Using your captives more effectively in a changing healthcare marketplace

Authors: Audrey N. GreeningLisanne Sison

For the past few years, healthcare organizations have faced rising costs as claim severity and large verdicts continued to impact the industry. Evolving regulatory requirements and developing liability issues created opportunities for hospital and healthcare system risk managers to reevaluate their strategic initiatives and respond to these emerging issues to support their healthcare organizations.

As COVID-19 continues to impact the U.S., healthcare organizations are grappling with insurance carriers imposing restrictive and exclusionary language in Workers’ Compensation, Professional Liability, Property, Directors & Officers (D&O) Liability, Employment Practices Liability and other coverage lines. Similarly, insurance carrier concerns arising from the increased number of allegations of sexual misconduct and the opioid epidemic are leading some carriers to exclude or limit coverage under commercial policies and reinsurance certificates.

Challenging conditions in the traditional marketplace are leading to sharply rising insurance premiums for a wide range of coverages, and captive insurance managers and regulators foresee captive formations increasing dramatically over the remainder of the year into 2021.1 With more than half of U.S. hospitals using captive or nontraditional insurance vehicles, some are working proactively with their captives to fund Enterprise Risk Management (ERM) programs, and challenge their captive managers and brokers to develop innovative solutions that benefit their parent organizations.

Where are our captives today?

Though in many cases captives are formed to address a specific gap in commercially available insurance coverage, healthcare organizations have frequently used their captives to challenge the status quo. These organizations have been exploring additional coverages beyond the traditional medical Professional and General Liability, engaging the captive to cover evolving risks, such as Employer and Provider Stop Loss, Cyber Liability, Regulatory/Billing E&O, Telehealth/Telemedicine, Accountable Care Organization (ACO) Downside Risk, and various other insurance coverages where captive owners may only be limited by their imagination and the confines of a domicile’s regulations.

Many healthcare organizations engage their captives to help fund risk management initiatives at the parent, developing grant programs to help mitigate risk, all of which elevates the discussion regarding the hospital claim trends and risk issues to the captive board level. A three-hospital system in Philadelphia, for example, worked with its captive to finance a range of system wide risk mitigation initiatives. These included online training programs for new residents, a medical device recall and alerts management program, and underwriting the roll- out of an informed consent and patient education system to standardize vital patient communications across the enterprise.2

While the issues we face today are unprecedented, captives provide the perfect platform to discuss the emerging issues and manage uncertainty more effectively. When used as a strategic risk management tool, a captive insurance company helps develop creative solutions for evolving risk management issues.

Leveraging the ERM approach 

One of the greatest benefits of leveraging an Enterprise Risk Management approach is that it links the effective management of risk and uncertainty with the successful achievement of organizational objectives. The better positioned an organization is to identify and manage uncertainty, the more likely it is to be successful in achieving its mission. Captives also play an integral role in supporting the execution of the parent organization’s strategic plan by providing enhanced flexibility of capital and ensuring that the captive board members, comprising senior leaders of the parent organization, are effectively engaged and focused on risk issues impacting the organization as a whole. A consistent and methodical process to identify issues allows them to use the captive to address developing risk exposures in appropriate and innovative ways.

Leveraging an Enterprise Risk Management approach both on an organization-wide basis as well as within its affiliated captive encourages the consideration of alternative solutions and promotes open discussion of contingency planning. As an example, the COVID-19 pandemic brought to light supply chain issues as doctors had to make decisions regarding ventilators or what to do when N95 masks became scarce, but it also forced creativity to rethink the supply situation.

