Health Care Captives Are Finding a Steady Home in the Caymans. Guess What? So Are Workers’ Comp, Property and GL

The Cayman Islands are the current market leader for health care captives.

By: Alex Wright | February 24, 2022

The Cayman Islands have firmly established itself as the market leader for health care captives. Starting out 35 years ago, when other jurisdictions were reluctant to write the business, it has gone from strength to strength ever since. Today, Cayman’s insurance industry has 765 licensed insurance companies and represents 60-80% of the U.S. market.

But its captives are where it really excels. Health care accounts for almost half of total premiums for all lines of business for Cayman’s captives.

The biggest focus for these health care captives, which provides 90% of risk management services to U.S.-based companies, is medical malpractice liability (MPL), making up 23% of total licenses and approximately $2.8 billion in premiums written in 2021. Other significant lines include hospital professional liability and physician liability (4%) and accident and health (2%).

“Cayman continues to be the leading choice for health care captives,” said Paul Bailie, Willis Towers Watson’s regional head of captives for the Atlantic and Caribbean. “It embraced that market about 35 years ago when other jurisdictions thought the business unattractive and, as a result, has established a leadership position it has maintained ever since.”

Number 1 for Health Care

Health care continues to be a main driver for Cayman’s captive formation and growth. This is being fueled by U.S. health care systems and providers moving away from a hard traditional insurance market, particularly for MPL.

It’s a market fraught with ever-increasing premiums, claims frequency and severity, class action lawsuits, social inflation, litigation financing, nuclear jury verdicts, demands for higher retentions and insurers pulling coverage or exiting the space altogether. This has merely been exacerbated by the perfect storm of the COVID-19 pandemic, a global supply chain crisis and labor shortage, which have all driven costs up.

“The increasing severity and volume of claims and settlements in the traditional U.S. health care market, and the consolidation of coverage available, has caused health care companies to look for alternatives,” said John Hall, founding partner of Hall Booth Smith. “Captives are the obvious risk transfer vehicle for this and, given its long-standing reputation for health care captives, this makes Cayman the domicile of choice.”

Erin Brosnihan, president,
Kensington Management Group

By switching to a captive model, health care organizations have been able to secure more favorable and flexible rates, terms and capacity, or they have utilized their existing captives to take on more risk and lines of coverage such as employee medical stop loss. It’s evidenced in the fact that Cayman captives continue to outperform U.S. commercial insurers, according to a recent A.M. Best report.

Another key trend is the continued merger and rationalization of captives as companies seek to become more efficient, spurred by the consolidation of the U.S. health care industry following the Affordable Care Act. That enables them to secure higher limits, expand lines of business and better control costs and claims.

“The changes to the U.S. health care system over the past 10 years have driven captive owners to take on more risk and, thus, the use of captives has increased,” said Julie Boucher, islands leader for Marsh Captive Solutions. “Due to mergers, these captives have also become much larger both in terms of asset and equity size, enabling them to expand their existing coverage and move into other areas.”

Howard Byrne, Aon Cayman’s commercial captive manager, added: “We’re now seeing an expansion beyond traditional health care products. These include provider stop loss protections where clients are using existing captive surplus to launch coverages that protect them from down-side exposure under various at-risk contracts they have in place with U.S. health payers.”

New Business Growth

As well as the growth in health care captives, there has been a steady stream of new and unrelated lines of business, including employee liability, cyber liability, cryptocurrency, cannabis and life and annuity coverage. Driving this growth are long-term and small commercial reinsurers, managing general agents, managing general underwriters and Insurtech startups.

“While the primary risks insured in the Cayman Islands remain health care, workers’ comp, property and general liability, there has been an increase in the number of captives writing third-party business,” said Erin Brosnihan, president of Kensington Management Group.

Another growth area, according to Beth Biega, VP, Atlas Insurance Management, is “the continued strong growth for group captives with a large pool of middle-market companies being overpriced by the commercial market. Reductions in reinsurance capacity in transportation is also a large driver of strong safety culture, enabling companies to retain larger layers.”

Key Strengths

With more than 50 years’ experience in the captive industry, Cayman’s key selling points are its robust legal and regulatory framework and favorable tax regime, as well as its flexible approach to capital and surplus ratios. The fact that it chose not to pursue Solvency II equivalence with Europe also enables it to be more North America-focused.

The International Association of Insurance Supervisors regularly peer reviews Cayman’s reinsurance sector. It’s also represented as the vice chair on the Group of International Insurance Centre Supervisors and is the president of the Caribbean Association of Insurance Regulators.

“As a leading international insurance jurisdiction, it is considered our responsibility to be part of the global standard-setting mechanism, lead by example, and achieve compliance with international standards” a Cayman government spokesman said. “Ultimately, Cayman’s membership in these international bodies allows for a level of feedback that helps develop policies and legislation for the advancement of the jurisdiction’s reinsurance and insurance sectors.”

As an innovation hub, Cayman has remained on the cutting edge by using existing data to develop new health care captive products and services to meet client’s ever-changing needs.

Despite its undoubted success in the health care captive space, Cayman faces a host of tax and regulatory challenges. The main one is the change to the corporate tax rate proposed by the Group of Seven countries and later approved by the Group of 20’s finance ministers and the Organization for Economic Co-operation and Development’s Inclusive Framework members in July 2021.

At the heart of the proposal is a commitment to a minimum corporate tax rate of 15% imposed on multinationals with more than $890 million in revenue, in line with one of President Biden’s key priorities to stop firms from moving their profits to low-tax domiciles. At this stage, it’s too early to tell what the likely impact will be.

Another headwind is the Base Erosion Anti-Abuse Tax, brought into force by the U.S. federal government in December 2017 to stop companies from hiding their profits overseas to avoid domestic corporate taxes. Then there’s increasing competition from other domiciles, both onshore and offshore, looking to get into the health care captive space.

However, as Nick Hentges, CEO of Captive Resources, pointed out: “Cayman has a proven track record as a captive domicile for the last 35 years.” You wouldn’t bet against it continuing in that vein for the next 35. &

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

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.