Healthcare organizations have been using captives for many decades to help manage their risks. Ron Sulisz of Strategic Risk Solutions estimates the size of this market and assesses how captives might help cover new risks in the future.
There are no consolidated statistics for healthcare captives worldwide because captive domiciles report their data differently. The figures for the number of healthcare captives in the Cayman Islands, however, are published, and they are available quarterly on the Cayman Islands Monetary Authority website—www.cimoney.com.ky.
As of June 30, 2012, there were 253 captives whose primary class of business encompassed medical malpractice liability based in this domicile. These captives had a total premium of $2.3 billion and total assets of $11.4 billion. Some other insurance domiciles publish similar data (such as Arizona and Hawaii) but since the statistical data are not available for all domiciles, one can only guess at the global size of this market. I would estimate that there are 650 to 700 healthcare captives worldwide.
Out of the 253 healthcare captives in the Cayman Islands, the majority are institutionally owned. Ever since the first captive, owned by the Harvard Medical Institutions, was formed in 1976, institutional healthcare providers have been forming captives in the Cayman Islands.
Many healthcare captives are established initially to address a particular need, but based on their success the coverage that they offer has been expanded. Some of the newer areas of coverage being explored are cyber liability, government liability and disciplinary proceeding defense cost liability.
Cyber liability has been the most discussed of these since it is readily insurable commercially. Some high profile data breaches have been reported for non-healthcare entities such as Sony and Epsilon, with astronomical costs associated with a response for a large privacy breach.
In addition to cyber liability coverage for a data breach, coverage endorsement to errors & omissions (E&O) insurance is being explored, to protect healthcare institutions for non-data breach-related service interruptions that can generate losses for independent physicians (or independent physicians groups) that are purchasing access to an institutional healthcare provider’s physician electronic records.
One of the big unknowns for institutional healthcare providers is that they are still trying to understand the whole accountable care organization (ACO) structure and whether this is a new area of risk for them. If so, how are they going to insure it—commercially, or via use of their captive?
Many institutional healthcare providers have commenced conversations with commercial carriers regarding the activities that their employees are undertaking to try to determine the classification of exposures, and whether it would be categorized as managed care or some new exposure for which they may need a new insurance product.
Outside of the institutional healthcare providers, independent physicians often form groups to share operating costs, one of which includes the cost of medical malpractice insurance. These physician groups can purchase a commercial insurance product; another option is that they can assess the feasibility of their own captive insurance program.
One of the difficulties with these groups of independent physician insurance programs is assessing an appropriate group-retained aggregate, and then being able to obtain insurance coverage beyond that retained aggregate. For many years, swing-rated programs have been available, whereby if losses occur beyond the retained aggregate, coverage will be available, but an additional premium would have to be paid. On the positive side, however, this program can swing to the benefit of the group if no losses reach the attachment point for the excess coverage. Many of these group programs would like simply to be able to purchase a static reinsurance program at a reasonable cost, but this has proved difficult over the years.
HOW HAS THE USE OF INSURANCE CAPTIVES HELPED THE HEALTHCARE INDUSTRY?
• It has given healthcare providers a tool with which they can absorb predictable risk for financial purposes;
• It has provided healthcare providers with an entity to consolidate their insurance program and highlight the overall costs to senior management; and
• It has provided senior management with an abundance of information so that appropriate risk management programs can be implemented to enhance the quality of care at their institution.
As stated above, an institutional healthcare provider often starts a captive with a professional liability and commercial general liability product and sees excellent results. It can then expand into physician professional liability, umbrella or excess coverages, and various types of deductible reimbursement products (workers’ compensation, directors & officers, E&O, cyber liability, property, pollution, non-Employee Retirement Income Security Act [ERISA] employee benefits, etc).
In the future what will insurance captives be able to do? It is difficult to assess at this juncture, nevertheless, something tells me that insurance captives are going to be able to help with the new and as yet unknown ACO structure.
Healthcare captives, Harvard Medical Institutions, cyber liability, Healthcare providers, Insurance Captives