The heart of healthcare

Cayman is the home of healthcare captives, but how did it achieve this lofty position? According to Phillip Giles, managing director of MSL Captive Solutions, “Healthcare risks—particularly large, US-based, hospitals, healthcare systems and physician groups—have been among the earliest adopters of self-funding and establishing captives as a strategic risk financing mechanism for their casualty exposures such as medical malpractice and general liability.“With its favourable proximity to the US, and as one of the earliest domiciles, it was a natural fit for Grand Cayman to become the leading domicile for healthcare risks.”But proximity is only one small part of Cayman’s business proposition.Colin Robinson, director at Strategic Risks Solutions and chair of Cayman International Insurance, says: “Cayman has deep experience working with healthcare clients. That experience includes insurance managers that know the intricacies of how to meet our unique client needs, auditors who are familiar with the industry, and a regulator that has nearly 50 years of overseeing healthcare captives.”Cayman’s regulator, the Cayman Islands Monetary Authority, is continuously praised for its active regulatory oversight and expertise. “Our regulator’s vast experience in the captive insurance sector affords captive owners with the opportunity to start and grow their captives in Cayman and have meaningful dialogue with the regulators on emerging issues or marketplace changes,” says Gretchen Hammes, director at KPMG.Agreeing, Giles adds: “Having a consistent and stable regulatory environment, especially one as familiar with the nuances specific to the healthcare industry, has been vital in helping to promote an increased level of stability and expansion for the captives domiciled there.”In addition, says Hammes, the Cayman government and regulator has a “demonstrated track record of adaptability being able to consistently met and respond to new challenges through evolving regulations and meeting the expectations of various inter-governmental bodies, such as the Caribbean Financial Action Task Force”.While captives representing organisations from all over the world are domiciled on the Island, there’s a clear focus on the US market, where mergers & acquisitions (M&A) are plentiful.Hammes says: “We continue to see some M&A activity, but not at the rate that we experienced in the jurisdiction a few years ago. The original tide of activity was driven to a large degree by escalating healthcare costs due to federal policy changes in the US.”As a jurisdiction, Cayman is mindful of the US policy changes that can arise with new federal administrations, she says.“Changes in the US healthcare environment or changing US lawmaker views on international financial centres will create change in the Cayman captives industry. We are now seeing an increase in the number of captive formations, including the use of segregated portfolios and portfolio insurance companies,” adds Hammes.The uptake of segregated portfolios and portfolio insurance companies is a result of a drive to establish alternative risk transfer structures to better manage the price and coverage volatility in the commercial marketplace, according to Hammes. This is reflected in the 36 new company formations in 2020, the highest annual increase since 2017.Giles adds that healthcare entities have been among the most active in M&A activity over the past decade.“Antitrust considerations notwithstanding, this is a trend that is not going to slow any time soon. The more of the healthcare service spectrum that an entity can control and provide in a geographic region, the more influence they have over procedural pricing in that area,” he says.As a result of this, bigger health systems have been acquiring or merging with smaller systems and independent specialty practices at a record rate, adds Giles.He says: “This allows them to increase market control and pyramid revenue from all phases of healthcare. As health systems merge there has been a consolidation of captives, but we are also seeing new ones continuously being formed.”Robinson adds that there continues to be M&A activity onshore and offshore for healthcare networks and their captives.“The captive tail never ends up wagging the dog, so mergers of Cayman captives are the result of changes in the healthcare marketplace in the US,” he says.This onshore consolidation is likely to drive the continued consolidation in healthcare captives on Cayman. However, says Robinson, these consolidations have led to “parent organisations that have a larger entity that can more broadly assist the organisation”. He adds: “New lines of coverage can be offered or more risk can be retained when it is advantageous to do so.”

