I Am in Health Care: Every Day Is a Gamble

Dr. Barbara McAneny, CEO and President of New Mexico Oncology Hematology Consultants, LTD, has long been an advocate for captives and their ability to offload risk while reducing commercial insurance companies’ premiums that vanish from her practice’s bottom line.

In the winter of 2023, her practice along with other medical practices faced a major challenge.  Due to a cyber breach involving one of the medical industry’s largest claims processors, Change Healthcare, her practice could not process their patient claims immediately.

Dr. McAneny had upcoming payroll looming for almost 300 employees as well as other payables, such as buying chemo drugs for their patients, with no incoming cash from Change Health. The inability to process claims and secure cash flow would impact her practice for 16 weeks.

Fortunately, Dr. McAneny and New Mexico Oncology Hematology Consultants, LTD operated a private captive insurance company, which had built up cash reserves to mitigate for such a risk. Dr. McAneny leveraged the captive by accessing its surplus in order to help mitigate further loss due to the cyber breach.

In addition, the medical practice has coverage through the captive insurer for additional expenses.

Not all medical practices had the ability to mitigate risk for such a major event; some practices needed to be sold as they were not able to insure the risk of the cyberattack and loss of receivables for several  months.

Dr McAneny also appreciates captives for their ability to mitigate the risk of punitive damages which traditional insurance does not cover. Since the captive was created in 2011, it has protected the practice from many risky events.

Dr McAneny started working with Capterra in 2021 after gaining an understanding of the true role and value of a Captive Manager.  Speaking of service providers, she continued, “There are ones that say why you can’t do it, the others find ways to provide solutions in a safe, compliant way.  I need someone to think with me and be creative in mitigating uninsured risks of my practice.”

The Value of Captive Insurance in the Age of COVID and During Other Trying Times

By Jeff Ellington, SVP, Capterra Risk Solutions

The last two years have been challenging for most businesses.

  • COVID-19 and subsequent strains left most business owners scrambling to just stay in business while figuring out a way to keep their customers and pay their employees.
  • From an insurance standpoint, businesses were already dealing with rising insurance rates and shrinking capacity from a hardening market, particularly with regard to property coverage. Then COVID hit, leaving most business owners facing the dire realization that the insurance they paid so much for did not cover business interruption resulting from COVID exposures.

In dealing with the disbelief that their insurance policy would not cover their losses due to COVID, some owners decided to sue their insurance companies to force them to pay.  A few plaintiffs in certain jurisdictions found sympathetic judges who did try to force payment, but the overwhelming majority held that the property policies issued to these owners were not intended to provide coverage for losses related to a pandemic, as the policies were written to provide coverage for direct physical damage.

Let’s face it, having to expend the resources of time and money to sue an insurance company and then wait for a judgment and any subsequent payment is not an ideal situation for a business trying to survive.

 

So, what’s a better solution? 

A captive insurance company can be established to insure the risks a company retains, either by choice or by the fact that they cannot find suitable terms in the standard commercial market.

Many smart business owners have set up captives to efficiently transfer the risks they have retained as an effective complement to their standard insurance program.

These same owners were comforted by finding during the COVID crisis that their captive insurance policies provided coverage for loss of income from business interruption from exposure triggers that did not involve direct physical damage to their property.  Situations such as work stoppage from governmental mandates and contingent business interruption from the permanent or temporary shutdown of the business’s suppliers or other dependent entities were covered causes of loss in policies written by many captives.  Additionally, exposure such as the permanent loss of a key customer or a key supplier, as well as a legislative or regulatory change, even globally, could be covered by captive insurance.

 

Captives have value beyond catastrophes

A catastrophic event like a pandemic is not the only challenging situation for which a captive could provide relief.

As mentioned above, the current commercial property and casualty insurance market has continued to harden, resulting in higher rates and premiums coupled with reduced capacity and product availability.   Just a few short years ago, the market was extremely soft with rates and corresponding premiums very favorable for business owners.

With some policies being priced at less than 50% of the standard premium, it did not make much economic sense for a business to take on a significant deductible as a layer of self-insurance when the reward did not justify the additional risk.   Although there are sound risk management reasons for taking on a layer of risk, such as a greater focus on causes of loss and maintaining a safe and efficient work environment; let’s face it, these reasons were not compelling enough to outweigh the economic impact of taking on a significant amount of risk when premiums were already so favorable.

Fast forward to the current hard market, which continues to harden, and businesses are seeking to take on a meaningful layer of risk to control costs and secure the terms of insurance they require.  In some cases, particularly with property, businesses are being forced to take on high deductibles to obtain coverage with a reduced benefit in the form of premium credit.  So, business owners are looking for a way to reap the maximum economic benefit for the significant level of risk they are taking on.  And again, a captive could be the best solution for progressive business owners.

