2018 Vermont Report

Captives and Liability

The flexibility of captives is well-suited to serve the rapidly changing risks health care organizations face.
By: | April 9, 2018 • 6 min read

The U.S. health care system is fraught with risks. From traditional risks such as medical malpractice, professional liability and workers’ compensation to the emerging threat of cyber and new technologies like telehealth and telemedicine, the next big lawsuit may be lurking just around the corner.


Last year’s spate of WannaCry attacks shut down entire hospital and health care systems across the world, with hackers demanding millions in ransom payments to unlock files.

Meanwhile, health care organizations and hospitals are continuing to grapple with health care reform, with 30 million more people entering the system under the Affordable Care Act. Add to that the shift from fee-for-service to outcome-based compensation and an aging population.

“There’s no way you can actively predict risk in the health care sector, because it keeps changing so rapidly,” said Bridget Zaremba, AVP, health care claims lead, QBE North America.

“The big increase in M&A activity has resulted in a much larger risk pool that runs to cyber liability and class action lawsuits around biometrics and experimental procedures, antitrust claims and the emergence of alternative care methods, such as telemedicine.”

Bridget Zaremba, AVP, health care claims lead, QBE North America

As health care risks continue to rise, so do the costs involved. U.S. health care spending topped $3.3 trillion in 2016, making it one of the country’s largest industries by value at 18 percent of gross domestic product.

Given the range and complexity of these new risks, captives can be a viable solution, enabling organizations to tailor their own specific coverage. By pooling together, health care providers can also spread the risk between themselves and leverage the data and analytics available to them.

Leading the way on this front is Vermont, with 100 health care captives on its books, a testament to its risk transfer expertise and regulatory infrastructure and reputation. That number is only expected to grow given the multitude of risks facing the health care industry.

Batch Claim Concerns

While medical professional liability, general liability and workers’ compensation remain the most common lines written in a health care captive, according to Aon’s latest captive benchmarking report, a host of new risks have emerged.

Jeremy Brigham, director, Willis Towers Watson

One of the biggest is batch claims, where one incident or a group of related incidents such as a rogue nurse or an infected surgical tool can result in multiple lawsuits.

The number of reported claims is on the rise annually, according to Aon/ASHRM’s 2017 Hospital and Physician Professional Liability Benchmark Analysis. Driven by plaintiff counsels seeking to maximize recovery, they are hard to contain and can often result in multimillion dollar claims.

“Batch claims are the equivalent of class action lawsuits in medical malpractice, representing an opportunity for plaintiff firms to have carte blanche,” said Jeremy Brigham, director, Willis Towers Watson. “If they can find a case and sign up multiple claimants, they will pursue it relentlessly.”

Kevin Gabhart, senior managing director, Beecher Carlson, said finding the appropriate coverage for batch claims in the commercial market can be difficult at the best of times. That’s because of the almost limitless outcomes possible, he said.

“Finding the right language and wording for batch claims that’s agreeable to both the insured and the underwriter can be problematic,” Gabhart said. “That’s because there’s no silver bullet for every potential scenario that may arise.”

In recent times, hospitals and health care systems have also become a prime target for hackers, who are increasingly sophisticated in their methods for gaining access to electronic medical records, including the use of ransomware.


Put in context, the average cost of a health care data breach topped $7.35 million in 2017, according to a report by the Ponemon Institute, sponsored by IBM Security.

The cyber threat has been exacerbated by the use of third parties, as well as handheld electronic devices in hospitals and health care systems, the large amount of patient and employee data held on the system, and multiple access points.

Then there is the crossover between cyber and product liability in the form of defective medical devices.

“We have had clients who were hacked and their whole system was in lockdown,” said Jason Flaxbeard, executive managing director, Beecher Carlson.

“As a result, they lost access to records and had to turn patients away, and the hackers demanded a ransom to release the files, which although costly is not as burdensome as losing all of your data.”

Remote Care

Another emerging risk is telemedicine, with the use of video consultations expected to increase 700 percent by 2020, according to industry experts.

Fueled by advancements in technology, health care providers are increasingly turning to video conferencing, digital photography and instant messaging to reach patients in even the remotest of places.

Its growth has been boosted by regulations such as the Medicare Telehealth Parity Act of 2015, which expanded telehealth coverage to Medicare beneficiaries and has streamlined the payment system.

While it can save time and money, as well as enable patients to do simple tasks such as give their heart rate and blood pressure reading at the click of a button, it’s not without risk.

“Billions are being invested in new digital telehealth technology, and health care executives are embracing it.” – Kevin Poole, client services director, Artex Risk Solutions

The main liabilities include standard of care and data breach as well as incorrect diagnosis, prescription or treatment. Fraud and abuse are also concerns, not to mention a host of legal and regulatory issues including cross-border licensure and credentialing.

Kevin Gabhart, senior managing director, Beecher Carlson

“Billions are being invested in new digital telehealth technology, and health care executives are embracing it,” said Kevin Poole, client services director, Artex Risk Solutions.

“The key to success is patient acceptance. However, liability issues such as jurisdiction, standard of care by venue, statute of limitations, credentialing of telemedicine providers, equipment malfunction and lack of informed consent remain.”

Captive Use

Captives have emerged as a viable solution to these emerging risks. The main reason for this, said Bill Boone, senior VP, alternative solutions within Marsh’s National Health Care Practice, is their flexibility.

“Traditionally, captives have been used to fund risks, like professional liability and workers’ compensation, for big health care providers. But now they are being used to cover high-severity, low-frequency risks such as cyber, D&O, E&O and anti-trust as well,” he said.

“They also provide direct access to the worldwide reinsurance market where rates are often more competitive than the traditional insurance market.”

Heather McClure, chief risk officer, OU Medicine, and executive director, OU-OUMI Risk Management, said health care captives are increasingly being used to cover lines typically written by commercial carriers. This also extends to benefits and workers’ compensation to better control loss and premiums, she said.


“In my own system, we recently added coverage for the teaching hospitals to our physicians’ captive,” she said. “This allows for centralized risk and claims management, efficiencies for patients and the promotion of safety improvements with one unified vision.”

Patti Pallito, director, Aon Insurance Managers, Vermont, added that given the increase in M&A activity, captives are being used to cover the legacy risk of newly acquired businesses. Risk retention groups are also being employed to standardize the terms and conditions of liability coverage for those entities, she said.

“A captive is a very effective mechanism to monitor and manage legacy risk,” Pallito said. “Meanwhile, risk retention groups can give the health care organizations better control of the oversight and defense of claims.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]