Leading the pack

Healthcare is big business and one that is vital to the financial wellbeing of the Cayman Islands. The offshore jurisdiction can already boast being the second largest domicile for captive insurance companies globally but it holds the number one position for the numbers of healthcare sector captives.

An indication of its importance is the fact that more than 800 people attended the sixth annual Cayman Islands Healthcare Conference back in October. Delegates included many very senior risk managers from US institutions grappling with change in their sector and many well-known insurers and brokers as both sponsors and delegates.

It’s easy to see why. The introduction in the US of the Affordable Care Act (ACA)—also referred to as Obamacare—has re-energised the US healthcare marketplace and forced healthcare providers to re-evaluate the way they insure their medical liabilities.

Cayman already has the major slice of the US healthcare captive cake—a stake it has built up over more than 40 years—and it is now in prime position to bring risk management solutions to the new-look US healthcare system.

The radical changes sparked in US healthcare have already driven mergers of hospitals and other healthcare entities as well as expanding Medicaid coverage to millions more Americans. This has led to a greater demand for new healthcare captives, or the development of existing structures to offset the corresponding upsurge in potential risks.

Another effect in the wake of the legislative change in the US is the tendency for large healthcare groups to revisit their captive structure and question whether it remains fit for purpose under the new legislation.

While the top coverage sought by healthcare companies remains medical malpractice and general liability, other risks are impacting on healthcare systems and firms are increasingly discovering their existing captive structure is too rigid in one area and/or does not allow for risks emerging from other sectors or other parts of their own organisation.

“What we are seeing industry-wide is the effect of two opposing forces,” says Kieran O’Mahony, chair of the Insurance Managers Association of Cayman (IMAC). “On the one hand we are seeing healthcare systems merge due to a drive for synergies and economies of scale, so where there were two or even three captives heretofore, now post-merger, only one remains, which reduces the overall number of captives.

“On the other hand, there is an increase in the size, capitalisation and usage of the remaining captives as they take on new and expanded areas of risk that would not have even been contemplated a mere five years ago—such as cyber, non-employed physicians and employee medical stop loss risk.”

JS De Jager, senior vice president of CSI International Underwriting (Cayman), agrees. “There is a definitely sign of change in the captive market due to the ACA, with more mergers being seen, especially in healthcare captive groups. This creates larger captives with more effective capital and risk management structures and with a wider reach, which makes it an attractive model for those seeking a solid captive and risk base,” he says.

New business, new models

The spate of mergers and acquisitions currently occurring in the US healthcare sector throws up the question of the newly-merged entity inheriting multiple captives that may not fit appropriately with the new business model, but perform a legitimate service in their own right.

New problems require new solutions and one advantage that Cayman possesses is the ability to react quickly to enhance or develop legislation as market demands dictate. The development in Cayman of the segregated protected cell (SPC) offers an off-the-shelf solution to risk managers.

Unique to the Cayman Islands, SPCs are a cost-effective way to establish multiple insurance programmes. An SPC is one company with one insurance licence, so the fees payable in respect of the registration of the company and the insurance licence are not multiplied as they would be if multiple companies were used. In addition, once an SPC is formed and licensed, individual cells of that SPC can be established in a fraction of the time and with a fraction of the cost of setting up a separate captive.

Similarly, the new portfolio insurance company (PIC) structure permits a new or existing SPC insurance company to incorporate one or more of its segregated portfolios (cells) by establishing a PIC under the relevant cell. The newly formed PIC registers with the Cayman Islands Monetary Authority (CIMA) and can then conduct insurance business in its own name. It does not need to be separately licensed as an insurance company but it will be a separate legal entity.

Both of these options are being used by healthcare bodies to good effect, says Solomon Harris’ head of insurance, Paul Scrivener, who is witnessing increasing numbers of healthcare captives converting to SPCs both for in-house and third party programmes.

“We continue to see healthcare captives segregate new programmes to accommodate new physicians joining the system as a consequence of the ACA,” he says.

“Even though the PIC legislation is still pretty new, we are seeing a good deal of interest from existing SPC captives or those considering setting up an SPC captive.

“As a firm we worked on the first two PICs and there are others in the pipeline. As it happened, the first two PICs were not in the healthcare space, but it is only a matter of time as PICs are ideal for a healthcare captive looking to go to the next stage and segregate using PICs rather than just cells.”

The switch from SPC to PIC by some entities is a phenomenon that has also been witnessed De Jager.

“We have seen positive growth in PIC business coming to Cayman over this past year following the implementation of the PIC regulations. We are very optimistic about a further influx of new business and also more on SPCs converting into PICs as we move forward,” he says.

Kevin Poole, client services director at the Kane Group says it is still too early to predict any wider take-up of the PIC structure, but he remains optimistic.

“It’s too early to identify any particular trends as to date only two or three PICs have been formed. However, while we can’t really say whether companies are migrating to PICs, there is definitely an interest in doing so if it makes good business sense.

“As the concept becomes more widely understood we would expect this interest to grow. We definitely expect 2016 to be more active, with the formation of PICs not only for healthcare clients, but clients in other sectors too.”

