A captive audience


A captive audience

Like a growing number of healthcare systems, Cape Fear Valley Health covers its professional and general liability risks with a captive. CEO Mike Nagowski spoke to HRMR about the challenges and benefits of this solution.

In 2004 Cape Fear Valley Health, a five-hospital system and the eighth largest in North Carolina, made the decision to transfer its general and professional liability coverage from a self-insured trust to a segregated cell captive—essentially its own insurance company, set up to solely to protect Cape Fear Valley.

A segregated cell captive can provide separate ‘cells’, each of which has dedicated assets and liabilities ascribed to it. Cape Fear Valley Health is not alone in choosing a captive. With the advent of Obamacare, the growth of accountable care organizations (ACOs) and the absorption of previously independent physicians into larger health systems, captives are an increasingly popular solution to risk, especially where general and professional liability are concerned. Making such a change may seem like a momentous decision but, says Cape Fear Valley’s CEO Mike Nagowski, it is a switch worth making.

The creation of a captive was not such a big leap for Cape Fear Valley Health because it had been using a self-insurance trust for funding of liability claims since 1989—a decision that was made in the face of a hard market and the failure of the group program the system had previously been participating in. By 2004, transitioning to a captive seemed like a logical step.

“It makes sense to cover our professional and general liability program in this way, allowing us to improve our losses through quality improvement and claims management,” says Nagowski.

The major challenge when deciding to make the switch was ensuring that the system’s board of trustees understood the captive’s purpose and function.

“People always want to understand why we have a segment of business offshore,” says Nagowski. “We have to explain that it has nothing to do with taxes or financial accounting. Our investments flow through the Cayman Islands but remain invested onshore. That’s been the biggest challenge: you’ve got to make sure people understand why, that they’re comfortable with it. Our board understands and is very comfortable.”
The move to domicile the captive in Grand Cayman was another easy decision because the Cayman Islands Monetary Authority has a very strong understanding of the healthcare business.

“They continue to be very good to work with. The application process was smooth and painless. Our assets are just under $50 million and it has been a good relationship,” says Nagowski.

When setting up the captive, Cape Fear Valley Health turned to claims consultant Layton Severson of L.C. Severson Company for advice and guidance. With his assistance the health system interviewed several management companies and worked from there.

Cape Fear Valley’s premiums are developed based on actuarial studies and their recommendation at the 75 percent confidence level of expected losses plus operating expenses and reinsurance premiums. The premiums cover general liability and professional liability and Cape Fear Valley uses reinsurance to provide the umbrella coverage to other lines of coverage.

The captive has given Cape Fear Valley Health better access to reinsurance markets, and it has enlisted the help of Paul Voller of Lloyd and Partners, a London-based insurance brokerage firm, to guide the reinsurance process.

“Paul has been wonderful to work with,” says Nagowski. “In starting the captive we moved our reinsurance into the Lloyd’s syndicated market. Paul works with our captive to help us select our reinsurance partners. He understands this market extraordinarily well and provides us with guidance.”

The captive maintains two or three layers of reinsurance depending on market conditions. “We routinely meet directly with the reinsurers,” says Nagowski. “We spend time telling them about our health system—we give them a very strong understanding of our operations, our quality and performance improvement activities as well as our approach to claims management.

“To give you an example, two years ago we moved from the Lloyd’s market to Bermuda for our first layer of umbrella coverage. Our upper layers are now placed in the US market—we always try and maintain long-term relationships but markets do change and we always want to be a partner with our reinsurers. We work hard to protect their interests as that’s what pays for us in the long run.”

Nagowski says that the captive has provided Cape Fear Valley Health with a very clear financial structure to account for liability costs and to help it budget for future needs. In addition, it holds open the possibility of extending the scope of coverages or potential partnerships with business partners.

“For us in the executive suite the clear financial structure that helps us account for the liability costs and helps us to budget is very important,” he says.

Asked what advice he would give to other healthcare providers seeking to set up a captive, Nagowski recommends ensuring that you prepare yourself carefully, gaining a full understanding of the pros and cons. It is also vital to select your partners with care: you need a captive manager who understands the regulatory climate and is capable of providing you with clear guidance on how to get started.

“You want to make sure you consider your partner’s ability to provide support for the daily operation of the captive. If it’s not top of your mind on a daily basis you really need to make sure that your partners consider it top of their minds on a daily basis,” he says.

Nagowski is in no doubt that if a business prepares well and monitors it carefully, a captive is a very attractive option for healthcare systems seeking to take control of their own risks.

“The captive has certainly worked for us,” he says. “In today’s environment healthcare is facing so many complexities. The captive allows us to have clarity and to stabilise our costs so for us the captive is absolutely the right decision.” 

Mike Nagowski, Cape Fear Valley Health, Cayman Island, captive, North Carolina