By forming a captive and purchasing a deductible reimbursement policy from the captive to cover a large deductible assumed by the business, owners have the advantage of deducting the premium paid for the deductible reimbursement policy, just as with the premium for the standard commercial policy to which the deductible applies.

As an insurance company, the captive can establish reserves, or if it qualifies as a small insurance company, it could choose to just be taxed on investment income and not on underwriting profit.  Both these scenarios are much more advantageous than paying for claims within the deductible layer with the retained assets of the company or through a loss fund.  Additionally, the risk management benefits mentioned above can now be realized and further enhance the value of insuring a large deductible through a captive.

Although businesses will undoubtedly encounter additional trying times in the years ahead, captives will remain as lucrative vehicles, enabling business owners to successfully navigate the risk and insurance challenges they face.

Sandra Fenters to Be on Panel @Western Regional Captive Insurance Conference

Tuesday, June 28th, 11am-12 noon.

A Deep Dive into the 4 C’s:

Captives, Control, Consolidation, and Changes

This course will assist service providers in understanding the impact of various captive arrangements on the financial statements and tax returns of captive companies. The ability to communicate the impact of various captive structures, including collateral issues on the financial statements of the insured is an important consideration for financial reporting and tax reporting, whether a separate account, protected cell, incorporated cell, single parent, group captive, or RRG. After attending you will have an overview of the impact of various captive structures on the financial statements of the captive owner/insured.

PANELISTS:

  • Leon Rives, Chief Visionary Officer, RH CPAs

  • Kevin Doherty, Member – Insurance Law Practice, Dickinson Wright

  • Sandra Fenters, President, Capterra Risk Solutions, LLC

  • Nate Reznicek, Head of US Distribution, International Re

A full conference agenda is available here.

Sandra Fenters Debuts on Power 50 List of Influential Captive Professionals

Capterra Risk’s President lands on the Captive Review Power 50 list in 2022.

The Power 50 is an annual list from Captive Review of the 50 most influential captive insurance professionals from the last year.

Captive Review summarized Sandra’s nomination in the following:

President of Capterra Risk Solutions, Fenters and her team manage a number of both national and multi-national captive structures. Passionate about the captive industry Fenters was on the faculty for the University of Delaware’s captive program, and often authors articles on captive insurance. A former broker Fenters has a wealth of experience and is making an impact in the industry.

Fenters began her insurance career with a large international insurance company as a surety underwriter. Her experience spans multiple disciplines including surety, professional liability, commercial liability, and high net worth personal lines insurance. Sandra is an active member of the Self-Insurance  Institute of America, Inc. (SIIA) and sits on committees specific to captives and advocacy. She is joining the Board of Directors of the North Carolina Captive Insurance Association (NCCIA) in 2022.

Congratulations to Sandra and her fellow nominees.

IRS Drops Case against Captive Puglisi Egg Farms

The captive insurance arrangement has been targeted by the IRS in recent years. An autumn court win is a highlight in this long-running battle; it is a victory not only for the captive taxpayer but also for the captive insurance industry.

Puglisi Egg Farms, an owner of a 831(b) captive insurance company, argued that the taxes and fees leveled by the IRS were unfair and unsubstantiated. The IRS decided to drop the fees and taxes before the decision would be announced by the court.

This comes on the heels of a May decision by the US Supreme Court that the IRS does not have special privileges that other government agencies also do not have.

We are pleased to see these cases land on the side of the captive companies. Congratulations to Puglisi Farms. To read more, click here.

 

Captive Insurance Brings Peace of Mind to Houston Business

Client Concern/Issue:

The principals of a Houston-area furniture retailer and interior design firm sought better control over potential business risks that its commercial policies were not covering.

Capterra Solution:

The firm launched a captive insurance program in 2013 to mitigate these risks.

Over 8 years the program has been called upon to cover a number of such claims.  The policy not only covered damage and business interruption losses from Hurricane Harvey, but it also paid claims on lost business due to a key employee exiting the company.

Capterra Risk’s Exceptional Support

The principals value Capterra’s deep expertise in risk mitigation and understanding the retailer’s requirements of their captive program. “Capterra allows us to focus our attention on our business with the ‘peace of mind’ that Capterra has our captive program fully covered.  They rigorously track the program’s details, keep us in full compliance, and update us on regulatory changes that affect our captive insurance company.”

Results/Benefits:

COVID-19: Illustrating the value of captive insurance

The captive program really showed its worth in spring 2020 when COVOD-19 shut down the United States economy. While US government programs did provide some payroll support, the business still suffered closures and significant delays, leading to lost profits. The captive’s Contingent Business Interruption policy paid a significant claim to cover these losses. This claim would certainly have been rejected under a commercial policy.

