Regulators keep tabs on malpractice insurer

Thursday, January 9, 2003

RICHMOND, Va. -- Virginia insurance regulators are looking into the finances of a Richmond-based malpractice insurance provider and waiting to see whether the company gets a multimillion-dollar cash infusion before deciding whether to take any action.

Reciprocal of America in recent days has been telling its subscribers -- hospitals who get their malpractice insurance from the company -- that it needs to raise $70 million by Jan. 31.

Reciprocal manages money pooled by hospitals and other medical providers to underwrite malpractice insurance for physicians and hospitals. The company is licensed to operate in 40 states and the District of Columbia. It conducts 11.7 percent of its business in Missouri.

Neither Southeast Missouri Hospital nor St. Francis Medical Center does business with Reciprocal of America, acording to spokeswomen at the hospitals.

The Virginia Bureau of Insurance "is closely monitoring" the company's financial status, Katha Treanor, a bureau spokeswoman, said Wednesday. The state agency "is in direct contact with senior management at ROA on a frequent basis."

In addition, she said, "The bureau is currently conducting a financial condition examination of ROA, including an actuarial review of ROA's loss reserves. The Bureau will also be closely assessing the results of ROA's capital call."

Under Virginia law, if the bureau decides that Reciprocal is insolvent, it can take a range of actions ranging from appointment of a receiver to outright liquidation.

Reciprocal's acting president, Thomas K. Smith, was traveling Wednesday and did not return a message seeking comment.

Reciprocal has been struggling financially for the past two years. The company's main line of business is medical malpractice coverage, which represents nearly half of its revenue, according to a profile of the company by debt-rating agency Standard & Poor's. S&P's current rating of Reciprocal is "weak."

According to Reciprocal's financial statements filed with the Bureau of Insurance, the company lost $12 million in 2000 and $88 million in 2001. Through the first nine months of 2002, the company reported net income of $1.4 million.

Reciprocal filed an amendment to its 2001 annual financial report after its independent auditor, PricewaterhouseCoopers, said the company had "materially misstated" its policyholder surplus -- the excess of assets remaining after accounting for liabilities. The company originally reported a surplus of $82.2 million at year-end 2001, which it lowered to $37.5 million in the amendment filed in September.

PricewaterhouseCoopers also noted that after making that adjustment, Reciprocal's surplus was below its authorized risk-adjusted capital ratio control level -- a regulatory standard of financial soundness. The low risk-adjusted capital ratio and the losses in 2000 and 2001 "raise substantial doubt about the company's ability to continue as a going concern," according to the auditor's report.

News editor Tony Hall contributed to this story.

Reciprocal is not alone among medical malpractice insurance providers in facing difficult financial conditions, said Julie Pulliam, public affairs director for the American Insurance Association in Washington.

Growing payouts for medical malpractice claims nationally have led many insurance providers to raise their premiums or quit the market, Pulliam said. Last year, malpractice insurance companies paid out $1.55 in claims for every $1 they received in premiums, she said.

Those conditions have sparked crises in parts of the country as doctors and hospitals have struggled to find and pay for coverage and others have quit practicing or have moved to states that have laws capping premium increases.

In West Virginia, for example, about two dozen doctors at four hospitals began a 30-day walkout last week to protest high malpractice insurance premiums. In Pennsylvania, Gov.-elect Ed Rendell headed off a threatened similar walkout by proposing legislation to give physicians $220 million in state funds to help pay premiums.

News editor Tony Hall contributed to this story

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