According to Global Healthcare Exchange Vice President of Healthcare Value Karen Conway, “One of the first things I did when the crisis broke was to review lessons learned from past outbreaks: SARS, H1N1 and Ebola. In all, the supply chain was noted as one of the biggest challenges.” Conway continued, “[Allocation of PPE] is often driven by past ordering patterns and contractual relationships, but this does not always ensure product is delivered where it is needed most in a pandemic… [Where] crisis standards of care require prioritizing how scarce resources are allocated, the healthcare supply chain must work to best match limited supply to the rising demand.”3

Rather than considering alternatives at the time of the crisis, as many healthcare providers were forced to do, conducting tabletop exercises that evaluate possible black swan or, more likely, gray rhino scenarios and related actions should take place on an ongoing basis for a variety of different crises. Such exercises give organizations time to consider a broad range of scenarios, allows them to proactively identify potential challenges they may face when the unexpected happens, and enables them to shift quickly and respond without a negative impact on the delivery of care to patients. Healthcare organizations need to reflect on the lessons learned from the past several months and how they can be better prepared for future events.

What is a black swan event?

A black swan event, a phrase commonly used in the world of finance, is an extremely negative event or occurrence that is impossibly difficult to predict. In other words, black swan events are events that are unexpected and unknowable. The following are three defining attributes of a black swan event.

  • Black swan events are unpredictable.
  • A black swan event results in severe and widespread consequences.
  • After the occurrence of a black swan event, people will rationalize the event as having been predictable (known as the hindsight bias).8

What is a gray rhino event?

A gray rhino event is a high-impact scenario that was always highly likely to occur. Gray rhinos are not random surprises, but occur after a series of warnings and visible events. Unlike the black swan, which appears only in hindsight, gray rhino theory is forward-looking. It is about actively seeing what’s in front of us and challenging ourselves to act.9

Some may argue that it doesn’t make sense to allocate time and resources to predicting and preparing for unknowable crises, but the healthcare industry as a whole is at the forefront of every community’s first response infrastructure, regardless of the nature of the crisis. Because of this unique and critical role in responding to catastrophes, it is the business of healthcare to actively invest in preparing for the unknown.

This preparation also extends to the insurance market. For example, Lloyd’s of London is proposing unique solutions to future unprecedented catastrophes, “such as another pandemic, a global cyberattack or a solar storm that shuts down electrical grids across the globe. Lloyd’s framework proposals include Recover Re (a government-backed vehicle offering long-term, after-the-event cover that could insure against COVID-19, as well as future pandemic risks), Black Swan Re (a government-backed vehicle to insure against future systemic risks) and ReStart, a pooled non-damage business interruption product that would cover clients against future waves of COVID-19.”4

According to Mike Zuckerman, associate professor of risk, insurance and healthcare management at Temple University Fox School of Business, “ERM is strategic because the risk management process addresses the full spectrum of an organization’s uncertainty, enhancing its ability to create value. Traditional risk management does not address the source of risk, it manages insurable risk. ERM focuses on the source of uncertainty to the entirety of the enterprise.”5

Captives enable the Enterprise Risk Management working group to address the complexity of emerging issues from a portfolio view, ensuring risk is addressed in a holistic manner, including control, mitigation and financing.5

The Enterprise Risk Management strategy should also complement and engage the captive to provide innovative and unique opportunities that:

  • Drive improved loss prevention and mitigation
  • Identify gray rhino scenarios so organizations can try to model these risks and fund for the extraordinary costs for these types of events
  • Offer flexibility and fund for coverages that the traditional market excludes or restricts (i.e., communicable disease, business income events not triggered by a property damage event, telehealth/telemedicine or other nontraditional risks), and provide solutions that impact and support the parent organization’s bottom line

Enterprise Risk Management and captives: An effective partnership

We are at a unique juncture in healthcare with the confluence of issues that are impacting the industry. The last few years of claim severity forced constriction in the healthcare professional liability marketplace as some carriers made the strategic decision to exit underwriting healthcare risks, increased rates and lowered capacity. However, the COVID-19 pandemic exacerbated the tightening this year and further compelled some carriers to implement exclusionary language. Challenges such as these are the foundation for why captives exist to support the parent organization.

Experts believe this COVID-19 pandemic is not going to be our last, and it is just a matter of time before the next one comes, so hospitals should dedicate their energy and efforts into getting ready for the next event.

