Vermont Report: A Milestone

Hospital Group Hits Milestone

The captive’s health care parent has a long history in alternative risk transfer.
By: | April 7, 2014 • 7 min read

Back in 1991, a group of Pennsylvania hospitals dipped their toes into the water of captives. That water happened to be offshore. Their other insurance option was the “turmoil” of the traditional market. So they decided to dive in with a class-2 insurer called Cassatt Insurance Co. Ltd. It provided members with excess professional and general liability insurance.

Advertisement




The group thrived — enough to encourage the formation of another captive in 1997. This time, Cassatt planted its flag firmly onshore, in Vermont, with a risk retention group (RRG) called Cassatt Risk Retention Group Inc. Coverage was for the primary level, set beneath what was then called the Pennsylvania CAT Fund, which became the Pennsylvania MCare Fund in 2002.

(Essentially, MCare, or Medical Care Availability and Reduction of Error, guarantees “reasonable compensation,” according to the Commonwealth, for persons injured due to medical negligence by paying from the fund for claims in excess of primary insurance coverage.)

The RRG today has five shareholders, nine hospitals and more than 1,200 physicians insured.

The next big step in the group’s evolution came in 2006, when Cassatt RRG Holding Co. gained a far greater role in the everyday operations of the captives and their members. The holding company assumed responsibility for claims, risk management, underwriting and finance.

“It is really a service organization to the membership,” said Eric W. Dethlefs, president and chief executive officer of the Malvern, Pa.-based holding company.

What the increased role of the holding company — and the overall development of Cassatt — demonstrates is truly an innovative progression; the ability to anticipate trends as they emerge. It’s a trait particularly handy for health care organizations, especially as of late, when issues appear to be rising faster than most organizations can understand, let alone manage.

Take the most recent examples of Cassatt’s growth. In 2012, Cassatt RRG Holding Co. launched the Cassatt Patient Safety Organization. This past October, it formed Cassatt Insurance Group Inc. — coincidentally, Vermont’s 1,000th captive formation. Both demonstrate Cassatt’s handle on 21st century health care exposures and strategic imperatives.

A Captive for Convenience

The Cassatt Insurance Group is a sponsored captive — or in other common parlance, a segregated cell captive. Vermont’s 1,000th captive is designed, Dethlefs explained, to provide insurance coverage flexibility for members as they merge and form affiliations with other hospital systems in the coming months and years, as they address the Affordable Care Act and other challenges. Many health care systems are scrambling to find such partners, Dethlefs said. (See related article Managing Change)

“The founding members believed then and continue to believe today that the sharing of risk and the sharing of best practices across the membership is something very important and one of the reasons they formed a group captive.” —Eric W. Dethlefs, president and CEO, Cassatt RRG Holding Co.

Cassatt’s sponsored captive will provide a flexible solution for the health care organizations that partner with Cassatt members. Dethlefs described the concept as each cell being similar to a new spoke off the sponsored captive’s wheel. The RRG is one established spoke. If new partners want the claims, patient safety and other benefits of Cassatt involvement, yet aren’t prepared to share in the other members’ liabilities as they would in the RRG, they can form their own cell, or a new spoke. One key benefit of segregated cell captives is that each cell’s liability is walled off.

Advertisement




Roughly six months into the new captive, Dethlefs said, talks are underway with several health groups.

It’s an attractive model for health care organizations, according to someone who has seen plenty of captive business models (not all 1,000 of Vermont’s, but plenty).

“It is a neat process for them to expand their services to other hospitals,” said David F. Provost, deputy commissioner in Vermont’s Captive Insurance Division. “The result is going to be better patient care.”

“The regulators in Vermont clearly understand the needs of our member hospitals, and this new company will help us to grow and to continue to provide the members and their patients with the benefits of Cassatt’s success,” said Gerald Miller, chairman of the Cassatt board of directors.

A Captive for Care

Cassatt member hospitals have enjoyed a surge of benefits from the aforementioned Cassatt Patient Safety Organization (CPSO), which has been approved by the Department of Health and Human Services’ Agency for Healthcare Research and Quality.

“It’s not a one-and-done kind of thing. It’s continual,” Dethlefs said.

The CPSO can, for example, conduct risk assessments. It brings in experts in a given medical field that represents a high degree of liability exposure — say, obstetrics or surgery — and works with them to analyze the current practice and delivery of care. They learn what they are doing well, and where they could improve.

R4-14pA14-A15_TipIn_charts.inddAnother function of the patient safety organization is protected knowledge sharing. Chief medical officers, chiefs of obstetrics and other leaders from member hospitals can gather around a meeting room — a “safe table,” as designated by the federal government — and essentially compare patient safety notes.

Dethlefs called the patient safety organization “just as important, or maybe even more important” than the insurance underwritten by the captives.

“The founding members believed then and continue to believe today that the sharing of risk and the sharing of best practices across the membership is something very important and one of the reasons they formed a group captive,” Dethlefs said.

Indeed, the same rationale went into leveraging the holding company for in-house claims and risk management in 2006. The holding company now has four case handlers and one director making up the claims staff, representing more than 125 years of collective professional liability experience, he said.

They investigate each case, evaluate liability and damages, and make recommendations on whether to settle or litigate. The claims personnel are capable of following a claim from the initial incident to the case disposition, working in conjunction with member hospital staff and in-house counsel. They will even attend trials. The results of hands-on claims management pay for themselves.

“We have a very, very good, solid record in terms of favorable loss development,” Dethlefs said.

Cassatt’s holding company also employs a patient safety staff consisting of an administrative director, a medical director and other staff members.

All of this investment was a conscious decision that Cassatt could be capable of managing its members’ exposure better than third-party vendors.

“We had the belief that if we internalized these functions of claims, risk, finance and underwriting, and held people accountable, results would be better,” Dethlefs said.

A Captive for Copying?

Cassatt’s growth — particularly the patient safety organization and the sponsored captive — are not mere symptoms of ACA implementation, though the dynamic nature of health care risk today has a lot to do with it.

“Changes in health care — and particularly in the economics of health care (including the advent of the Affordable Care Act and other legislation and initiatives) — require hospitals to find better, more efficient ways to deliver consistent, high-quality care,” said Laurence M. Merlis, president and CEO of member Abington Health.

Advertisement




“Cassatt is an indispensable partner for Abington as it addresses both challenges: cost and quality. Through its first-class patient safety and risk management work and innovative solutions to insuring our risks, Cassatt plays a major role in ensuring that Abington remains a center of excellence in health care in the Philadelphia region,” he said.

Collective risk management has been a long-term view of the member companies.

“Cassatt was created more than 20 years ago in response to the member hospitals’ need for a high-quality, cost-effective liability insurance solution,” said Miller, Cassatt’s board chairman. “The members’ continued attention to and investment in Cassatt has resulted not only in what we believe is a superior insurance program but also in Cassatt’s capability to provide first-class patient safety and risk management services to the member hospitals.”

Developments since then have been improvements on that theme and responses to current trends.

Although Cassatt’s model may well be considered innovative and worthy of imitation by others facing the current turbulence — we’ll leave that to the experts to determine — Dethlefs doesn’t think it’s particularly innovative. “I think it’s getting back to the basics of doing things correctly and holding folks accountable,” he said.

                                                                                       

Complete coverage from R&I’s 2014 Vermont report:

Hospital Group Hits Milestone

Managing Change

Who’s Who in Montpelier

Matthew Brodsky is editor of Wharton Magazine. He can be reached 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.

Advertisement




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.

Advertisement




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?

Advertisement




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.

Advertisement




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 and 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.

Advertisement




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]