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For 1987 and thereafter, the liability policy issued by
Parthenon to petitioners was modified to incorporate a $10
million deductible, causing petitioners to be substantially self-
insured for general and professional liability risks for policy
years after 1986. Parthenon continued to provide petitioners
risk management services and claims administration, and insured
high-level excess exposures, but no longer provided insurance for
any substantial portion of the day-to-day professional and
general liability risks faced by petitioners. Parthenon
continued to provide reinsurance of the workers' compensation
risks of petitioners on the same basis as before, with the
exceptions that a retrospectively rated feature was added in
1987, and charges to hospitals were made on the basis of
actuarial calculations of loss experience beginning in 1988.
As a result of the retrospectively rated premium plan for
workers' compensation insurance during policy years 1987 and
1988, Parthenon received a premium installment in the year the
policy was issued, followed by a payment in the second year
designed, within limits, to cover the losses plus expenses
actually incurred. Parthenon recorded annual statement
liabilities during the first year only to the extent that they
corresponded with the amount of that year's premium installment,
adjusting both premiums and liabilities in the second year to
reflect estimated total losses and corresponding premium amounts.
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