation, is a holding company
that owns NCRIC, Inc., a medical professional liability insurance company, and
NCRIC MSO, Inc., a physician practice management and financial services company.
The principal operations of NCRIC, Inc. and NCRIC MSO are conducted in the
District of Columbia, Maryland, Virginia, and North Carolina. References to
"NCRIC" mean NCRIC Group and its subsidiaries, including their predecessors.
NCRIC Group was organized in December 1998 in connection with the
reorganization of National Capital Reciprocal Insurance Company into a mutual
holding company structure (the "Reorganization"). NCRIC, A Mutual Holding
Company owns all of the outstanding shares of NCRIC Holdings, Inc., which prior
to July 29, 1999, owned all of the outstanding shares of NCRIC Group. Effective
July 29, 1999, NCRIC Group completed a public offering (the "Stock Offering")
and issued 2,220,000 shares of the common stock, to NCRIC Holdings, Inc. and
1,480,000 shares of the common stock in a subscription and community offering at
a price of $7.00 per share.
NCRIC Group owns all of the outstanding shares of NCRIC, Inc. and NCRIC
MSO. The following chart illustrates the organizational structure pursuant to
which the Company operates.
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NCRIC, A Mutual Holding Company
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|
100% of Shares |
|
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NCRIC Holdings, Inc.
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60% of Shares |
|
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NCRIC Group, Inc. 40% of Shares Public
------------- Stockholders
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|
100% of Shares | 100% of Shares
|
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| |
| |
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NCRIC, Inc. NCRIC MSO, Inc d/b/a
HealthCare Consulting
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| |
| |
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Subsidiaries Subsidiaries
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District of Columbia law provides that NCRIC, A Mutual Holding Company must
at all times own, directly or indirectly, a majority of the outstanding voting
stock of NCRIC, Inc.
NCRIC is the leading provider of medical professional liability insurance
in the District of Columbia, based on direct premiums written in 1999. Medical
professional liability insurance insures the physician against liabilities
arising from the rendering of, or failure to render, professional medical
services. NCRIC is one of the leading providers of practice management and
financial services to physicians in Virginia and North Carolina. In January
1999, NCRIC expanded its operations through the acquisition of HealthCare
Consulting, Inc., a physician practice management company, its affiliate, HCI
Ventures, LLC, a provider of capital and financial services to management
services organizations, and of Employee Benefits Services, Inc., a provider of
employee benefits services, owned by the stockholders of HealthCare Consulting.
Net proceeds received by NCRIC in the Stock Offering were $8.4 million. In
connection with the Stock Offering, NCRIC loaned $1,036,000 to the Employee
Stock Ownership Plan, ESOP, and $518,000 to the stock award plan. The loans from
NCRIC enabled the ESOP to purchase 148,000 shares of NCRIC's common stock, and
the stock award plan to purchase 74,000 shares of NCRIC's common stock. Of the
net proceeds, $5.1 million were used to repay indebtedness incurred through the
acquisition of HealthCare Consulting.
Medical professional liability insurance
NCRIC, Inc. is a medical professional liability insurance company servicing
healthcare providers in the District of Columbia and Maryland. NCRIC, Inc.'s
wholly-owned subsidiary, Commonwealth Medical Liability Insurance Company, CML,
sells medical professional liability insurance to healthcare providers in
Virginia, Maryland, West Virginia, and Delaware. CML's policies closely resemble
NCRIC's policies except that insureds of CML do not become members of NCRIC, A
Mutual Holding Company.
Created by District of Columbia physicians in 1980 when medical
professional liability insurance was either unavailable or prohibitively
expensive, NCRIC has provided high quality insurance products to its insureds in
the District of Columbia, a legal jurisdiction which has rejected tort reform
and has the highest cumulative average medical professional liability jury
awards of any jurisdiction in the United States. NCRIC's success rests, among
other factors, on its ability to successfully litigate claims, reduce its
insured's loss exposure through effective risk management and provide its
insureds with individualized service. Recognizing the value of NCRIC's insurance
products, 96% of NCRIC's insureds renewed their policies in 2000. NCRIC believes
that it successfully managed the medical professional liability insurance crisis
of the early 1980's and has prospered since through a combination of physician
governance and professional management expertise. As of December 31, 2000, the
insurance companies had 32 employees.
Over the past four years, NCRIC has distributed a customer satisfaction
survey. In 2000, 93% of those responding indicated that they were "always
pleased" or "almost always pleased" with NCRIC's service, which is comparable to
1999's rating of 94%.
According to A.M. Best Company, in 1999, 54% of the direct premiums written
for physician and hospital professional liability insurance in the District of
Columbia were written by NCRIC. In addition, during the year ended December 31,
2000, NCRIC generated 20% of its premiums in Maryland and Virginia. NCRIC's
market share is less than 3% in each of these markets. As of December 31, 2000,
NCRIC had approximately
1,800 medical professional liability policies outstanding in all of its markets.
The majority of NCRIC's premiums are generated from individual and small-group
practices, but it also has risk sharing programs with groups of physicians
sponsored by metropolitan Washington, D.C. area hospitals. NCRIC markets its
products directly to its physician clients. NCRIC also markets its products
through independent brokers and agents who produced 59% of new premiums in 2000
as compared to 43% in 1999.
Medical professional liability insurance insures the physician or other
healthcare provider against liabilities arising from the rendering of, or
failure to render, professional medical services. NCRIC's policies are written
on a claims-made basis and include legal defense against asserted professional
liability claims.
NCRIC's direct insurance premiums written were $22.7 million, $21.4
million, and $19.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The historic results of operations may not be indicative of future
operations. The operating results of medical professional liability insurers are
subject to significant fluctuation, which can result in net losses due to a
number of factors, including:
o adverse claims experience;
o judicial trends;
o changes in the investment and interest rate environment; and
o general economic conditions.
NCRIC believes it can best leverage its strengths and appeal to customers
by maintaining conservatism in its financial accounts. In line with this
philosophy, as of December 31, 2000, NCRIC has established, on a gross basis,
$81.1 million in loss reserves. NCRIC's conservative estimation of loss reserves
is demonstrated by its favorable loss developments in each year since 1990.
These favorable loss developments have contributed significantly to NCRIC's
reported earnings. While NCRIC believes that its loss reserves are adequate,
there is ultimately no guarantee that reserve levels will be adequate as losses
develop.
Practice management and financial services
NCRIC believes that its practice management and financial services business
diversifies its operations while solidifying the already strong relationship
NCRIC has with its existing insureds. As NCRIC successfully diversifies into
practice management and financial services, its goal is to increase its profits
and provide an additional market for its core insurance products. NCRIC MSO was
established in 1997 as NCRIC's vehicle to provide practice management and
financial services to physicians. NCRIC's business strategy is to develop a
range of practice management services which will give physicians the management
expertise they need to conduct their practices without requiring them to
relinquish ownership or control of their practices. NCRIC intends to be a
partner that physicians can rely on to understand their problems and who has the
foresight to develop services to fit their needs. In order to substantially
accelerate its entry into the practice management, financial services and
employee benefits markets, NCRIC acquired HealthCare Consulting, HCI Ventures
and Employee Benefits Services. Since the acquisition, NCRIC MSO has been doing
business as HealthCare Consulting.
Other NCRIC Group subsidiaries
In addition to NCRIC, Inc., CML, and NCRIC MSO operations, NCRIC has a
reinsurance brokerage operation, an insurance agency, and a physicians
organization.
National Capital Insurance Brokerage, Ltd., a wholly-owned subsidiary of
NCRIC, Inc., was formed in 1984 to serve as NCRIC's domestic reinsurance broker.
National Capital Insurance Brokerage, Ltd. has retained commission income that
would otherwise have been paid to outside reinsurance brokers. This income has
been used by NCRIC to offset other operating expenses. National Capital
Insurance Brokerage has also played a critical role in restructuring NCRIC's
reinsurance program to provide effective and comprehensive reinsurance coverage
without reducing NCRIC's profitability.
NCRIC Insurance Agency, a wholly-owned subsidiary of NCRIC, Inc. formed in
1989, offers life, health and disability insurance as well as property and
casualty insurance products. NCRIC Insurance Agency had commission income of
$80,312 in 2000 compared to $71,051 in 1999 and $81,573 in 1998. NCRIC Insurance
Agency offers its products in the same markets as NCRIC. As an insurance agent,
NCRIC Insurance Agency receives commissions for business it places for insurance
companies it represents. NCRIC Insurance Agency markets insurance products not
underwritten by NCRIC. This permits NCRIC's core insureds to obtain a wider
range of insurance products through NCRIC.
NCRIC Physicians Organization, Inc., organized in 1994, a wholly-owned
subsidiary of NCRIC MSO, manages a coalition of physicians which is organized to
contract with managed care payers as an exclusive healthcare provider network.
Approximately one-half of NCRIC Physicians Organization's members are insureds
of NCRIC. NCRIC Physicians Organization ended all of its contracts in 1999 and
formed an agreement with American Medical Security, AMS, to provide its network
to a developing PPO health plan by AMS for the Washington, D.C. metropolitan
area. NCRIC Physicians Organization reached a settlement with AMS, effective
October 1, 1999, that will provide NCRIC Physicians Organization with $6,000 per
month over a five year period. The monthly fee of $6,000 is reduced by $0.75 for
each subscriber who enrolls in the network plan.
Current Business Environment
The physicians served by NCRIC continue to face new challenges in the three
critical areas that underpin our healthcare system: cost, quality and delivery.
NCRIC has strived to create a financial services organization that will assist
physicians in each of these critical areas and to be adaptive to provide new
services and products that will meet changing cost, quality and delivery issues
within a physician's practice and the provider community.
Cost
The cost of health care has seen a sharp rise through 2000 and into 2001.
Managed care rose in power and dominance in the 1990s by trying to limit access
to health care resources under fixed payment reimbursements to the providers of
the resources, principally physicians. Large commercial payers and the federal
government tightened restrictions on service utilization and lowered payment
levels in an effort to gain control over costs. These methods have shown to be
largely a failure at cost control and have disenfranchised both the providers
and consumers of healthcare. Physicians face these cost issues
daily both through the frustration of dissatisfied patients and through their
own concerns as to the limitations placed by health plans on the access to care
needed by their patients. The restrictions increase the possibility of patient
litigation and lead to fiscal stress for the physician's practice.
