Kerr Russell
With healthcare systems looking to a captive for various reasons, Patrick Haddad of Kerr Russell suggests that the healthcare captive insurance market will remain strong going into next year
What is your role at Kerr Russell?
I am a senior partner in the firm’s healthcare and insurance practice groups. I have been in practice for over 28 years, advising clients on both commercial and captive insurance, many of which are related to healthcare organisations.
My role when representing captive clients varies according to the preferences of the parent organisation. It can range from advising the parent or captive on governance structure, US legal developments, assessing US tax treatment of the captive during formation and in connection with new regulatory developments, drafting policy documents, and furnishing coverage opinions.
What role does/can captive insurance play for healthcare systems?
For healthcare systems, captive insurers typically furnish the initial layer of insurance coverage for professional liability risk. In addition, captives often furnish the initial layer for commercial general liability coverage.
These initial layers of coverages taken on by the captive are typically the self-insured retentions of the excess professional liability and commercial general liability policies maintained by the healthcare system. Consequently, the captive’s coverages need to be coordinated with the healthcare system’s excess coverages in order to properly interface and ensure no gaps in coverage.
Healthcare systems look to captives for various reasons. In addition to cost efficiencies, captives can help ensure that the assets of the health system available to respond to professional liability claims are maintained within a licensed insurance company and are thereby segregated from other liabilities and creditor’s claims of the healthcare system.
Typically, a healthcare system will wholly own a subsidiary corporation that will be licensed and function as the system’s captive insurer. Although professional liability and general liability are the risks typically covered by healthcare system captives, organisations which have captive insurers often consider expanding the captive’s coverages to other risks, such as cyber liability.
What needs to be considered by healthcare systems when choosing a domicile for a captive?
There are a number of factors that any organisation should assess when evaluating the choice of domicile. This evaluation is typically undertaken as part of a broader and more comprehensive study to assess the feasibility of a proposed captive structure. A feasibility study typically assesses various matters including financial viability, insurance structures, taxation treatment and choice of domicile.
Many jurisdictions in the US and abroad license captive insurers. Factors that bear on choosing a domicile include capitalisation and licensing requirements, as well as the domicile’s familiarity and experience with the type of risks that are insured.
Another key factor is the regulatory environment—both in terms of whether the domicile’s laws provide a flexible framework to accommodate innovative insurance structures and whether the domicile’s regulators view those whom they regulate as customers or potential adversaries.
Another important factor bearing on the choice of domicile is the domicile’s reputation for compliance with international and US government standards addressing taxation compliance, information disclosure, and anti-money laundering initiatives.
A favourable domicile will also have a number of experienced captive managers available who are well versed in the management of the insurance business written by the captive insurer. Captive managers may be independent or affiliated with the insurance brokers responsible for the organisation’s overall insurance programme.
Cayman and Bermuda are probably the leading domiciles of choice for captives in the healthcare system space.
What type of vendors furnish support services in the healthcare captive space?
There are a number of different types of vendors that furnish the support services. Typically, a captive associated with US persons will have an ongoing professional relationship with US legal counsel.
When forming a new captive, there will need to be legal counsel from the local domicile. There will be a captive manager in the domicile who will manage the captive’s business and interface with the domicile’s regulatory authority and is responsible for maintaining compliance with the domicile’s legal regulation.
Healthcare systems also operate risk management programmes. Risk management professionals are versed in the techniques and strategies of mitigating the risk of claims exposures by managing risk prospectively. For example, a system’s risk management department may arrange for continuing education programmes on medical records documentation which is important for the rendering of good quality care, billing and reimbursement, and the defence of professional liability claims. Risk management professionals are also experienced in managing claims that are asserted against the healthcare system and its professionals.
How strong is the healthcare captive market? Are we likely to see much change moving forward into 2019?
The current healthcare captive insurance market is strong. I expect that this trend will continue in 2019. Initiatives by captives to maintain and document compliance with US and international taxation, anti-money laundering and accounting standards will continue, as will the bolstering of related standards adopted by captive domiciles.
Do you expect emerging technology/digitalisation to have a big impact?
Technology continues to facilitate the exchange of information among captive insurance managers, risk managers and others supporting captive insurance companies. It is very important that organisations that exchange financial, claims and proprietary information electronically have appropriate electronic security measures and safeguards in place, given the increasing prevalence of data breaches generally.
Additionally, it is important that vendors that qualify as direct and indirect business associates of healthcare organisations are compliant with all applicable privacy and security standards of the Health Insurance Portability and Accountability Act and its implementing regulations.