Scenarios for Enterprise Risk Management work groups and captives to consider

  • Avoiding the supply chain snafus that impacted hospitals throughout the pandemic: COVID-19 exposed critical flaws in the supply chain for vital equipment like PPE and ventilators. According to Nick Patel, president of Healthbox, “Several Chicago hospitals are talking about creating a consortium and building some domestic manufacturing of PPE here locally to reduce their reliance on importing.” He added, “Going forward, supplies will need to have a primary or secondary sourcing that is local.”6
  • Changing our thinking to consider healthcare from the patient’s perspective, similar to how technology companies create products from a consumer’s perspective: We saw a change in patient perception as they embraced telehealth platforms in the past few months, and healthcare organizations should consider how the delivery of care will continue to change. This entails helping patients understand the drivers that impact their health to better manage their conditions with the aim of keeping them healthy and out of the hospital. It is not just telling them what to do, but really engaging them in the process and providing smart devices that measure heart rate, blood pressure, breathing, weight and activity levels where the smartphone app feeds the information to the medical record. The patient and care team monitor the information to determine when intervention is needed.7
  • Consideration of additional innovations for patient interventions: Most hospitals implemented or expanded their telehealth/telemedicine services due to COVID-19. Is the next step additional digital innovations, such as at-home diagnostic equipment, so providers can offer remote virtual care?
  • Compelling a change in behavior: As hospitals promoted hand-washing for decades as a means to slow the spread of viruses, how can hospitals force visitors, vendors and other third parties entering the hospital setting to maintain this higher level of sanitizing to mitigate the next risk? As simple as it sounds, this may have an impact on instilling confidence in patients who have avoided elective surgeries due to ongoing concerns about the safety of the hospital setting.

Other questions that healthcare organizations can ask themselves to prepare for future uncertainty can include the following:

  • What can your hospital do to prepare for a shortage in PPE, ventilators or other required medical devices to be able to provide patient care when the next unexpected event happens?
  • How do we continue to share information and, if necessary, supplies and other capacity to meet the collective demand?
  • What are the financial implications of changing our interactions with patients if we create more remote patient care opportunities and less facility space?
  • How can hospitals monetize remote monitoring of patients?
  • What risks are there to technology breakdown?
  • What are the privacy issues?

Captives need to support this contingency planning as a strategic risk management tool to address the spectrum of business issues the parent organization may face.


Now, more than ever, having a proactive Enterprise Risk Management framework and process in conjunction with a captive allows healthcare organizations to think beyond the traditional risk management approach, foster a more open dialogue on emerging risks and impact the full spectrum of an organization to prepare for the next unexpected event.

Risk managers play a vital role in asking the difficult questions and, working collaboratively with their captive managers and brokers, can develop innovative solutions that will help the parent organization successfully achieve its strategic objectives.

Author Information:


1 “Hardening Traditional Market Drives Pace of New Captive Formations.” June 24, 2020.
2 Healthcare Risk Management. “Collaborating With Captives.” June 22, 2020.
3 Mitchell, Pierre. “Modernizing The Healthcare Supply Chain in The Coronavirus Era.” July 9, 2020.
4 L.S. Howard. “How to Prepare for the Next “Black Swan” Event? Lloyd’s Has Some Suggestions.” July 15, 2020.
5 Michael Zuckerman. “The Future of Uncertainty: Captives and ERM.” July 9, 2020.
6 Landi, Heather. “The COVID-19 Pandemic Will Have a Long-Term Impact on Healthcare. Here Are 4 Changes To Expect.” July 9, 2020.
7 The Telegraph, brought to you by Philips. “Seven Visions of The Future of Healthcare.” July 9, 2020.
8 Corporate Finance Institute. “What is a Black Swan Event?” 
9 Tappe, Anneken.“5 Questions With The Woman Who Coined The Term ‘Gray Rhino’.” January 24, 2019.


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