NCRIC stands ready to assist physicians in their struggle with the health care
cost environment in both its malpractice insurance and practice management
operations. NCRIC has seen a rise in the cost of malpractice insurance through
an increase in the cost of losses, both the indemnity portion and litigation
expense, and has taken steps to better protect its insured physicians by
judiciously adjusting the rates to reflect the underlying costs for the
insurance protection. While this may increase the price to physicians, it
alleviates the risk to the medical practice of facing a sizeable rate increase,
or worse, a carrier with insufficient rates which ultimately leaves the
physician with no malpractice coverage at all. NCRIC continues to develop new
risk structures to better assist physicians with loss control and risk
assumption. Equally, NCRIC continues to assist physician practices with
management services to negotiate better contracts with payers, assess which
contracts provide a physician with fair reimbursement, and provide cost control
and revenue generation strategies for their practice.
Last year NCRIC began providing full evaluations of contracts and often removing
our physicians from managed care contracts when they were detrimental to the
cost of delivery. Additionally to protect NCRIC's assets and provide the highest
level of service at the appropriate cost, in 2001 rates were increased
throughout our licensed jurisdictions.
Quality
Quality is a dominating influence for patients and for the reputation and
provision of service by physicians. It works hand in hand with cost, for it is
difficult in the health care industry to provide high quality health care at a
cheap rate. Managed care in the 1990's impacted the level of quality of the
services delivered. The strict controls of resource utilization and referral for
services forced physicians into an unmanageable situation in an era of "managed
care" and often tied their hands to deliver the quality of care they are trained
to deliver. Occurring in tandem with managed care during the 1990's was the rise
of national publicly traded physician practice management companies (PPMCs). The
physician community is littered with the fallout from the self-destruction of
these companies and their inability to add value and quality to physician
practices.
NCRIC is in a position to offer to physicians, including those who have
disengaged from the PPMCs and other ownership models that proved unsuccessful, a
management structure that allows the physician to focus on the delivery of
quality healthcare while NCRIC focuses on improving their business practices.
NCRIC has also improved its position to assist its insured physicians with risk
management education and practices that focus on improving patient communication
and relationships to improve their quality of service while reducing the
likelihood of litigation.
NCRIC has developed new programs, services and insurance coverages to meet
changing regulatory requirements such as the Health Insurance Portability
Protection Act (HIPPA) and new Medicare/Medicaid Fraud and Abuse regulations in
order to increase the level of assurance and quality provided by a physician.
NCRIC has begun this by implementing its PracticeGard policy and compliance
planning services. Additionally, to help physicians readily with quality
education, NCRIC has increased access to its services by utilizing its Web site
for risk management education, discussion groups for NCRIC's management
consultants and requests for services from its insureds and management clients.
Delivery
The dissolution of public PPMCs disrupted many physician practices from
continuing the delivery of care in the manner by which they had been reorganized
by PPMCs, nor could they readily revert to their former practice course of
delivery, i.e., "pre-PPMC". The PPMC model had created a drain on revenue from
the payment of high management fees and promise of wealth through ownership in a
publicly traded company. As noted above in Cost and Quality, the effect of
managed care interrupted the appropriate delivery of care through its stringent
control over referrals of patients, allowable charges for services and
utilization of necessary resources.
NCRIC believes that its model of providing critical management and business
services has worked well for those physicians who needed to re-establish their
practices after the fallout of being owned or managed by a PPMC. NCRIC deems it
to be critical to provide fundamental practice management services, without
having ownership in the physician's practice. This allows the physician to
provide the necessary delivery of care and services without being jeopardized by
other ownership interests. NCRIC also understands that it is critical to help
physicians improve the delivery of care from a malpractice risk perspective by
proactively providing necessary loss and risk information related to new
clinical services and rising issues of existing services. This provides the
physician with the necessary information and the ability to deliver care in a
manner that provides appropriate consent for the patient, while improving
communication of the risks of such services. NCRIC also believes that its risk
sharing arrangements in partnerships with hospitals and physicians provides a
covenant of improved risk information among all providers that reduces the risk
associated with the delivery of those clinical services that NCRIC has helped
organize and manage risk for the providers.
NCRIC has initiated products and services to help the physician improve the
delivery of their services. Primarily NCRIC began a new service product,
Alliance Risk Management Service, that enjoins it with physicians and hospitals
to evaluate providers' risks of malpractice and develop benchmarks and risk
management methods for risk reduction and prevention of malpractice. Further,
NCRIC has transitioned several individual practitioners into private practice
from PPMCs, which has allowed these physicians to reconstruct their delivery of
care into a model that allows for the quality of care at the high level they
desire to provide. Additionally, NCRIC has assisted several large groups in 2000
in renegotiating their payer contracts with more favorable terms. This has
reduced the burden of managed care for the practice and opened access by the
patient to the physician.
NCRIC remains focused on developing and providing needed services to the
physician and provider community that address the issue of cost, improves the
quality of services and eases the access for better delivery of care. NCRIC
believes the above shows how it has begun addressing current and forward-looking
issues through the development of new products and services, while maintaining
and building on the core strength of its current companies.
Our vision
NCRIC intends to become a healthcare financial services organization which
provides individual physicians and groups of physicians and other healthcare
providers with economical, high-quality medical professional liability insurance
and the practice management and financial services necessary for them to
succeed in the current healthcare environment. NCRIC believes that it is well
positioned to accomplish these goals because it has a loyal policyholder and
management client base to build upon.
The direct channels of distribution and the strong retention of clients by
NCRIC will assist it in cross-selling its expanded range of services and
products. NCRIC's insurance operations will sell its medical professional
liability products and services to some of its management and financial services
approximately 1,100 physician clients. Since the HealthCare Consulting
acquisition closed on January 4, 1999, NCRIC has sold 58 medical malpractice
insurance policies to clients of HealthCare Consulting which, in turn, provides
services to 21 NCRIC physicians through its D.C. operations. In addition, a full
range of practice management and financial services is being marketed to the
community at large, and a dedicated marketing team has been deployed in the D.C.
market.
The HealthCare Consulting acquisition will also permit NCRIC to provide
practice management and employee benefit services to its approximately 2,000
insureds. In 2000, NCRIC's practice management revenue from its insured
physicians was approximately $365,000. Altogether in 2000 NCRIC provided
products and services to approximately 3,100 physicians, up from approximately
2,600 physicians in 1999.
Core Insurance Products
NCRIC underwrites medical professional, office premises, and medical
billings, errors, and omissions liability policy risks for physicians, physician
medical groups and clinics, and other providers in the healthcare industry.
NCRIC currently issues policies on a claims-made basis. Claims-made policies
provide coverage to the policyholder for claims occurring and reported during
the period of coverage. NCRIC also offers prior acts insurance coverage to new
insureds, subject to the new insureds' meeting NCRIC's underwriting criteria.
This coverage extends the effective date of claims-made policies to designated
periods prior to the physician's becoming an insured of NCRIC. Insureds are
insured continuously while their claims-made policy is in force.
Physician and medical group liability. NCRIC offers separate policy forms
for physicians who are solo practitioners and for those who practice as part of
a medical group or clinic. The policy issued to solo practitioners includes
coverage for professional liability that arises in the medical practice and also
for a number of "premises" liabilities that may arise in the non-professional
operations of the medical practice, such as slip and fall accidents. The
professional liability insurance for solo practitioners and for medical groups
provides protection against the legal liability of the insureds for injury
caused by or as a result of the performance of patient treatment, failure to
treat and failure to diagnose and related types of malpractice.
Policy limits. NCRIC offers limits of insurance up to $5 million per claim,
with up to a $7 million aggregate policy limit for all claims reported for each
calendar year or other 12-month policy period. The most common limit is $1
million per claim, subject to a $3 million aggregate policy limit. Higher limits
and excess coverage can also be written in conjunction with special reinsurance
arrangements.
Reporting endorsements. Reporting endorsements are offered for physicians
terminating their policies with NCRIC. This coverage extends the period
indefinitely for reporting future claims resulting from incidents occurring
while a claims-made policy was in effect. The price of the reporting endorsement
coverage is based on the length of time the insured has been covered by NCRIC.
NCRIC provides reporting endorsement coverage at no additional cost for insured
physicians who die or who become disabled so that they cannot practice their
specialty during the coverage period of the policy and to those who have been
insured by NCRIC for at least three consecutive years, attain the age of 60 and
retire completely from the practice of medicine.
PracticeGard. NCRIC has established a limited defense reimbursement benefit
of up to $25,000 for proceedings by governmental disciplinary boards. NCRIC
provides this coverage to its insureds automatically without a surcharge.
PracticeGard provides legal counsel to defend licensure actions brought by the
District of Columbia or a State Medical Licensing Board, actions involving
medical staff credentialing committees, actions to remove physicians from
participation in a managed care plan and actions to limit participation in
government programs like Medicare and Medicaid.
PracticeGard Plus. In 1999, NCRIC began providing PracticeGard Plus,
offering to physicians and hospitals coverage for Medicare and Medicaid billings
errors and omissions liability. This coverage provides up to $1 million in
limits, inclusive of the cost of civil defense, penalties and fines but provides
no coverage should a physician or hospital be found criminally liable. Coverage
is provided under a separate claims made policy and can be extended to three
years of prior acts coverage.
Program for physicians who do not meet usual underwriting standards. NCRIC
also has a program for physicians who do not meet some of NCRIC's usual
underwriting standards. NCRIC carefully evaluates the additional risk it assumes
when it insures these physicians. A surcharge is applied to the premiums of
these physicians to compensate NCRIC for the higher level of risk it is
assuming. NCRIC monitors the activities of these insureds more closely than
those of its other insureds and attempts to rehabilitate these insureds through
risk management training. This program was not a significant source of revenue
in 2000.
Direct premiums. The following table summarizes NCRIC's physician and
medical group professional liability direct annual premiums under policies in
effect as of February 16, 2001.
