TUCSON, Arizona – Businesses should periodically review their captives to ensure they keep pace with changing exposures and claims trends, a panel of experts said.
Failure to adapt can lead to significant losses, even for captives with long records of profitability, they said Monday during a session at the Captive Insurance Companies Association’s international conference in Tucson.
“It’s really important not to become siloed and fall in love with your operation. The world is changing out there,” said Robert Blasio, a Houston-based managing director at Gallagher Specialty, a unit of Gallagher Bassett Services Inc.
Emory Health, the health care system of Emory University in Atlanta, has seen substantial growth in its captive Clifton Casualty Insurance Co. since it was formed, said Shulamith Klein, chief risk officer for the university.
The system has 11 hospitals, 2,800 physicians, 34,000 employees and 6,000 medical students, she said.
The captive was set up in Colorado in 1981 to insure medical professional and general liability risks. By 1999, it was expanded to cover enterprise risks for the health care system and university and was moved to the Cayman Islands, she said.
The captive was profitable during the expansion, Ms. Klein said. In 2017, however, claims began to escalate as jury awards increased and medical inflation accelerated. In 2018, the captive reported an underwriting loss of $10 million, and in 2019 the underwriting loss was $27 million, she said.
“Our board requested that we solicit an external site review of our claims and risk management functions,” Ms. Klein said.
Gallagher analyzed the operations, including a review of the captive’s purpose. In addition, the TPA reviewed Emory’s litigation philosophy, Mr. Blasio said.
“That’s a question that anybody who is a captive owner should be asking every year as you have your annual captive board meeting,” he said.
Over the prior five years, Emory had begun to place a bigger emphasis on patient safety, which drew on resources of the risk management department, Mr. Blasio said. As a consequence, many of the system’s claims were handled by outside counsel.
“We found that the staffing had simply not grown commensurate with the organization’s growth,” he said.
“Emory was effectively using outside counsel as a component of its claims management process … at outside counsel rates.”
In addition, Emory’s risk management information system was little more than an incident management system, Mr. Blasio said.
Emory also reserved early for potentially compensable events, which included any incidents that the organization thought might lead to a claim, said Chad Wischmeyer, Atlanta-based managing partner for the actuarial practice of Oliver Wyman, a unit of Marsh & McLennan Cos. Inc.
Substantial reserves were put on the potential claims, but only about 10% of the events resulted in claims, he said.
By analyzing the reserving practices and bringing in outside expertise, the risk management department was able to show the finance department that there was another way to approach the process, Ms. Klein said.
After the review, Emory moved to a collaborative model that used internal resources and a third-party administrator, Mr. Blasio said.
Other measures that captive owners should take include regularly reviewing policy forms, said Maryann McGivney, Atlanta-based health care industry leader at Willis Towers Watson PLC.
“Make sure you are getting a good, deep, honest policy review on a regular basis,” she said. The review should include discussions on policy wordings during captive board meetings.
In particular, boards should review exclusions in the policies, Ms. McGivney said. Board members often raise concerns about how exclusions affect new facilities or operations that an organization’s risk management department may not be aware of, she said.
“It’s a good opportunity to get senior leaders to eyeball this stuff and let you know if there’s something you are missing,” Ms. McGivney said.
Going through the list of named insureds and additional insureds at a board meeting is also an effective way to ensure that all risks are covered, she said.
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