Better together

Third party insurance within healthcare captives seems to be a growth area. In other instances, two or more healthcare systems have created what is essentially a joint venture with each other to provide for their insurance needs. In some cases, this has been done because the parent healthcare systems have merged but there is a need or desire to keep the captive insurance lines distinct.

“We are seeing captives looking to expand and write third party business, for example, for joint venture partners of the health system,” confirms Scrivener.

Poole says: “We have seen increased interest from clients who already have a captive in looking to partner with other institutions. This has led to discussions about ways to leverage the existing captive to offer coverage to partners, and we have been assessing whether a cell or PIC structure would be appropriate.”

It’s not only medical liabilities that healthcare captive risk managers are seeking coverage for—many creative uses for SPCs are being conceived for situations where it is highly desirable to segregate the assets and liabilities of new lines of business from the existing coverage provided by the captive.

One such areas is employee benefits, which is gaining increasing popularity for offshore captive owners, as direct insurance arrangements for this risk class are highly regulated.

“Some healthcare systems are looking to leverage their captive by adding new risks under the programme. Healthcare benefits is one example; another is cyber,” confirms Scrivener.

Cyber is interesting. Rarely a day goes by without news of data breaches and other cybersecurity issues making the news. For healthcare companies charged with protecting the medical and insurance records of hundreds of thousands of patients and staff this is a huge headache.

It’s one that is only going to continue to throb as the ability of hackers to outrun any tracking technologies seems unstoppable at present. It makes sense for captives to expand coverage to include cyber or to transfer that risk into an individual cell.

Poole says: “Cyber-related risks are rising up the corporate agenda due to recent high-profile incidents in which patient records have been breached making the headlines. Companies will also need to consider the potential impact of government fines and penalties relating to the loss of data.

“While professional liability will remain the primary focus of most healthcare captives, the emergence of new technologies such as tele-medicine could give rise to greater interest in managing associated risks.

“Given the ample reinsurance capacity that exists, we believe it’s a great opportunity for captive owners to take charge of certain risks and do so at highly competitive rates. The only concern with risks such as cyber is that this is a relatively new insurance product which is evolving as demand grows.”

Onshore competition

While Bermuda is often associated with being Cayman’s main competitor in the captive market, there is also competition onshore, as more US states enact captive legislation. Over half of the 50 US states now have captive insurance legislation in place, mirroring offshore jurisdictions

Adrian Lynch managing director at Aon in Cayman, says: “We are fortunate that in the Caymans we have 40 years of history in healthcare captives.

“As a jurisdiction we have to be proactive—we need to be continually evolving and as a manager we are always looking at our value proposition. We can’t do what we have always done before but I am comfortable in saying that the Cayman Islands is still a very strong jurisdiction.”

Part of the evolution process includes seeking out new business streams. The small-to-medium sized businesses (SMEs) based in Canada are currently targeted.

The SME business community, which is considered a booming sector for captives with the Cayman PIC model, is considered ideally suited to facilitate the wider SME marketplace.

Piers Dryden, a senior associate at legal firm Ogier’s Cayman Offices, says: “PIC legislation is a powerful addition to the Cayman captive market and can also enhance the attractiveness of Cayman to smaller captive insurers by enabling them to grow within an SPC/PIC structure and, in due course, readily transition to a standalone captive.”

Scrivener says: “The SME sector is an increasingly important component of the captive space and in Cayman we have seen, and I think we will continue to see, growth in microcaptives and cell captives.”

But he cautions: “I certainly don’t rule out healthcare opportunities in other jurisdictions, but the unique nature of the US healthcare industry means that the US will inevitably remain the core of this sector of Cayman’s captive insurance industry.

“So, for example, while Cayman is now targeting more Canadian captive business, this is generally outside healthcare because with Canada’s universal healthcare system and liability caps, hospitals do not have the same need for healthcare-related insurance.

“There may be some healthcare opportunities for Cayman in Latin America, but I think it is largely untapped at this stage.”

Poole believes that SME clients in the healthcare industry are finding themselves squeezed by cost containment and regulatory requirements, forcing firms increasingly into competition with larger players and under pressure to partner with others or become an acquisition target themselves.

“While it’s possible that Cayman’s healthcare experience could potentially assist healthcare providers in other countries, many (such as those in Europe) have a form of government-backed social medicine available that makes it difficult for structural and political reasons to justify a captive formation,” Poole adds.

“We would expect that as private medical programmes and arrangements become more popular, as state-backed medical care comes under pressure, then opportunities will arise. For several clients, we have discussed the viability of including overseas operations within their existing captive programme.

“As rates, particularly in Europe, remain competitive, coupled with the fact that it would need to involve a locally-admitted carrier, so far it hasn’t proved cost-effective to pursue further.”

Leading the way in healthcare

The Cayman Islands is the leading jurisdiction for healthcare captives, representing 34 percent of all captives. As at June 30, 2015 medical malpractice liability continues to be the largest primary line of business with 246 companies, and workers’ compensation the second largest with 151 companies.

The vast majority (90 percent) of the insurance companies licensed in the Cayman Islands insure risks in North America. The next most important geographical source is the Caribbean and Latin American region. 2015 total premiums were reported to be $11.8 billion and total assets $54.4 billion.