Direct Premiums Percentage
Group Size Written of Total
- ---------- --------------- --------
(in thousands)
Solo practitioner physicians............................... $ 11,476 44%
Groups with two physicians................................. 1,826 7
Groups with three or more physicians....................... 7,796 30
Sponsored programs, including risk sharing................. 4,808 19
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Total.............................................. $ 25,906 100%
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Occurrence basis policies. Until July 1, 1986, NCRIC issued policies on an
occurrence basis. Occurrence policies provide coverage to the policyholder for
all losses incurred during the policy year regardless of when the claims are
reported. As of December 31, 2000, NCRIC has loss and LAE reserves in the amount
of $5.9 million in connection with its potential liability under occurrence
policies.
Maintenance and expansion of core insurance products
NCRIC's future success rests on its ability to ensure that its core
insurance products continue to meet the needs of existing insureds and other
healthcare providers. Growth and retention of NCRIC's core insurance business
will be sought through expanding NCRIC's relationships with larger groups of
physicians, broadening its geographical boundaries and enhancing its
distribution systems. NCRIC will also continue developing appropriate risk
financing vehicles for larger groups. The key elements of NCRIC's strategy to
compete effectively and create profitable long-term growth for its core
insurance products are the following:
Maintain its strong franchise or close relationship with area medical
communities. National Capital Reciprocal Insurance Company was founded in 1980
with the strong support of the Medical Society of the District of Columbia and
the District of Columbia's physicians. NCRIC maintains the exclusive endorsement
of the Medical Society of the District of Columbia, as well as that of the
Virginia-based Arlington County Medical Society. NCRIC's endorsement agreement
with the Medical Society of the District of Columbia requires NCRIC, A Mutual
Holding Company to reserve a seat on its board of directors for an individual
nominated by the Medical Society of the District of Columbia. NCRIC also
maintains a good working relationship with and is a recommended carrier of the
Medical Society of Virginia.
NCRIC continues to maintain a target of at least a 95% annual retention
rate for its core insurance business. The articles of incorporation of NCRIC, A
Mutual Holding Company require that at least two-thirds of the members of their
respective boards of directors be physicians. This direct involvement of
physicians enables NCRIC to better understand medical practice patterns, claims,
customer needs and other relevant matters. It also maintains NCRIC's strong ties
with the physician community.
Growth through geographic expansions and increased distribution channels.
NCRIC intends to build on its strong franchise in the District of Columbia area
and its recent growth in Virginia and Maryland to expand into adjoining states.
According to A.M. Best Company, in 1999 the states in which NCRIC is currently
licensed produced $290 million in medical professional liability direct premiums
written. NCRIC is also pursuing potential expansion opportunities in other
Mid-Atlantic states. If NCRIC expands into areas where it is inexperienced, it
will have to attract and retain qualified personnel. Competition for qualified
personnel may be intense and NCRIC may be unable to attract and retain qualified
persons.
NCRIC must continue to expand and support its brokers and agents in its new
markets and for its new products. Its direct distribution in the District of
Columbia area has held down expenses and provided close ties to its insureds.
Direct distribution provided 92% of NCRIC's renewal premiums in 2000. However,
new growth has largely come from its appointed agent and broker distribution
channel. Of premiums written with new insureds, 41% were through direct
distribution and 59% through brokers and independent agents. NCRIC believes it
can further increase new business through greater use of brokers and independent
agents, both in connection with geographic expansion and in marketing to larger
healthcare providers. This will increase NCRIC's dependence on insurance brokers
and other intermediaries. There is also a possibility that brokers and other
intermediaries will be unwilling to offer NCRIC's products or that they will
only do so if NCRIC contractually agrees not to directly market NCRIC's policies
to clients of the insurance broker.
Enhance current insurance product offerings with new coverages to increase
sales and strengthen ties with physicians. NCRIC has developed other insurance
products in addition to its core medical professional liability insurance
offerings. These products include comprehensive premises liability coverage for
medical offices and NCRIC PracticeGard Plus. PracticeGard Plus is designed to
protect physicians from costly civil fees and penalties related to the
government's new regulations regarding billing coding and compliance.
Additionally, NCRIC has developed a new program, CompliancePlus, which couples
its insurance product with needed compliance and educational services. The
CompliancePlus package consists of (a) Compliance Advantage, a comprehensive,
Internet-based risk evaluation tool, which serves as a primary source for
information on billing compliance; (b) CompliancePlus Office Program, a survey
and written plan which outlines areas of risk that may need special interest or
attention both now and in the future; and (c) PracticeGard Plus, a billings
errors and omissions insurance product that provides defense and indemnity
coverage for attorney costs as well as civil fines and penalties brought under
compliance violations enforced by Medicare and Medicaid agencies.
Captive insurance subsidiary as new expansion. NCRIC has filed under new
D.C. legislation for the establishment of a captive insurance company subsidiary
to meet the needs of larger healthcare provider risks that desire to retain a
part of their own risk with reinsurance protection. It also plans to establish
and provide administration and management services to other captive
organizations that license in D.C., and, where appropriate, provide reinsurance
on the captive risks.
Growth through strategic acquisitions. NCRIC believes that consolidation
will continue in the medical professional liability insurance industry. This may
give rise to opportunities for NCRIC to make strategic acquisitions to expand
its business, product offerings and geographic scope. As a result of the
reorganization, NCRIC is better positioned to make acquisitions, since it has
greater access to capital and can issue stock in connection with an acquisition.
In addition, NCRIC intends to diversify into other healthcare-related
enterprises through strategic acquisitions such as the HealthCare Consulting
acquisition. NCRIC may be unable to acquire other medical professional liability
insurers or other physician practice management companies. An unsuccessful or
poorly performing acquisition could have a material adverse effect on NCRIC's
business or financial results.
Maintain conservative balance sheet and strong ratings. Management believes
that existing and prospective clients evaluate, among other factors, the
financial strength of NCRIC in any decision regarding the purchase of medical
liability coverage.
Use legal and risk management expertise to vigorously reduce loss costs.
NCRIC's experience with, commitment to and focus on medical professional
liability insurance for over 20 years has allowed it to develop strong knowledge
of the local healthcare and legal environments and to build an extensive
database of medical professional liability claims experience. NCRIC uses this
expertise to select and price risks, to provide risk management services to
prevent or reduce the severity of losses and to aggressively defend against
unjustified claims or excessive settlement demands.
Practice Management Services
On January 4, 1999, NCRIC Group acquired all of the outstanding shares of
HealthCare Consulting, Inc. and all of the outstanding membership interests of
HealthCare Consulting's affiliate, HCI Ventures. NCRIC Group also purchased all
of the assets of Employee Benefits Services, an
employee benefits company formed by the three stockholders of HealthCare
Consulting. NCRIC Group assumed all of the liabilities of HealthCare Consulting,
HCI Ventures and those relating to the assets of Employee Benefits Services.
HealthCare Consulting has been merged into NCRIC MSO, and HCI Ventures has
become a wholly-owned subsidiary of NCRIC MSO. HealthCare Consulting and
Employee Benefits Services continue to operate as divisions of NCRIC MSO. The
HealthCare Consulting acquisition has greatly enhanced NCRIC's ability to
provide practice management services, employee benefit services and financial
services to physicians in the Washington, D.C. metropolitan area and throughout
the Mid-Atlantic region.
HealthCare Consulting. Since 1978, HealthCare Consulting or its predecessor
has provided practice management services, accounting and tax services and
personal financial planning services to medical and dental practices throughout
the Mid-Atlantic region. HealthCare Consulting offers its clients extensive
experience and expertise in:
o practice management;
o managed care contracting;
o information systems implementation;
o practice evaluations;
o billing and collections;
o personnel;
o practice structure; and
o management and market recognition among key players in the healthcare
industry.
HealthCare Consulting has offices in Lynchburg, Virginia; Richmond, Virginia;
Fredericksburg, Virginia; Washington, D.C.; and Greensboro, North Carolina.
HealthCare Consulting has been doing business in Greensboro, North Carolina
since September 1, 1993. It offers the same services in Greensboro as in its
other locations. HealthCare Consulting's Greensboro operations accounted for
approximately 16% of its 2000 revenues. As of December 31, 2000, HealthCare
Consulting had approximately 43 employees, of whom 12 served as practice
management consultants.
The following table indicates the sources of HealthCare Consulting's revenues
during the past three calendar years:
2000 1999 1998
---- ---- ----
Practice management...................... 52.4% 46.2% 48.9%
Accounting............................... 31.3 35.8 32.1
Tax & personal financial planning........ 12.7 13.0 13.2
Other.................................... 3.6 5.0 5.8
---- ---- ----
Total.................................... 100% 100% 100%
==== ==== ====
HCI Ventures. HCI Ventures provides start-up capital to newly-formed
management services organizations. HCI Ventures owns interests ranging from 5%
to 20% in four management services organizations: Middle Fork MSO, L.L.C.;
Central Virginia MSO, L.L.C.; Southwest Virginia MSO, L.L.C.; and Mid-Atlantic
MSO-FBG, L.L.C. Created in 1997, HCI Ventures allows HealthCare Consulting to
have an equity ownership interest in the various management services
organizations for whom HealthCare Consulting provides practice management
services. HCI Ventures' income has not been material.
Employee Benefits Services. Employee Benefits Services provides employee
benefits services, plan design, plan administration and plan asset accounting to
approximately 300 clients in the Mid-Atlantic region. The principal assets that
NCRIC acquired from Employee Benefits Services were its established client base
and the systems it had developed to service its clients. Employee Benefits
Services also manages documentation and required forms filings. Over 78% of
HealthCare Consulting's physician practice clients who qualify for plan
administration services utilize Employee Benefits Services as their employee
benefit plan administrator. While Employee Benefits Services initially provided
services only to healthcare businesses, currently over 41% of its clients are
non-healthcare related. As of December 31, 2000, Employee Benefits Services had
eleven employees.
