First published in Captive Visions e-magazine, Winter 2016
As a result of a rapidly shifting regulatory environment and evolving technological innovations and financial practices, the US is spending more on healthcare than any other country in the world. According to the PwC’s Health Research Institute, estimated US healthcare expenditures reached $2.8 trillion in 2013. With expenses continuing to rise, healthcare organizations are seeking out new avenues for improving efficiency, lowering costs, optimizing resources, and diversifying revenue streams.
Over time, captives were formed in response to a hardening commercial market that was charging high premiums, forcing large retentions on insureds overnight, and/or was inflexible in not allowing certain coverages – such as for employed physicians. Other insureds grew weary of paying premiums that clearly outran the corresponding loss payments year after year, allowing a third party to take advantage of their improving patient safety, quality and risk management.
For these reasons, many have turned to the use of alternative risk transfer vehicles, which in addition to self-insurance captives, includes risk retention groups and self-insurance trusts. From broader coverage to stability in pricing, improved cash flow, and increased control over programs, investments, and effectiveness, captives are capable of turning risk into a strategic advantage.
Captives have evolved over the last thirty or so years to respond to a myriad of challenges and objectives, including challenging professional liability, market conditions caused by insurers leaving the market, as well as to raise the level of risk within the organization with the board. Captives have made money in both underwriting and investments. In fact, some captives have done so well that they underwrite to a loss and make up the difference with investment income.
Using your captive to its full potential
However, despite the fact that captives are incredibly powerful tools, they’re not often used to their full potential. Rather, they’re used similarly to traditional insurance – primarily to protect against losses – despite the fact that they’re often over capitalized. But using captives in this way is comparable to owning a powerful racecar that you only drive 25 miles per hour around your neighborhood. With that much horsepower, it can and should do more. The same is true for captives.
While captives can be used to reinsure traditional lines such as worker’s compensation, general liability and professional liability, they are also full of untapped possibility, particularly for risk management. They can couple with patient safety initiatives and encourage senior leadership and board involvement in the risk management process.
For example, captives can provide parent companies with key advantages to launching and operating communication and resolution programs (CRPs), by utilizing political momentum from the captive board to fund grants and supporting physicians by removing the negative consequences of a malpractice insurer. Perhaps counter intuitively, such programs have been shown to reduce costs without increasing litigation, as in the case of The Risk Authority Stanford’s CRP, PEARL (Process for Early Assessment and Resolution of Loss). Stanford Law School conducted a study in which a pre/post analysis of 2003-2008 vs. 2009-2014 shows that after PEARL was implemented, the frequency of lawsuits was 50% lower, indemnity costs in paid cases were 40% lower, and defense costs were 20% lower for cases handled through PEARL.
It’s time to uberize your captive
This demonstrable success is due in part to the role of the captive in investing in the program, and its preparedness to accept risk at any time. It’s vital that captives be prepared to accept risk at any and all times in order to make the most of opportunities that present themselves. To get the most out of a captive, modern and innovative strategies are required. It’s time for captives to uberize.
By assessing the following, captives can improve the way they function in order to optimize capital while simultaneously funding losses.
- Identify: Types of risks that the captive can be used for.
- Collect: Data around third party risk.
- Communicate: Changes in processes to actuaries and reinsurers clearly and with supporting data. This is imperative so they’ll understand how new programs will work and the potential impact they’ll have–and a full understanding will make it easier to bring them on board.
- Anticipate: Don’t just wait–anticipate and establish the framework you’ll need to put something in the captive ahead of time. This way, when new and different business opportunities present themselves, the captive is ready and able to respond.
- Upgrade: From a model of sitting back and waiting, to instead proactively recognizing the captive’s capital position and putting it to work.
Ultimately, captives can act as a valuable and powerful vehicle for improving the effectiveness of risk management strategies by investing in programs and opportunities with the potential to improve efficacy. And this will happen most successfully if the captive is firing on all engines, if it’s prepared to take action, and if its ready to uberize the way it manages risk.
By: Jeff Driver, CEO