The insurance industry offers countless examples of how, in response to shifting realities and economic situations, organizations and individuals have benefited from the industry’s ability to adapt and find solutions. In response to the hard insurance market, broadly defined by rising costs and restricted insurance capacity, long term care facilities have also had to adapt, turning to alternative insurance options to create their own solutions.
One such solution that is sometimes valuable but not readily considered is forming a captive insurer. Doing so could offer myriad benefits. At a high level, a captive is a licensed insurance company owned by a non-insurance organization and created to insure the risks of its owners. The benefits to an organization forming their own captive can be substantial:
- Financial benefits: A long term care facility under a captive is its own small insurance company, allowing the organization access to the reinsurance market and its potential savings. Captives also allow the organization to better manage cash flow and build up reserves, saving money on losses.
- Control: Under a captive, long term care facilities are both the insurer and insured, meaning they have more control over key factors such as the claims process. The current commercial insurance market is inundated with claims. Processing those claims is a time consuming and costly endeavor. Captives have increased capacity and can establish certain claims management preferences tailored to the organization’s needs, including choice of counsel, which can contribute to reduce costs.
- Tailored coverage: Long term care facilities are faced with a unique set of risks, making the availability of adequate and affordable coverage in the commercial market limited, if not impossible. Under a captive, the organization can secure coverage specific to its needs across multiple lines.
Forming a captive may not be for every long term care facility. However, organizations with at least $800,000 to $1 million in annual premiums could benefit from a captive model.
Types of coverage are also a factor. For example, few insurance companies write nursing home professional liability insurance. This results in high premiums for the limited coverage available. Organizations in the nursing home space may have similar experiences across several lines, making alternative options more attractive. The costs involved in creating a captive are not insignificant and can vary. Once a long term care facility is able to assess the potential cost of starting a captive, it can weigh those costs against the premiums and options available on the commercial market and act in its own best interests.
Consider the following steps to starting a captive:
- Put together a consulting agreement that defines the structure of the captive that best suits the organization’s needs.
- Complete the feasibility phase. Once an agreement is in place, all parties should compile relevant documents including policies and historical loss info. During the feasibility phase, organizations should consider consulting an actuary to develop projected losses and aid in the process.
- Complete an application. Based on which state or states where a long term care facility operates, the organization will have to complete an application and submit for approval.
For those long term care facilities looking to better control costs in an environment where capacity is limited, captive models can offer the freedom to control and protect the organization while taking some measure of control of its own risk.