The following table indicates the sources of Employee Benefits Services'
revenues during the past three years:
2000 1999 1998
---- ---- ----
Retirement Plan Accounting and Administration.. 90% 91% 90%
Section 125 Administration..................... 10 9 10
---- ---- ----
Total..................................... 100% 100% 100%
==== ==== ====
Maintenance and expansion of core practice management services
The growth and future success of our practice management company will be best
served through increased services to existing clients, development of new
services to address the changing health care environment and governmental
regulations, and focusing on acquisitions that supplement and strengthen our
core practice management services.
Retain existing clientele and bring additional services to strengthen our
relationship. NCRIC's acquisition of HealthCare Consulting brought to NCRIC some
long-standing business relationships, some of which span back to 1973. NCRIC's
practice management company has experienced significant growth and, in addition
to that growth, has seen the stability of providing services to satisfied
clients who retain our services with them year to year. NCRIC maintains a target
of retaining at least 95% of its core clientele. Throughout the year NCRIC
analyzes additional services a client may need to improve their medical practice
and review fee levels for appropriateness. Additional services, if accepted by
the client, integrate NCRIC into the success of their practice and strengthens
its relationship with these clients.
Expand through the development of new products and services that meet changing
physician needs from regulations, other providers and payers. NCRIC continues to
monitor the ever-changing healthcare environment for the development of needed
services for physicians. NCRIC evaluates changes in state and federal
regulations, hospital organizational changes, revamping reimbursement and payer
requirements. These issues force physicians to redirect how they may price their
services, deliver and market their services, and with whom they should have
business relationships. Since the beginning of 2000, NCRIC has focused on
developing needed compliance services to meet federal changes for Medicare, OSHA
and CLIA and the impact these regulations have on the expenses of running a
medical practice. With pending changes for health care data information NCRIC
has assisted in evaluation of appropriate office technology. Also, NCRIC has
assisted several large groups in disengaging from PPMCs and hospital owned
relationships, resulting in a mutual benefit both for the hospital and the
physicians.
Focus on services that integrate with our insurance products and can be
cross-sold. NCRIC continues to focus on cross-selling all of its services across
each company discipline. As an example, NCRIC has developed a new program,
CompliancePlus, that bundles its PracticeGard Plus policy with its compliance
planning services. A three-year service agreement is required for which the
client/insured receives the insurance policy, access to an Internet-based risk
evaluation tool, chart audits and a compliance plan and educational services.
This product will also be offered through NCRIC's captive insurance company on a
nationwide basis.
Growth through strategic acquisitions. NCRIC believes that there are many
smaller organizations that provide a niche service, such as billing, or
accounting, that will supplement its core base of services with additional
resources and personnel. NCRIC is also able to offer target acquisitions the
opportunity to expand their product offerings with a viable purchase and
transition option, particularly for those nearing retirement. NCRIC may be
unable to acquire other companies and a poorly performing acquisition could have
an adverse effect on NCRIC's business or financial results.
Maintain fee schedules and focus on profitability of services. NCRIC believes it
is critical to develop profitable services as opposed to loss leaders. On an
annual basis, each account is evaluated and its resource commitment to assess if
fee adjustments are appropriate. Additionally, the overall rate structure is
evaluated to ensure continued profitability of NCRIC services. As a result,
NCRIC may not have competitive prices for all its services.
Marketing and policyholder services
NCRIC markets directly to its insureds through seven employees by providing
marketing/sales and communications services. NCRIC markets directly to solo
practitioner physicians and other prospective insureds through its relationships
with medical associations, referrals by existing insureds, advertisements in
medical journals, the presentation of seminars on timely topics for physicians
and direct solicitation to licensed physicians. NCRIC attracts new physicians by
targeting medical residents and physicians just entering medical practice. In
addition, NCRIC participates as a sponsor and participant in various medical
group and hospital administrators' programs, medical association and specialty
society conventions and similar programs. NCRIC believes that this personal,
comprehensive approach to marketing is essential to providing medical
professional liability insurance, where special knowledge and experience are a
prerequisite.
NCRIC's primary marketing channel for new business is its contracted
brokers and agents who in 2000 produced 59% of new premiums and 8% of renewing
premiums. Healthcare providers frequently utilize agents when they purchase
medical professional liability insurance. Therefore, NCRIC believes that
developing its broker relationships in Virginia, Maryland, West Virginia and
Delaware is important to grow its market share. NCRIC selects brokers and agents
that it believes have demonstrated growth and stability in the medical
professional liability insurance industry, strong sales and marketing
capabilities, and expertise in selling medical professional liability insurance.
Brokers and agents receive market rate commissions and other incentives
averaging 9% based on the business they produce. NCRIC strives to maintain
relationships with those brokers and agents who are committed to promoting
NCRIC's products and are successful in producing business for NCRIC.
NCRIC also has a policyholder services department that provides account
information to all insureds and strives to maintain a close relationship with
the small medical groups and solo practitioners insured by NCRIC. Each of these
smaller practices has a designated client service representative who can answer
most inquiries and, in other instances, can provide the insured with immediate
access to the person with expertise in a particular department. For hospital
based programs and large and mid-size medical groups, NCRIC has an account
manager assigned to each group who heads a service team comprised of
underwriting, risk management and claims management representatives, each of
whom may be contacted directly by the policyholder for prompt response. NCRIC
believes this approach has resulted in its high customer retention rate, year
after year.
Risk management
NCRIC provides risk management services that are designed to reduce
potential loss exposures and improve medical practice. The Risk Management
Committee, comprised of physicians representing various medical specialties,
assists the risk management department to identify loss trends in the local and
national markets. Through these efforts, NCRIC is able to present topical loss
prevention programs. As NCRIC's market has expanded into Virginia and other
states, the risk management department has provided services to these areas. In
addition to on-site seminars, the risk management services have expanded and
adapted to include home study and on-line programs, all of which carry CME
accreditation. In addition, NCRIC will soon have risk management staff located
in its Richmond office to provide all of the risk management services to the
insureds located throughout Virginia outside of the D.C. metropolitan area.
Many of NCRIC's claims result from a physician's failure to adequately
communicate or document their medical care. NCRIC addressed these topics as well
as others in its 2000 Risk Management Educational Program. The seminars "Basic
Risk Management Principles" and "The Claim Process: A view from the Plaintiff,
Defense and Insurance Company" dealt with documentation and communication.
Medication errors have been highlighted in the national news, and NCRIC
addressed the issue with its timely seminar entitled "Causes and Preventions of
Medication Errors." Regulatory issues related to the Health Insurance
Portability Accountability Act were addressed in "Informatics: Medicine in the
Information Age." Recognizing that the physician's office staff plays a large
part in helping to reduce risk and improve care rendered in the office, seminars
were presented for office staffs, both in a large group setting as well as for
specific offices on request. In 2000, 60% of NCRIC's insureds utilized its risk
management services (seminar, office assessment, or home study course), earning
continuing medical education credits as well as a policy premium discount.
NCRIC also produces a quarterly newsletter to advise insureds of emerging
risks and additional topics of interest. When immediate dissemination of
information is warranted, a risk management alert is distributed. NCRIC's risk
management staff is also available for consultation with insureds on an
individual basis to review issues which may arise in the insured's practice. The
risk management department conducts physician office visits on both voluntary
and involuntary bases. Risk management reviews may be performed at the request
of the underwriting or claims committees, with the review report provided to the
requesting committee. NCRIC also provides office assessments for physicians on a
voluntary basis, consisting of an on-site visit with a review of medical records
and office practices. Feedback is given to the physician in a meeting where
suggestions are made to reduce risk factors in the medical practice office.
Risk management services also supplement NCRIC's marketing efforts. The
value added services that are provided augment the claims and policyholder
services NCRIC provides. NCRIC also intends to begin offering its risk
management services independent of its core insurance products. Healthcare
providers, such as self-insured hospitals and clinics, will be able to purchase
risk management services directly from NCRIC. The risk management services will
be offered through direct marketing efforts and by agents and brokers to their
larger self-insured accounts.
Claims and litigation experience
The claims department of NCRIC is responsible for claims investigation,
establishment of appropriate case reserves for loss and LAE, defense planning
and coordination, monitoring of attorneys engaged by NCRIC to defend a claim and
negotiation of the settlement or other disposition of a claim. NCRIC's policy
obligates it to provide a defense for its insureds in any suit involving a
medical incident covered by its policy, which is in addition to the limit of
liability under the policy. Medical professional liability claims often involve
the evaluation of highly technical medical issues, significant injuries and
conflicting expert opinions. In most cases, the person bringing the claim
against the physician is already represented by legal counsel when NCRIC learns
of the potential claim.
NCRIC emphasizes early evaluation and aggressive management of claims. When
a claim is reported, claims department professionals complete an initial
evaluation and set the initial reserve. After a full evaluation of the claim has
been completed, which generally occurs within seven months, the initial reserve
may be adjusted.
Over the last year, NCRIC significantly increased the number of its
insureds in Virginia. Claims and risk management services have expanded into
Virginia. Through on-site visits, interviews with local law firms, discussions
with insureds and communications with NCRIC's Virginia offices, the medical and
legal climates were analyzed in order to plan NCRIC's strategy for structuring
claims and risk management services in Virginia. One of the claims department's
most experienced staff members is relocating to NCRIC's Richmond office in early
2001 to direct the delivery of those services. This will enable NCRIC to
reliably deliver its claims services and risk programs, sharing successful
solutions through a team approach. Attorneys located throughout Virginia who
have a successful track record in medical liability defense and share NCRIC's
philosophy have been identified for defending claims against NCRIC insureds. As
NCRIC expands its insurance coverage into other jurisdictions, a similar process
will be utilized to ensure the delivery of quality claims and risk management
services in all its markets.
As of December 31, 2000, NCRIC had approximately 315 open cases with an
average of 71 cases being handled by each claims representative. The claims
representatives at NCRIC are all certified paralegals who have on average
approximately 13 years of experience with NCRIC and an average of 13 years of
prior experience handling medical professional liability cases. NCRIC limits the
number of claims handled by each representative to approximately 70 cases.
Management believes that by limiting the case loads of its claims
representatives, all of its insureds who face claims will receive personalized,
professional service, thus enabling claims to be thoroughly investigated,
well-managed and, if they have merit, quickly resolved.