The perfect storm
In terms of growth trends, Giles is seeing an emerging interest in large health systems forming their own regional health plans for other self-insured employers.He says: “These ‘narrow network’ plans feature deep ‘favoured nation’ procedural discounting from in-network facilities. The premise is that they can compete very favourably with traditional network discounting and the increasing prevalence of referenced-based plans (RBPs) and direct provider negotiated discounts.“The prevalence of these health system-sponsored health plans will increase as the comprehensiveness of service capabilities provided within individual health systems continues to expand through M&A. Captives fit nicely and are being used to help the health systems capture and augment the profitability emanating from these programmes.”Additionally, Hammes has seen growth for a number of years in the “inclusion of covered physicians and contracted labour, expansion of the programmes to include enterprise risks such as cyber and business interruption and higher retention limits being taken by the captives”.It would be remiss not to talk about how the pandemic has impacted healthcare captives across the globe.“I appreciate that many readers will feel that COVID-19 has already been a much-discussed topic within their respective organisations. However, it continues to have relevance in the discussion of developments,” says Hammes.She notes that during the initial year of the pandemic, much of the focused discussion was around investment performance. Now, as entities go through a second year of financial reporting, the focus on COVID-19 has shifted.“At the moment, captive owners are experiencing changes in the programme coverage due to a challenging renewal cycle as we have seen insurance and reinsurance participants either exit the space or change their risk appetite for loss exposure, such as medical malpractice,” she says.Claimant behaviours regarding litigation or expectations on settlement size and/or the impact of continued delays in court proceedings is another area where captive owners are noting COVID-19-related changes, adds Hammes.Robinson adds that, at the height of the pandemic, some of his clients had cash needs as they were no longer to offer their normal services.“Some captives were able to provide support from the surplus within the company or through other ways that only a captive can offer,” he says.For Giles, the pandemic really has “represented a perfect storm of sorts for healthcare entities” with just about every operating or financial unit being adversely effected.“At a high level, most coverage sectors have experienced increased risk issues. In terms of human risk, think about the increased medical risk (such as employee healthcare and workers’ compensation coverage) caused from things such as disease contraction from increased exposure to COVID-19 patients, a lack of personal protection equipment (demand-based scarcities), and staffing shortages from increased demand, illness, and mental fatigue, the latter having been very problematic,” he says.Giles adds that there is increased liability (and moral) risk from triage-based treatment delays caused by staffing, pharmaceutical, equipment, and capacity shortages.“In terms of financial risk, think in terms of the costs associated with supply chain disruption (personal protective equipment, surgical supplies, and medication availability), forced cancellation of non-emergency or elective procedures, and the huge increases in the number of uninsured or indigent patients due to COVID-19-driven employment (loss of benefits) furloughs and layoffs,” he says.Giles adds that each of these issues has had different levels of impact depending on the line of coverage and amount of risk retained within each entity’s captive.“One segment that has not been greatly impacted by COVID-19 is medical stop-loss. The self-funded benefit plans themselves have seen various levels of increased claim duress, but the higher layers of the excess coverage held within the captive have not been materially impacted,’ he says.

An enticing opportunity
As the traditional insurance market hardens, captives become increasingly attractive.“The changes in market capacity and hardening insurance rates introduces additional pricing pressures on insureds,” says Hammes. “This in turn makes the use of Cayman captives more enticing for current and potential captive owners.”According to Hammes, there is growing interest amongst private equity funds with insurance and longevity offerings, which “presents different growth opportunities or potential for pricing arbitrage, putting statutory reserves to work”.Robinson adds: “Cayman’s new licence formations have been quite strong and focused in the B(iii) category. In addition to new formations in the healthcare space, our clients are becoming more diverse.In agreement, Hammes says that the growth in the B(iii) licences focuses on third party risks or startup phase reinsurance vehicles. “With this growth, the level of sophistication and dollar value behind these reinsurance transactions is increasing with crypto and digital assets forming part of the entity’s investment strategy,” she says.In the context of the wider captive insurance sector, she adds, there is potential for future coverage diversity including insurtech, cannabis and stop loss. However, says Hammes, she anticipates that there will “continue to be a clear market focus on healthcare”.Giles, whose perspective is centred primarily on medical stop-loss, has seen an “experienced continuous momentum” in the number of captives—particular healthcare entities—accommodating this line of business.“Within the self-funded medical insurance industry, hospitals and healthcare systems are among the industry segments having the largest percentage of self-insured employee benefit medical plans. Since healthcare captives account for one-third of the Cayman captive market, it is logical for us to see this sort of activity in medical stop-loss,” he says.Giles is confident that the importance and utility of captives, especially for healthcare risks, will continually expand.“The kinds of risk and financial tensions that I mentioned earlier illuminate emerging coverage gaps and weaknesses; and not only from pandemic-related causes. There will be increased pressure to expand coverages and redefine exclusions within most every coverage segment,” he says.He concludes: “We’re in a world of continuously evolving and newly emerging risks. A captive is an ideal vehicle for delivering responsive capacity innovation that would otherwise be too expensive or even unavailable from traditional sources.”