Taking care of the workers

If modern medicine can be said to have a downside it’s the issue of cost. Yes, we can now cure more diseases and conditions. The problem is that it all costs more. Which is why, faced with spiralling insurance costs, businesses and organisations have been resorting to creating their own healthcare captive insurance companies.

This is not a new phenomenon but it is a growing one, which Cayman as a home for captives has been able to benefit from.

According to Adrian Lynch, managing director, Aon Risk Solutions, healthcare accounts for a significant portion of Cayman Islands captive insurance business, so it has a material role to play in the existing and future success of the Industry.

“Considering its 40-year history we now have a mature industry that has gone through a number of changes over the years; we are probably in a cycle of most change in healthcare right now,” says Lynch.

“I do not expect there to be too much growth by way of new entrants to the healthcare market but I do see our existing client base adapting to the exigencies of the US Affordable Care Act (ACA) and as a result have seen their captives undergo a transformation over time.

“We are seeing growth in our larger clients who are acquisitive and combining programmes yet the consolidation has meant certain other captives have run their course. The larger captives are well capitalised and look to us to expand their programmes and put their capital to better use, so I see the growth laterally.”

Conor Jennings, managing director at Captiva, agrees. He points out that healthcare has always been important to Cayman and says that in his view Cayman managers and the regulator have built up levels of expertise unsurpassed in any other jurisdiction in this field. According to Jennings, that is why Cayman is top of the list when considering a domicile for a new healthcare programme.

Jennings also points out that the ACA has encouraged smaller healthcare groups to be more cost-effective and efficient. This has led to mergers in the sector which, although resulting in a fall in total captive numbers, has been more than offset by increased premiums and assets under management of those now larger surviving groups. Many of these remain in Cayman.

Insurance with benefits

In addition, the use of captive insurance companies for financing employee benefits continues to evolve as companies increasingly go beyond using their captive vehicle purely to save money on their annual employee benefits bill—including healthcare.

According to a study by Willis Towers Watson, released in August this year, the primary driver for nearly half (44 percent) of companies with employee benefits in their captive is to control and improve their claims data to help with ongoing cost management. This is up from a quarter (24 percent) in Willis Towers Watson’s 2015 study. Conversely, the study finds that the proportion of companies for whom the main driver is cost savings dropped from two-thirds (67 percent) in 2015 to 44 percent in 2016.

According to Willis Towers Watson there has been a clear evolution in the rationale for companies to include employee benefits in their captives, and the initial motivation for using a captive is often the simple desire to save money on the ever-increasing cost of providing employee benefits. For some companies these ongoing cost savings are all they require from their captive, but many are developing their use and finding additional benefits.

Willis Towers Watson’s study claims that more companies are using their captive as a strategic tool to manage risk and benefit costs proactively and to analyse claims data to identify and address key cost drivers. Many also look to employee benefits as a source of diversification from the more traditional lines of risk typically included, such as property, casualty or business-related risks.

Willis Towers Watson’s study polled over half of the employee benefit captives operating globally as part of its specialist Captive User Group forum, held in London and New York in May and June. The study found that half (50 percent) of those questioned use their captive vehicle to provide death and disability benefits as well as healthcare or medical benefits.

Proactive risk management was also reflected in the influence which employee benefit captives have on pricing, with half (50 percent) indicating that their captive has full determination or significant influence over pricing rather than relying purely on local insurers’ underwriting. Looking ahead, nearly half of the employee benefit captive users (47 percent) indicated that they are also considering a captive pension transaction, either in the next three to five years (41 percent) or within the next 12 months (6 percent).

“We continue to see a broadening use of employee benefit captives. Companies continue to explore further areas in which they can take on more of the risk and manage it internally, in order to save money and mitigate risk,” Mark Cook, director at Willis Towers Watson, said in a statement.

“Many companies now recognise the importance of a captive as a tool in benefit cost management, by identifying and addressing the key cost drivers. Successful employee benefit captives are able to stabilise and slow down the increase in benefits costs, in an environment where medical costs continue to increase.

“Our own Global Medical Trends report from earlier in the year shows that the average global health insurance premium increased 7.5 percent in 2014, 8 percent in 2015 and is estimated to grow by over 9 percent in 2016. Captives users recognise this trend: over three-quarters of those we questioned had noticed a trend towards increasing medical insurance claims among their employees. So the savings available to companies who run a successful benefits captive can be significant.”

Long-term health

Looking at growth prospects Linda Haddleton, managing director at Artex, is bullish. She regards healthcare captives as an important and healthy segment, traditionally representing approximately 30 percent of the Cayman captives population.

Haddleton says that she sees room for growth in this segment, and that a good example of this is the long-term care sector of the healthcare industry.

“Given population dynamics in the US, long-term care ranging from assisted living to acute care, will continue to affect insurance needs, and healthcare captives provide an excellent model for managing and financing risks in this setting. Captives are already utilised by this sector but not yet in the widespread manner that Artex has seen with hospitals and other healthcare networks,” she says.

A note of caution comes from Clayton Price, Cayman head of office at Marsh. He points out that as the single largest industry sector of captives in Cayman, healthcare captives remain highly valued, but due to what he described as the strains placed upon an individual healthcare system’s operating margins, the sector has been forced to increase its efficiency, resulting in the merging of several systems—with more on the horizon.

“Whereas Cayman may obtain a new captive incorporation by a healthcare parent, the likelihood of an existing one being either wound up or amalgamated into another captive due to the merging of two
or more systems at the parent level appears to be the new normal,” he says.