NCRIC retains locally based attorneys specializing in medical professional
liability defense to defend claims. NCRIC also obtains the services of medical
experts who are leaders in their specialties and who bring integrity,
credibility and expertise to the litigation process.
NCRIC's claims committee is composed of eight physicians from various
specialties including anesthesiology, general surgery and neurosurgery,
obstetrics, internal medicine and radiology. The claims committee meets monthly
to provide evaluation and guidance on claims. The multi-specialty approach of
these physicians adds a unique perspective to the claims handling process in
that there is an opportunity to obtain the opinions of several different
specialists meeting to share their expertise and experience in the area of
liability evaluation and general peer review. This service is invaluable to the
claims representatives and insureds as it provides in-depth analysis of claims.
Federal law requires that any claim payment, regardless of amount, be
reported to a national practitioner data bank, which can be accessed by various
state licensing and disciplinary boards, hospitals, other healthcare entities
and professional societies. Thus, the physician is often placed in a difficult
position of knowing that a settlement may result in the initiation of a
disciplinary proceeding or some other impediment to the physician's ability to
practice. The claims department staff must be able to fully evaluate
considerations of settlement or trial and to communicate effectively NCRIC's
recommendation to its insured. NCRIC may investigate a claim and, with the
written consent of the named insured, settle any claim or suit as it deems
expedient. In the event the named insured and NCRIC fail to agree that a claim
or suit should be settled, either party may request a review and decision by a
peer review panel selected in accordance with established NCRIC procedures.
District of Columbia Superior Court rules impact NCRIC's claims handling,
particularly in the area of claims handling expenses. The discovery period,
during which the plaintiff's case must be discerned and, in conjunction with an
attorney, the defense developed, generally takes place over a six- to
eight-month period of intense activity, which increases claims handling
expenses. The court-imposed mediation process has not proven to successfully
resolve NCRIC's cases in part because the volunteer mediators are frequently
plaintiffs' attorneys. Trials are being set about one to one and one-half years
from the date of service of the complaint. Despite obstacles presented by the
legal environment, management believes its aggressive claims handling procedures
effectively assist NCRIC to reduce losses and obtain favorable results.
Proactive approaches to reducing NCRIC's exposure and improving its
favorable results include meeting regularly throughout the year with defense
attorneys retained by NCRIC for coordination, discussion and presentations on
all aspects of claims handling.
Claims closed in the 36-month period from January 1998 through December
2000 resulted in 15% of cases closed with indemnity payment and 85% of cases
closed with no payment. Indemnity payments during this three-year period totaled
$29.3 million, with an average payment per paid claim of $305,242.
Trial results for the 36-month period from January 1998 through December
2000 reveal that of the 63 cases tried, 37, or 59%, were won by NCRIC, 13 trials
resulted in verdicts for the plaintiff, 9 ended in mistrials or hung juries, and
4 were settled. Of the 13 plaintiff verdicts, 5 awarded amounts in excess of
NCRIC's $500,000 retention. Trial results for 2000 reveal that of the 16 cases
tried, 5, or 31%, resulted in plaintiff verdicts, 7 cases in defense verdicts, 2
ended in mistrials or hung juries, which will need to be retried, and 2 cases
were settled. Of the 5 plaintiff verdicts in 2000, no amounts were awarded in
excess of NCRIC's $500,000 retention while the two cases which were settled did
exceed NCRIC's $500,000 retention.
Underwriting
NCRIC's underwriting committee consists of 12 physicians, all of whom are
insureds of NCRIC. Members of the committee are not employees of NCRIC, but
receive compensation for their services on the committee. In addition to the
underwriting committee, NCRIC has a policyholder services department, consisting
of three technicians, who are trained in underwriting, and an administrative
assistant. NCRIC believes that this combination of medical professionals and
insurance industry professionals gives NCRIC a competitive advantage in
underwriting services. The physicians on the underwriting committee are able to
assist the underwriting department's insurance professionals by applying their
medical knowledge to better assess risk.
NCRIC's policyholder services department is responsible for the evaluation
of applicants for medical professional liability coverage, the issuance of
policies and the establishment and implementation of underwriting standards for
all of the coverages underwritten by NCRIC. The policyholder services department
provides information to the underwriting committee to assist the physicians on
the committee in making their decisions.
NCRIC follows what it believes to be consistent and conservative procedures
with respect to the issuance of all physician professional liability policies.
Each applicant or member of an applicant medical group is required to complete
and sign a detailed application that provides a personal and professional
history, the type and nature of the applicant's professional practice,
information relating to specific practice procedures, hospital and professional
affiliations and a complete history of any prior claims and incidents. NCRIC
performs its own independent verification of these matters and conducts an
investigation to determine if there are any lawsuits that may not have been
disclosed in the application.
NCRIC performs a continuous process of reunderwriting its insured
physicians. Information concerning physicians with large losses, a high
frequency of claims or changing or unusual practice characteristics is developed
through renewal applications, claims history and risk management reports. Each
year, NCRIC also sends current practice questionnaires to all of its insured
physicians. These questionnaires request information similar to that submitted
in connection with the physician's original application for insurance, and are
designed to detect any changes in the specialty or practice characteristics of
the physician that may require a higher or lower premium rate or possible
non-renewal of insurance.
The policyholder services department submits all recommendations for
premium surcharges or non-renewal to the underwriting committee for a final
decision. Physicians have the right to seek reconsideration of surcharges by
NCRIC's board of directors, although to date, every request for reconsideration
has resulted in the underwriting committee's decision being upheld. As insureds
are often more comfortable discussing claims and practice issues with their
peers, NCRIC has found that physician interchange with the committee is a
strength of NCRIC.
Rates
NCRIC establishes, through its management and independent actuaries, rates
and rating classifications for its physician and medical group insureds based on
the loss and LAE experience it has developed over the past 20 years and the loss
and LAE experience for the entire medical professional liability market. NCRIC
has various rating classifications based on practice location, medical specialty
and other factors. NCRIC utilizes various discounts, including discounts for
part-time practice, physicians just entering medical practice, claim-free
insureds and risk management participation. Most discounts are designed to
encourage lower risk physicians to insure with NCRIC. Total discounts granted to
a policyholder cannot exceed 25% of the policyholder's premium. Effective rates
equal NCRIC's base rate, less any discounts and renewal credits provided to the
insured.
NCRIC's base rates remained unchanged in 2000 and 1999, and increased 6% in
1998. In recognition of the increase in the severity of losses, NCRIC raised
base premiums an average of 7.5% effective January 1, 2001. NCRIC establishes
its rates based on its previous loss experience, loss expense adjustments,
anticipated policyholder discounts and NCRIC's fixed and variable expenses.
Since 1993, NCRIC, Inc. has authorized renewal premium dividend credits to
physician insureds who renew their policies. Renewal credits are a premium
credit on the renewal policy's premium. Renewal credits stabilize policyholder
premiums and improve NCRIC, Inc.'s competitive position relative to other
insurers by encouraging policyholder renewals. For accounting purposes, renewal
credits are accrued in the policy year declared as a reduction of premium
income. NCRIC's insureds are not automatically entitled to renewal credits and
only renewing insureds receive renewal credits. NCRIC has in the past, and will
in the future, consider general insurance market conditions as well as the
previous years' loss and loss adjustment expenses in determining whether or not
to authorize renewal credits and the amounts of any renewal credits.
NCRIC has authorized renewal credits of the following amounts:
Percentage of Earned
Year Renewal Premiums Amount
---- ---------------- ----------
2000 10% $1,033,000
1999 10 1,068,940
1998 12.5 1,888,794
1997 16 2,245,918
1996 10 1,452,308
1995 10 1,560,907
1994 10 1,806,450
If the rising trend in severity continues, NCRIC anticipates that it will not
provide a renewal premium credit for 2002 renewals.
Risk sharing arrangements
Since its inception, NCRIC has entered into agreements for risk sharing
programs for groups of physicians practicing at some hospitals in the
Washington, D.C. metropolitan area. One type of risk sharing arrangement offered
by NCRIC involves the initial funding of a portion of a premium being held by
NCRIC to pay losses. In this type of arrangement, NCRIC receives its full gross
premium, less applicable credits otherwise granted, and pays quota share losses
from the amount being held; thereafter, any remaining funds are returned to the
insured should a review of actual loss experience show favorable loss
experience.
Another type of risk sharing arrangement previously offered by NCRIC is one
in which physicians practicing at a hospital pay lower individual premiums if
the physicians in their hospital group, taken as a whole, have favorable loss
experience and comply with risk management protocols. Under such a risk sharing
arrangement, physicians receive an initial premium reduction or credit. At the
end of the policy year covered by the premium, a review of the actual loss
experience of the physician group is completed. Should the group's loss
experience be unfavorable, NCRIC will require additional premium payments to
offset the unfavorable losses.
Risk sharing arrangements help lower NCRIC's risk associated with medical
care provided by the hospital's attending physicians. The arrangements also
establish a cost-effective source of professional liability coverage for
physicians participating in the program.
Loss and LAE reserves
The determination of loss and LAE reserves involves projection of ultimate
losses through an actuarial analysis of the claims history of NCRIC and other
medical professional liability insurers, subject to adjustments deemed
appropriate by NCRIC due to changing circumstances. Included in its claims
history are losses and LAE paid by NCRIC in prior periods, and case reserves for
losses and LAE developed by NCRIC's claims department as claims are reported and
investigated. Actuaries rely primarily on historical loss experience in
determining reserve levels on the assumption that historical loss experience
provides a good indication of future loss experience despite the uncertainties
in loss trends and the delays in reporting and settling claims. As additional
information becomes available, the estimates reflected in earlier loss reserves
may be revised. Any increase or decrease in the amount of reserves, including
reserves for insured events of prior years, would have a corresponding adverse
or beneficial effect on NCRIC's results of operations for the period in which
the adjustments are made.
NCRIC's estimates of the ultimate cost of settling the claims are based on:
o information then known;
o predictions of future events;
o estimates of future trends in claims frequency and severity;
o predictions of future inflation rates;
o judicial theories of liability;
o judicial interpretations of insurance contracts;
o legislative activity; and
o other factors.