 

Construction Firm Appreciates Risk Mitigation of Captive Insurance

R.D., Controller of a privately held Pennsylvania-based $150 million construction firm, initiated a review of all the firm’s providers in 2017.  Insurance brokers were asked to complete a comprehensive RFP.

One of the areas the Controller looked to improve was the construction company’s risk mitigation efforts with the possible use of captive insurance.  She traveled to the Cayman Islands to gather more information of this potential risk mitigation tool.

After deciding that a captive plan met the construction company’s goals, R.D. conducted due diligence of 3 captive insurance consulting firms. The construction company selected Capterra Risk Solutions based on its comfort with the team. The construction firm recognized that there are various risks in any business decision, but R.D. is confident that Capterra is a talented partner constantly working to keep the captive in compliance.

R.D. commented that the captive plan provides the following benefits for their Company:

  • Helps risk mitigation as captive covers previously uncovered risks
  • Creates potential to capture underwriting profits with strong loss mitigation techniques
  • Builds awareness of potential claims, risks, and exposures, resulting in improved operations

“Our expectations of launching the captive have been exceeded. The Capterra Risk team keeps us updated on changes in captive regulations and squarely within compliance with the Tennessee Department of Commerce & Insurance.

“We like that Capterra is appropriately cautious. And they encourage us to get involved with activism.”

R.D., Controller, Pennsylvania based Construction Firm

Captive Insurance Pays Off Over the Years for Specialty Chemical Maker

10+ Years of Captive Coverage

The owner of a specialty chemical manufacturer has long utilized a captive program to mitigate company risk.

As a business owner, R.L.E. must look at the big picture and consider long-term decisions including purchasing insurance and best practices in risk mitigation.  With Company exposures in mind, the owner is constantly looking for products to help shore up uncovered or undercovered risks in the business his grandfather started two generations before. R.L.E. first learned about captive program benefits in a Vistage group and began working with Capterra Risk Solutions President Sandra Fenters in 2010.

At the time, the CEO found that his Pennsylvania-based Company could not purchase a policy insuring environmental pollution liability with a traditional insurance carrier. He found that a captive program could write a policy to insure for that risk as well as many other uncovered risks.

“We view our captive as a competitive advantage against our competitors.”

Captive Insurance during  COVID

More recently, during the COVID-19 pandemic, the chemical manufacturer had issues with its supply chain and struggled to get specific packaging parts delivered on-time or at customary prices to produce the company’s key consumer products. R.L.E. found it had to pay premium prices and to airfreight the pieces to his factory in order to fulfill customer orders. The additional expenses caused by the extraordinary situation were insured by a policy written by the captive; they would not have been reimbursed by their traditional insurance policies. The owner comments “After 10 years and as illustrated by the pandemic, our captive continues to serve our risk mitigation needs.”

“We view Capterra Risk Solutions as a very efficient team that serves our needs well. They know the industry and counsel us to ensure our captive is in compliance with regulations.”

What Brokers Really Need to Know about Working with Captive Managers

Sandra participated on a panel discussion at the SIIA 40th Annual National Conference & Expo in October titled “What Brokers Really Need to Know about Working with Captive Managers.”

Park Eddy from Active Captive Management and Ken Kotch from Ryan, LLC joined Sandra on the panel.  The panel discussed how the Broker and Captive Manager work together to best serve their joint clients.

Major Takeaways from Panel

Sandra and her fellow panelists highlighted these points:

  • The market is hardening: The panel discussed the hardening market where clients are seeing rising premium rates (20+%), reductions in limits and capabilities, and cancelation increases. All of this hardening is in absence of significant claim payouts.
  • Speak as one unified voice to the client: Captive Managers partner with brokers to fill in gaps in coverage for the client. It’s critical that the broker and captive manager provide one valuable solution, delivered in one consistent voice.
  • Eliminate duplicative coverage: After filling in gaps in a client’s coverage, it is key for the team to cut products that are overlapping.
  • Brokers benefit from working with captive managers: A complete risk mitigation solution leads to a happier client whose captive company fills in gaps in coverage as well as potentially being a profit center. Also, fruitful broker relationships with captive managers create access to a broader network of professionals that is likely to provide the broker with new business opportunities.
  • Captive Managers often fill the role of a quarterback: We are creating an insurance company so a number of qualified professionals with specific skills such as actuary, legal, and tax need to be brought to the team. Captive Managers have the expertise to recruit and coordinate these disparate functions to deliver on best practices.
  • Accounting experience for Captive Manager: Sandra recommended that accounting expertise, especially tied to insurance, is particularly valuable for this leader.
  • Recent business interruption losses due to COVID shutdowns are a big issue: Many brokers have unhappy clients who have suffered losses due to the pandemic. Given that traditional insurance is typically not paying business interruption claims, captive insurance can cover these losses. This should be attractive to brokers’ clients.
  • Code of conduct important for clients and brokers: Sandra discussed her work on a SIIA committee that created and distributed its code of conduct for Captive Managers. Clients and brokers should assess a Captive Manager’s adherence to these principles.
  • Quarterly claims reviews are important: Firms get busy and often neglect to make the appropriate and required claims for losses. These reviews are significant to ensure that a captive insurance company is taking on the required financial risk transfer within a company.

