Blue Waters Consulting, LLC

                                   As unreasonable as it may seem, catastrophic insurance losses from hurricanes, earthquakes, volcanic eruptions, and terrorist attacks affect the premiums doctors pay for professional liability.  When the insurance industry lost seventy billion dollars from the collapse of the Trade Towers, medical professional liability premiums rose dramatically. Then too, tall buildings, pension funds, 16% commissions, high executive salaries (fourteen million for one company president) advertising and other excessive expense also affect the premium dollars doctors pay for insurance.

          One of the nations leading companies puts a mere 45 cents from every dollar doctors pay into reserves for claims and legal defense. That means 55 cents on every dollar paid in premiums goes for something other then paying claims.  If we were considering the eight hundred dollars we pay every year for car insurance, so what you might ask. However, with the burdensome cost of medical liability premiums, a close examination of any alternative is warranted.

An Introduction to Captive Insurance:

           Twenty years ago, A.M. Best reported only three percent of all liability dollars flowed into captive insurance companies. Last year, 2003, A.M. Best reported 50% of all liability dollars were now flowing into captive insurance companies. There is no need to wonder why. As captive insurance companies only insure the interests of their owners, there is no need for tall office buildings, pension plans, commission charges or executive salaries. The savings from these expenses means captive owners are putting ninety cents or more of their premium dollars into reserves for claims. And that means the owners recapture as much as 40% of their premium dollars even after the cost of the reinsurance most captives purchase.

How Captives Work

·         A “captive” is a licensed insurance company serving the needs of its shareholders.  Captives are operated much the same as any insurance company.  Actuaries calculate the risk, which when added to the expense of running the company forms the basis of premiums to be paid by shareholders.  The captive issues policies to its shareholders, premiums are collected and a reserve account is established to pay any future claims.  In its simplest form, a captive is an organized plan of self-insurance.    

·         The financial solvency of the captive rests with its capital base, its reserves and its reinsurance concessions. 

·         In the early years, most captives cede part of their risk to other insurance or re-insurance companies until the captive’s loss reserve account accumulates an adequate sum to bear the burden of paying policy limits on any loss.  

·         Captives are managed by third party administrators located in the jurisdiction where the captive is domiciled. 

CAPTIVES: 

            Captives are privately owned insurance companies, both small and large, that are owned by individuals, partnerships, associations or corporations. Captives do not sell or otherwise offer insurance to anyone not associated with the owner. Indeed, captive charters prohibit the offering of insurance to any interest other than the interest of the captive owner. While captive owners usually hire accountants or administrators to perform the various administrative functions of the captive, the owner has complete control of the captive’s bank and investment accounts.   Further, while the captive’s owner purchase reinsurance as a risk sharing venture, the captive’s owner has control over the process of any claims including settlement. In short, the captive is the owner’s business as with any other corporation.

RENT-A-CAPTIVES:

            There are various forms of rent-a-captive programs. They are all based however, upon statutory law within the program’s jurisdiction, authorizing the establishment of “cells” or individual bank accounts for property & casualty losses. This means that a single insurance company, having met the minimum capital requirements, may establishing any number of bank accounts without limit. In theory, each bank account (cell) stands on its own for losses, and is not responsible for the losses of any other bank account. This concept has not been tested in any court to date.

            However, though the “cell” or statutory account practice may prevail within the company’s offshore jurisdiction, it is doubtful that such a concept would prevail in any US court. Therefore, each cell runs the risk that at some future time a US court will rule that all cells are responsible for a catastrophic loss incurred by any other cell and order all cell owners to make funds available to that cell’s creditors. It is of no matter that the cells operate outside of the US if the cell owners individually are subject to the jurisdiction of a US court.

            Typically, rent-a-captive programs are the product of an offshore insurance company run as a for profit enterprise by its stockholders. As with any other insurance company, its solvency is based upon the condition of its capital and reserves. As the company has no control over the underwriting practices of individual “cells” or losses, the company’s financial condition is hard to analyze as a whole, making the acquisition of reinsurance, particularly rated reinsurance, all but impossible. The insolvency of a host company means loss of any contributed capital by “cell” owners and the inability to continue business practices.

            The jeopardy faced by individual cells within a rent-a-captive program is the reason these programs are not recommended by members of the International Association of Captive Consultants.  

Blue Waters Consulting, LLC

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