The inherent uncertainty of establishing reserves is greater for medical
professional liability insurance because lengthy periods may elapse before
notice of a claim or a determination of liability. Medical professional
liability insurance policies are "long tail" policies, which means that claims
and expenses may be paid over a period of 10 or more years. This is longer than
most property and casualty claims. As a result of these long payment periods,
trends in medical professional liability policies may be slow to emerge, and
NCRIC may not promptly modify its underwriting practices and change its premium
rates to reflect underlying loss trends. Finally, changes in the practice of
medicine and healthcare delivery, like the emergence of new, larger medical
groups that do not have an established claims history, and additional claims
resulting from restrictions on treatment by managed care organizations, may not
be fully reflected in NCRIC's underwriting and reserving practices.
NCRIC's independent actuaries review NCRIC's reserves for losses and LAE
periodically and prepare semi-annual reports that include a recommended level of
reserves. NCRIC considers this recommendation as well as other factors, like
loss retention levels and anticipated or estimated changes in frequency and
severity of claims, in establishing the amount of its reserves for losses and
LAE. NCRIC continually refines reserve estimates as experience develops and
claims are settled. Medical professional liability insurance is a line of
business for which the initial loss and LAE estimates may change significantly
as a result of events occurring long after the reporting of the claim. For
example, loss and LAE estimates may prove to be inadequate because of sudden
severe inflation or adverse judicial or legislative decisions.
Activity in the liability for unpaid losses and LAE is summarized as
follows:
Year Ended December 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
(in thousands)
Balance, beginning of year...................... $ 84,282 $ 84,595 $ 72,031
Less reinsurance recoverable on unpaid claims 25,815 24,546 17,077
------------ ------------ ------------
Net balance..................................... 58,467 60,049 54,954
------------ ------------ ------------
Incurred related to:
Current year............................ 17,829 20,795 19,140
Prior years............................. (5,883) (7,928) (3,463)
------------ ------------ ------------
Total incurred...................... 11,946 12,867 15,677
------------ ------------ ------------
Paid related to:
Current year............................ 917 817 1,247
Prior years............................. 15,674 13,632 9,335
------------ ------------ ------------
Total paid........... 16,591 14,449 10,582
------------ ------------ ------------
Net balance..................................... 53,822 58,467 60,049
Plus reinsurance recoverable on
unpaid claims............,,,,,,,,,........... 27,312 25,815 24,546
------------ ------------ ------------
Balance, end of year............................ $ 81,134 $ 84,282 $ 84,595
============ ============ ============
The amounts shown above and the reserve for unpaid losses and LAE on the chart
located on the next page are presented in conformity with generally accepted
accounting principles.
The following table reflects the development of reserves for unpaid losses
and LAE for the years indicated, at the end of that year and each subsequent
year. The first line shows the reserves, as originally reported at the end of
the stated year. Each calendar year-end reserve includes the estimated unpaid
liabilities for that coverage year and for all prior coverage years. The section
under the caption "Cumulative Liability Paid Through End of Year" shows the
cumulative amounts paid through each subsequent year on those claims for which
reserves were carried as of each specific year end. The section under the
caption "Re-estimated Liability" shows the original recorded reserve as adjusted
as of the end of each subsequent year to reflect the cumulative amounts paid and
any other facts and circumstances discovered during each year. The line
"Redundancy (deficiency)" sets forth the difference between the latest
re-estimated liability and the liability as originally established. The years
1991 through 1999 are presented on a direct basis consistent with Statement of
Financial Accounting Standards No. 113. The year of 1990 is presented net of
reinsurance. NCRIC is unable to generate the table on a direct basis for this
year because the records were maintained on a net basis.
The table reflects the effects of all changes in amounts of prior periods.
For example, if a loss determined in 1995 to be $100,000 was first reserved in
1990 at $150,000, the $50,000 favorable loss development, being the original
estimate minus the actual loss, would be included in the cumulative redundancy
in each of the years 1990 through 1995 shown below. This table presents
development data by calendar year and does not relate the data to the year in
which the claim was reported or the incident actually occurred. Conditions and
trends that have affected the development of these reserves in the past will not
necessarily recur in the future.
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Reserve for Unpaid
Losses and LAE...... $32,151 $64,333 $86,727 $88,891 $77,647 $68,928 $68,101 $72,031 $84,595 $84,282
Cumulative Liability
Paid Through End of
Year:
One year later 12,561 13,094 18,103 19,786 21,667 16,084 14,916 9,667 13,865 20,813
Two years later 18,552 27,889 35,861 39,293 34,829 27,634 22,237 21,810 32,778
Three years later 21,605 37,247 51,163 47,348 43,237 32,409 29,135 36,310
Four years later 25,891 47,633 56,648 51,845 45,219 34,657 39,938
Five years later 28,387 51,482 59,473 52,984 45,682 41,578
Six years later 29,115 52,276 60,335 53,208 51,450
Seven years later 29,595 53,098 60,440 58,246
Eight years later 29,939 53,193 63,395
Nine years later 29,973 56,145
Ten years later 30,681
Re-estimated Liability:
One year later 35,942 69,522 79,174 70,640 68,891 62,028 61,121 71,419 72,575 77,373
Two years later 29,123 61,090 65,174 63,248 66,439 53,429 62,097 64,980 66,733
Three years later 28,085 54,208 62,521 65,422 60,858 55,883 58,169 61,336
Four years later 30,692 54,215 65,225 64,460 62,625 53,400 54,324
Five years later 30,136 55,221 67,681 66,275 61,077 50,744
Six years later 30,311 58,324 69,765 64,877 58,220
Seven years later 30,999 60,908 68,415 63,514
Eight years later 31,461 60,218 67,740
Nine years later 31,878 59,031
Ten years later 31,722
Redundancy
(deficiency)........ $ 429 $ 5,302 $18,987 $25,377 $19,427 $18,184 $13,777 $10,695 $17,862 $ 6,909
General office premises liability incurred losses have been less than 1% of
medical professional liability incurred losses in the last five years. NCRIC
does not have reserves for pollution claims as NCRIC's policies exclude
liability for pollution. NCRIC has never been presented with a pollution claim
brought against it or its insureds.
Reinsurance
NCRIC follows customary industry practice by reinsuring a portion of its
risks and paying a reinsurance premium based upon the premiums received on all
policies subject to reinsurance. By reducing NCRIC's potential liability on
individual risks, reinsurance protects NCRIC against large losses. NCRIC has
full underwriting authority for professional liability policies including
premises liability policies issued to physicians, surgeons, dentists and
professional corporations and partnerships. The reinsurance program cedes to the
reinsurers up to the maximum reinsurance policy limit (1) those risks insured by
NCRIC in excess of NCRIC's retention -- an amount of exposure retained by NCRIC
and (2) quota share participation -- a percentage of exposure retained by NCRIC.
Although reinsurance does not discharge NCRIC from its primary liability
for the full amount of its insurance policies, it contractually obligates the
reinsurer to pay successful claims against NCRIC to the extent of risk ceded.
NCRIC's current reinsurance program is designed to provide coverage through
separate reinsurance treaties for three layers of risk.
(1) Losses in excess of $500,000 per claim up to $1,000,000. Effective
January 1, 2000, the treaty which reinsures NCRIC for losses in excess of
$500,000 per claim up to $1,000,000 is a fixed rate treaty. The reinsurance
premium is agreed upon as a fixed percentage of gross net earned premium income.
Gross net earned premium income is NCRIC's gross premium earned net of
discounts.
For claims submitted related to 1999 and prior years, NCRIC has a swing
rated treaty which reinsures NCRIC for losses in excess of $500,000 per claim,
subject to an inner aggregate deductible of 5% of gross net earned premium
income, up to $1,000,000. The ultimate reinsurance premium is subject to
incurred losses and ranges between a minimum premium of 4% of gross net earned
premium income and a maximum premium of 22.5% of gross net earned premium
income. The inner aggregate deductible means that NCRIC must pay losses within
the reinsurance layer until the inner aggregate deductible is satisfied. NCRIC
pays a deposit premium equal to 14% of gross net earned premium income that is
ultimately increased or decreased based on actual losses, subject to the minimum
and maximum premium. Following are the reinsurance premium terms for the swing
rated treaty for calendar years 1999, 1998, 1997 and 1996.
Percentage of Gross Net Earned
--------------------------------
Premium Income
--------------
1999 1998 1997 1996
------ ------ ------ ------
Deposit premium.......................... 14.0% 14.0% 14.0% 14.0%
Maximum premium.......................... 22.5 22.5 22.5 30.0
Minimum premium.......................... 4.0 4.0 4.0 4.0
Inner aggregate deductible............... 5.0 5.0 5.0 10.0
NCRIC has recorded, based on actuarial analysis, management's best estimate
of premium expense under the terms of the swing rated treaty. Each year, for the
most recent treaty year, the premium has been capped at the maximum rate. NCRIC
then adjusts the liability and expense as losses develop in subsequent years.
(2) Losses up to $1,000,000 in excess of $1,000,000 per claim. NCRIC's
first excess layer treaty covers losses up to $1,000,000 in excess of $1,000,000
per claim. For risks related to claims submitted January 1, 2000 and thereafter,
NCRIC cedes 100% of its risks and premium under this treaty. For claims related
to 1999 and prior years, NCRIC cedes 91% of its risks to the $1,000,000 excess
layer treaty program and retains 9% of the risks. The premium payable by NCRIC
for the $1,000,000 excess layer treaty is 91% of the premium collected from
insureds for this coverage. NCRIC receives a ceding commission from the
reinsurers to cover the cost associated with issuing this coverage to its
insureds.
(3) Losses up to $3,000,000 in excess of $2,000,000 per claim. The second
excess layer treaty covers losses up to $3,000,000 in excess of $2,000,000 per
claim. NCRIC cedes 100% of its risks to the $2,000,000 excess layer treaty
program and retains none of the risks. The premium for the $2,000,000 excess
layer treaty is 100% of the premium collected from insureds for this coverage.
NCRIC receives a ceding commission from the reinsurers to cover the cost
associated with issuing this coverage to its insureds.