SIIA members can view the complete webinar on SIIA’s Canoe site.

Brokers are encouraged to contact Sandra for more discussion about these best practices. Sandra can be reached at sfenters@capterrarisk.com.

How Should You Best Manage Your Risk Given the Hardening of Commercial Insurance Markets

Are you getting decline letters from insurance carriers? Did rates go up at renewal resulting in higher premiums charged?  Are you seeing restrictions or retractions in coverage terms and conditions or reduction in limits available?

The pandemic has caused the greatest economic disruption in generations.  All industries are affected, causing many firms to rethink their business models, operations, and risk appetites.  Given the current circumstances, many companies are reviewing their risk management plan and uncovering potential risks and exposures they hadn’t considered in the past.

At Capterra Risk we have played active roles in the insurance industry for 25 years. There has never been one global shared risk that enacted such extensive global changes including those we are seeing in the commercial insurance market encompassing so many lines of coverage.

We are sure you are seeing some of these changes:

  • Premiums are going up, even if claim histories are low
    • Commercial property insurance pricing in the U.S. increased 22% in the second quarter of 2020, according to the Global Insurance Market Index by Marsh LLC.
    • Commercial financial and professional liability insurance average rates in the U.S. increased 30%, as pricing in the directors and officers market was up 59%, with more than 90% of clients experiencing an increase, Marsh said.
  • Insurers are limiting coverage or adding more exclusions
    • Several D&O insurers are also trying to impose both bankruptcy and COVID-19 exclusions in their policies
    • Joe Peiser from Willis Towers Watson adds “we’ve seen intense underwriting reviews, reductions in available limits, non-renewals and even some cancellations.”
  • Companies are scaling back or exiting sectors
    • According to Peiser, for distressed industries like retail, hospitality and health care, rate increases could be even worse, given a dramatic fall-off in insurance capacity for these sectors.

Hardening of Market

In the fall of 2019, the market began to firm and has continued to harden, meaning that insurance companies are reevaluating their coverages offered in light of the changing market and uncertainty. Consequently, we are seeing premium increases, reductions in available limits, retractions in coverage terms and conditions, denials, and even some insurers exiting markets.

With the pandemic, resulting recession, and current social unrest, this hardening market is not likely to change anytime soon.

As an owner looking to cover business risks, the limitations being added to the commercial insurance policies in this hardening market will likely impact you in a significant way.

What Does This Mean to Business Owners?

You have various (some undesirable) options including, but not limited to, (1) purchasing coverage in the traditional market with reduced limits, (2) purchasing coverage in the traditional market with higher deductibles, (3) going without certain coverages and taking on more risk in your business, (4) purchasing coverage with truncated terms and conditions, (5) reducing your highest-risk operations within your Company.

Another option that is getting more attention in 2020 is forming a captive to write coverages and ultimately reduce some of the effects of the hardening market.

Benefits of captive insurance include:

  • Captive owners better control their own risks, customizing policies to fit their operation and needs.
  • Take higher deductibles on traditional policies and have the captive write a deductible reimbursement policy.
  • If there is not capacity in the traditional market for higher limits, the captive may be able to write an Excess policy with additional limits above those written in the traditional policies.
  • A difference in conditions policy can be written to fill those gaps in the traditional policies.
  • Owners retain profits as opposed to simply paying premiums to commercial programs.
  • Encourages you to be better educated on risks, incenting your business towards better risk management behaviors.

Large companies have taken advantage of the benefits of operating a captive for many years.  The 1986 Tax Act provided the 831b captive framework for smaller companies to have the opportunity to form a captive and the ability to manage risks the way a bigger Company could, by utilizing a Captive.

The lines of risk customers are most keen on insuring through a captive are property DIC, directors and officers, cyber, professional liability, product liability, and trade credit.

 

Does it make sense for you to form a captive?

Contact Capterra Risk Solutions, LLC to find out if your Company is a good fit to form a captive.

Now might be the time to consider captive insurance.  Let us provide a free evaluation of your business’ risk mitigation needs and whether captive insurance can benefit you in this hardening market.