Ceding commissions, which are 15% of gross ceded reinsurance premiums in
the excess layer treaties are deducted from other underwriting expenses. Ceding
commissions were $357,000, $322,000 and $300,000 in 2000, 1999, and 1998.
Additionally, NCRIC's reinsurance program protects NCRIC from paying
multiple retentions for claims arising out of one event. NCRIC will only pay one
$500,000 retention regardless of the number of original policies or claimants
involved. NCRIC also has protection against losses in excess of its existing
reinsurance. Following is a table that summarizes the structure of NCRIC's
current reinsurance program:
Through December 31, 1999 Effective January 1, 2000
------------------------- -------------------------
Total Amount of Individual Loss Company Reinsurers Company Reinsurers
------------------------------- ------- ---------- ------- ----------
$0 - $500,000.......................... 100% 0% 100% 0%
$500,000 - $1,000,000.................. 4 96 0 100
$1,000,000 - $2,000,000................ 9 91 0 100
$2,000,000 - $5,000,000................ 0 100 0 100
The table does not reflect the effect of the inner aggregate deductible for
treaty years through 1999.
NCRIC may provide policy limits in excess of $5,000,000, which are
reinsured through facultative reinsurance programs. Facultative reinsurance
programs are reinsurance programs which are specifically designed for a
particular risk not covered by NCRIC's existing reinsurance arrangements. NCRIC
currently has facultative reinsurance in connection with groups of physicians
who desire policy limits greater than $5,000,000.
NCRIC determines the amount and scope of reinsurance coverage to purchase
each year based upon its evaluation of the risks accepted, consultations with
reinsurance consultants and a review of market conditions, including the
availability and pricing of reinsurance. NCRIC's primary reinsurance treaty is
placed with non-affiliated reinsurers for a three-year term with annual
renegotiations. NCRIC's current three-year treaty expires January 1, 2003.
The reinsurance program is placed with a number of individual reinsurance
companies and Lloyds' syndicates to mitigate the concentrations of reinsurance
credit risk. Most of the reinsurers are London companies or Lloyds' syndicates;
there is a small percentage placed with a domestic reinsurer. NCRIC relies on
its wholly-owned brokerage firm, National Capital Insurance Brokerage, Ltd.,
Willis Re, Inc. and a London-based intermediary to assist it in the analysis of
the credit quality of its reinsurers. NCRIC also requires reinsurers that are
not authorized to do business in the District of Columbia to post a letter of
credit to secure reinsurance recoverable on paid losses.
The following table reflects reinsurance recoverable on paid and unpaid
losses at December 31, 2000 by reinsurer:
Reinsurance
Reinsurer Recoverable
- --------- -----------
(in thousands)
Lloyd's of London syndicates................................. $ 15,576
Hannover Reinsurance......................................... 2,298
CNA Reinsurance of London Limited............................ 3,199
Unionamerica Insurance....................................... 3,291
Transatlantic................................................ 1,327
4 other reinsurers........................................... 1,858
---------
Total............................................ $ 27,549
=========
The effect of reinsurance on premiums written and earned for the years
ended December 31, 2000, 1999, and 1998 is as follows:
Year Ended December 31,
-------------------------------------------------------------------------
2000 1999 1998
----------------------- ---------------------- ---------------------
Written Earned Written Earned Written Earned
-------- ------ ------- ------ ------- ------
(in thousands)
Direct............ $ 22,727 $ 19,965 $ 21,353 $ 18,832 $ 19,214 $ 16,270
Ceded............. (5,874) (4,110) (4,127) (2,977) 3,691 4,089
-------- -------- -------- -------- -------- --------
Net............... $ 16,853 $ 15,855 $ 17,226 $ 15,855 $ 22,905 $ 20,359
======== ======== ======== ======== ======== ========
In late 1999, NCRIC introduced PracticeGard Plus, which provides errors and
omissions coverage on Medicare/Medicaid billing to health care providers. This
coverage provides up to $1 million in indemnity and expense protection and only
pays indemnity on civil fines and penalties. NCRIC reinsures 100% of this risk
and receives a 15% ceding commission. NCRIC intends to evaluate its level of
risk acceptance based on how losses develop in the future. Since this coverage
protects a new risk based on recently passed national legislation, current loss
development is uncertain.
Investment portfolio
Investment income is an important component in support of the operating
results of NCRIC. NCRIC utilizes external investment managers who adhere to
policies established and supervised by the Investment Committee of the Board of
Directors of NCRIC, Inc. NCRIC's current investment policy has placed primary
emphasis on investment grade, fixed income securities and seeks to maximize
after-tax yields while minimizing portfolio credit risk. Toward achieving this
goal, NCRIC's investment guidelines, which set the parameters for NCRIC's
investment policy, permit investments in tax-advantaged securities such as
municipal bonds and preferred stock. NCRIC's investment guidelines document is
reviewed and updated annually. Effective January 1, 2000 Scudder Insurance Asset
Management, SIAM, became the external investment manager for NCRIC's fixed
income securities including tax advantaged preferred stocks.
Since 1996, NCRIC and its investment manager have conducted extensive
financial analyses of the investment portfolio using stochastic models to
develop a risk appropriate investment portfolio given the business environment
and risks relevant to NCRIC. SIAM supplements stochastic modeling with the
output from their independent investment research and strategy group to develop
a tailored investment approach for NCRIC. Analysis of NCRIC's capital structure
and risk-bearing ability, valuation, peer comparisons, as well as proprietary
and third party modeling, determine the optimal level of tax advantaged
investments and provide strategy input.
SIAM uses Dynamic Financial Analysis, DFA, a total company tool to test the
company's capital structure and business plan under numerous potential future
economic scenarios. The results of DFA, in the form of probability distributions
on key financial statistics, allow NCRIC to make risk informed decisions on the
structure of its investment portfolio as it relates to its business profile. DFA
output has been especially useful in setting portfolio policy regarding average
duration and optimizing potential equity exposure.
NCRIC has classified its investments as available for sale and reports them
at fair value, with unrealized gains and losses excluded from net income and
reported, net of deferred taxes, as a component of stockholders' equity. During
periods of rising interest rates, as experienced during 1999, the fair value of
NCRIC's investment portfolio will generally decline resulting in decreases in
NCRIC's stockholders' equity. Conversely, during periods of falling interest
rates, the fair value of NCRIC's investment portfolio will generally increase
resulting in increases in NCRIC's stockholders' equity.
The following table sets forth the fair value and the amortized cost of the
investment portfolio of NCRIC at the dates indicated.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- --------- ----------
As of December 31, 2000 (in thousands)
U.S. Government and agencies............. $ 13,037 $ 490 $ (14) $ 13,513
Corporate................................ 32,301 181 (1,763) 30,719
Tax-exempt obligations................... 15,379 631 - 16,010
Asset and mortgage-backed securities..... 31,335 208 (303) 31,240
--------- ---------- --------- ----------
92,052 1,510 (2,080) 91,482
Equity securities........................ 7,121 45 (603) 6,563
--------- ---------- --------- ----------
Total.................................... $ 99,173 $ 1,555 $ (2,683) $ 98,045
========= ========== ========= ==========
As of December 31, 1999
U.S. Government and agencies............. $ 13,937 $ -- $ (716) $ 13,221
Corporate................................ 27,842 25 (1,605) 26,262
Tax-exempt obligations................... 14,058 22 (289) 13,791
Asset and mortgage-backed securities..... 38,907 2 (1,246) 37,663
--------- ---------- --------- ----------
94,744 49 (3,856) 90,937
Equity securities........................ 4,691 -- (536) 4,155
--------- ---------- --------- ----------
Total.................................... $ 99,435 $ 49 $ (4,392) $ 95,092
========= ========== ========= ==========
As of December 31, 1998
U.S. Government and agencies............. $ 23,728 $ 1,032 $ (16) $ 24,744
Corporate................................ 18,823 704 (40) 19,487
Tax-exempt obligations................... 19,329 1,045 -- 20,374
Asset and mortgage-backed securities..... 26,218 381 (69) 26,530
--------- ---------- --------- ----------
88,098 3,162 (125) 91,135
Equity securities........................ 5,195 88 (70) 5,213
--------- ---------- --------- ----------
Total.................................... $ 93,293 $ 3,250 $ (195) $ 96,348
========= ========== ========= ==========
NCRIC's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. NCRIC's investment
policy provides that all security purchases be limited to rated securities or
unrated securities approved by management on the recommendation of NCRIC's
investment advisor. As of December 31, 2000, NCRIC held 40 asset and
mortgage-related securities most of which had a quality of Agency/AAA.
Collectively, NCRIC's mortgage-related securities had an average
yield-to-maturity of approximately 6.7%. Approximately 64% of the
mortgage-related securities are pass-thru securities. NCRIC does not have any
interest only or principal only pass-thru securities.
The following table contains the investment quality distribution of NCRIC's
fixed maturity investments at December 31, 2000.
Type/Ratings of Investment Percentage
-------------------------- ----------
Treasury/Agency................................. 32%
AAA............................................. 37
AA.............................................. 9
A............................................... 17
BBB............................................. 5
The ratings set forth in the table are based on ratings assigned by
Standard & Poor's Corporation and Moody's Investors Service, Inc.
The following table sets forth information concerning the maturities of
fixed maturity securities in NCRIC's investment portfolio as of December 31,
2000, by contractual maturity. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
At December 31, 2000
-----------------------------------------------------
Percentage of
Amortized Cost Fair Value Fair Value
-------------- ---------- ----------
(in thousands)
Due in one year or less........................... $ 300 $ 299 0.3%
Due after one year through five years............. 19,717 19,771 20.2
Due after five years through ten years............ 17,203 17,456 17.8
Due after ten years............................... 23,497 22,716 23.1
-------- --------- ----
60,717 60,242 61.4
Equity securities................................. 7,121 6,563 6.7
Asset and mortgage-backed securities.............. 31,335 31,240 31.9
-------- --------- ----
Total................................... $ 99,173 $ 98,045 100%
======== ========= =====
Proceeds from bond maturities, sales and redemptions of available for sale
investments during the years 2000, 1999, and 1998 were $10.5 million, $66.1
million and $58.8 million, respectively. Gross gains of $16,000, $260,000 and
$521,000 and gross losses of $21,000, $331,000 and $362,000 were realized on
available for sale investment redemptions during 2000, 1999, and 1998,
respectively.
The average effective maturity and the average modified duration of the
securities in NCRIC's fixed maturity portfolio as of December 31, 2000 and 1999,
was 5.2 years and 2.8 years, respectively.
Competition
The physician medical professional liability insurance market in the
District of Columbia and NCRIC's other target geographic market areas are highly
competitive. Competition is based on many factors, including the following:
o perceived financial strength of the insurer;
o A.M. Best ratings;
o policy pricing;
o policy terms and conditions; and
o service, reputation and experience.
NCRIC competes principally with three commercial companies, CNA Insurance
Companies, Medical Protective and St. Paul Companies. Each of these companies is
actively engaged in soliciting insureds in NCRIC's markets. According to A.M.
Best Company, NCRIC has 54% of the District of Columbia physician and hospital
professional liability market and these three companies have a combined market
share of less than 25%. However, the A.M. Best Company data includes all medical
professional liability insurance sold in the District of Columbia including
insurance purchased by institutions like hospitals, which NCRIC does not insure,
but which are insured by its principal competitors. Thus, the A.M. Best Company
data does not accurately reflect NCRIC's share of the medical professional
liability insurance markets in which it participates. Several medical
professional liability insurers in NCRIC's markets, including its two principal
competitors, offer products at lower premium rates than NCRIC. A.M. Best Company
calculates that at least 25 other companies offer some type of medical
professional liability insurance in each of NCRIC's markets, and more companies
may enter NCRIC's markets in the future. In addition, NCRIC believes that the
number of healthcare entities that insure their affiliated physicians through
self-insurance may increase.
In addition, as NCRIC expands into new states, it may face strong
competition from carriers that are closely focused on narrow geographic markets.
In particular, NCRIC expects to encounter strong competition from
well-established insurance companies as it carries out its expansion plans in
Maryland, Virginia, West Virginia and Delaware. Many of NCRIC's current and
potential competitors have greater financial resources than NCRIC and may seek
to acquire market share by decreasing pricing for their products below
prevailing market rates. If this occurs, NCRIC's profitability will be reduced.
In particular, NCRIC may be forced by competitive pressures to accept
unprofitable premium rates and underwriting terms and conditions. NCRIC's
competitors may also have existing relationships with insurance brokers or other
distribution channels, which NCRIC may be unable to supplant.
NCRIC believes that its principal strengths are:
o its claims management and underwriting expertise;
o its ability to successfully litigate claims;
o its risk management; and
o its individualized service.
In addition, NCRIC believes that it derives competitive advantage from its
20-year presence in the metropolitan Washington, D.C. medical professional
liability market and its commitment to its District of Columbia physicians.
Risk Factors
The concentration of NCRIC, Inc.'s business in the District of Columbia leaves
it vulnerable to a decrease in the number of medical practices or an increase in
damage awards in the District of Columbia
In 2000, District of Columbia insureds accounted for approximately 80% of
NCRIC, Inc.'s direct premiums written. The concentration of NCRIC, Inc.'s
business in the District of Columbia means that NCRIC, Inc.'s revenues and
profitability depend heavily on conditions in the District of Columbia medical
community. NCRIC, Inc. is the most significant subsidiary of NCRIC Group.
If we established inadequate loss and LAE reserves, our profitability will
diminish
NCRIC reserves for losses and loss adjustment expenses or LAE are estimates
of amounts needed to pay reported and unreported claims and related LAE. If
NCRIC experiences greater than expected severity or frequency of claims, or
both, there is a risk that currently established reserves will prove inadequate.
Indemnity payments in medical professional liability cases are rising and there
is a risk that a very high jury award could be rendered against NCRIC
We cannot predict the impact of clusters of cases, like the breast implant
or "Fen-Phen" cases. Also, from time to time NCRIC has had, and may in the
future have, very high jury awards rendered against it. This risk is heightened
by the District of Columbia's rejection of tort reform. According to the
National Practitioner Data Bank, between September 1, 1990 and December 31,
1999, the District of Columbia had the highest cumulative mean medical liability
payment average in the United States at $316,958. The next closest jurisdiction
is Alabama with a cumulative mean medical liability payment of $265,962 during
the same period. In addition, according to the Physician Insurers Association of
America 1998 Data Sharing Report cited in the August edition of A.M. Best's
Review, the medical professional liability insurance industry's average claim
costs increased 17% between 1996 and 1997 following a 13% increase in the
previous year.
Our profitability could be adversely affected by market driven changes in the
healthcare industry
Managed care has negatively impacted physicians' ability to efficiently
conduct a traditional medical practice. As a result, many physicians have joined
or affiliated with managed care organizations, healthcare delivery systems or
practice management organizations. The impact of managed care and tightened
Medicare/Medicaid reimbursement may impact a physician's decision to continue
purchasing consulting and practice management services, shifting a purchase
decision from
quality and value to price only. Larger healthcare systems generally retain more
risk by accepting higher deductibles and self-insured retentions or form their
own captive insurance companies. This consolidation has reduced the role of the
individual physician and the small medical group in the medical professional
liability insurance purchasing decision. In 2000, 51% of NCRIC's gross premiums
came from physicians practicing alone or in groups of less than three
physicians.
NCRIC may be unable to obtain affordable reinsurance from high quality
reinsurers, which would increase the risk borne by NCRIC and restrict NCRIC's
ability to insure larger risks
NCRIC's ability to provide medical professional liability insurance at
competitive premium rates and coverage limits on a continuing basis depends in
part on its ability to secure adequate reinsurance at commercially reasonable
rates. The amount and cost of NCRIC's reinsurance is governed by prevailing
market conditions beyond the control of NCRIC. At times in the past, insurance
industry conditions have resulted in reinsurance being either unavailable or
prohibitively expensive. Reinsurance permits NCRIC to reduce its net liability
on individual risks and to protect itself against large losses. The reinsurance
program automatically passes on the risks insured by NCRIC in excess of NCRIC's
retention and quota share participation, up to the maximum reinsurance policy
limit offered.
While NCRIC seeks to obtain reinsurance with coverage limits that it
believes are appropriate for the risk exposures it assumes, there is a risk that
losses experienced by NCRIC will not be within the coverage limits of its
reinsurance.
NCRIC is also subject to credit risk because reinsurance does not relieve
NCRIC of its obligation to pay claims to its insureds for the risks ceded to
reinsurers. A significant reinsurer's inability or refusal to make payment under
reinsurance terms could have a material adverse effect on NCRIC.
We may purchase less reinsurance and retain more risk ourselves which will
increase our exposure to larger losses
We may reduce our insurance costs by retaining more risk ourselves. This
means that NCRIC would assume the risk of individual losses up to an increased
maximum exposure amount. Any decrease in reinsurance will increase the amount
NCRIC pays for losses.
We may be unable to sell our products to doctors outside of the District of
Columbia metropolitan region or expand our sales to dentists because we have not
had significant sales to either group in the past
Expansion and diversification of our product lines will require adequate
capital, marketing success and the ability to set profitable rates and comply
with applicable regulatory requirements. We may be unable to accomplish any or
all of these requirements. NCRIC's current new policy initiatives include
selling professional liability and office and equipment insurance policies to
dentists. NCRIC has not had a significant presence in the dental insurance
market in the past and may be unable to break into it in the future. NCRIC has
recently obtained licenses to sell medical professional liability insurance in
West Virginia and Delaware. There is a risk that NCRIC will be unable to
penetrate the West Virginia and Delaware markets.
There is also a risk that the cross-selling activity of our practice
management and insurance services by non-traditional channels of distribution
(i.e., practice management consultants marketing medical malpractice insurance
and malpractice underwriters marketing practice management services) will be
thwarted by the incumbent underwriters and management service company.
In the absence of regulations governing a full demutualization, there is a risk
that any future regulations will disadvantage minority stockholders like
yourself
The Commissioner of Insurance and Securities has not issued regulations
regarding the conversion of a District of Columbia mutual holding company to the
stock form of organization. If regulations are issued by the Commissioner of
Insurance and Securities, there is a risk that the regulations may be onerous or
burdensome or may include provisions which are disadvantageous to the
stockholders of NCRIC Group other than NCRIC, A Mutual Holding Company.
Public stockholders will not be able to determine matters submitted for
stockholder approval, including whether fundamental corporate changes will be
made
NCRIC, A Mutual Holding Company possesses voting control of NCRIC Group.
Minority stockholders will not be able to control the election of directors or
other matters, including whether NCRIC, A Mutual Holding Company will fully
demutualize or whether NCRIC Group will be merged into another entity.
Regulation
NCRIC, A Mutual Holding Company and NCRIC, Inc. are domiciled in the
District of Columbia, and Commonwealth Medical Liability Insurance Company is
domiciled in Virginia. Therefore, the laws and regulations of these
jurisdictions, including the tort liability laws and the laws relating to
medical professional liability exposures and reports, have the most significant
impact on the operations of NCRIC.
Regulation of NCRIC, A Mutual Holding Company after the reorganization.
District of Columbia law provides that NCRIC, A Mutual Holding Company must at
all times own, directly or indirectly, a majority of the outstanding voting
stock of NCRIC, Inc. At least two-thirds of the members of the boards of
directors of NCRIC, A Mutual Holding Company and NCRIC must at all times be
policyholders of NCRIC, Inc. NCRIC may not, without approval of the Commissioner
of Insurance and Securities, by way of an acquisition or investment in a
subsidiary, or otherwise, diversify out of the healthcare and insurance fields.
NCRIC, A Mutual Holding Company, as a mutual insurance holding company
organized in the District of Columbia, is subject to regulation at a level
substantially equal to that of a District of Columbia domestic insurance
company. The Commissioner of Insurance and Securities retains jurisdiction over
NCRIC, A Mutual Holding Company, NCRIC Holdings, Inc., NCRIC Group and NCRIC,
Inc. to assure that policyholders'