'Captives' as an alternative to traditional liability insurance: pros & cons

Never in my wildest dreams did I think that a physician with 25 years in academic medical centers would have a problem obtaining professional liability insurance. But that's just what happened to my partner and me (Dr. Librizzi) when we made the move to a community institution with over 7,000 deliveries to develop their maternal-fetal medicine program.

The reason: each of us had been "enjoined" in several cases that occurred on the clinic service in our capacities as Chair and Vice Chair. After listing these cases, our ability to obtain professional liability insurance coverage didn't just plummet; it became impossible. And by impossible, I mean we couldn't obtain a policy at any cost. In fact, after 3 months of exhaustive searching, our new hospital was able to get insurance with a premium equal to more than our combined salaries!

It hit me for the first time: someone else was controlling my ability to practice medicine. Sure, I could pick my preferred practice location, but it was the insurance industry that allowed me to practice. Ultimately, our new hospital decided to establish an insurance "captive." Not being familiar with this option, I needed to learn more, and quickly. I always knew I needed to get the best training and education to pass certifying boards and licensing exams, but never did I realize there was another field of study equally vital to practice-understanding professional liability insurance options.

Enter my co-author, Jeff Packard. I see him as an "academic" insurance executive: a professor whose lectures are highly sought after in the insurance world. Bright, gifted, articulate, and knowledgeable, he made me realize that I really had no control over my ability to practice-but his industry sure did. Jeff clued me in that insuring a medical practice is about finding the right type of insurance program to maximize our coverage and that some products may actually bolster our bottom line! Enter, what's called "Alternative Insurance," in contrast to traditional.

"Dr. Librizzi," explained my tutor, "that is why alternatives to traditional insurance programs exist. In an increasingly complex world, risk managers and the companies they represent must confront risk each and every day. Traditionally, that risk was simply transferred to an insurance company by buying commercially available insurance policies. You pay the premium and they take the agreed-upon risk."

CREATIVE WAY TO TRANSFER RISK. However, the dynamics of the insurance industry have changed dramatically over the past 30 years, and as a result of market conditions as well as just simply looking for a better way, those insured have gotten more creative in how they transfer risk. Although the benefits associated with this type of thinking would be readily evident to a business person, most physicians have never looked at their insurance from this point of view.

CAPTIVES: A PROACTIVE APPROACH. Captives offer less cost to you over longer time periods, a more proactive approach to handling claims, ultimate control of what's known as the insurance cycle, as well as the return of underwriting profit and investment income on reserves established to pay future claims.

Other possible benefits to captives include improved cash flow, availability as well as capacity of coverage, and the perception that their current professional liability insurance premiums offer high costs with no return. Captive insurance companies offer a wide range of options for physicians and hospitals wanting to assume financial control. So our goal in this article is to look at exactly what a captive is and then illustrate both the benefits and the pitfalls.

How captive insurance got so hot

How did captive insurance become such a popular alternative? The road began with the failure of traditional insurance providers (traditional market) to meet certain needs of individuals and businesses. You got wind of it when you couldn't get malpractice insurance. It became evident to lots of hospitals and large practices during the insurance crisis of the mid-1980s, when many doctors and medical centers couldn't find coverage, and those that could wound up paying outrageously high premiums. This scenario is not unlike the malpractice market in some areas of the country during the current crisis.

Those entities that had difficulty finding needed coverage at affordable premiums designed their own solutions through the use of "captives." As a result, over the past 20 years, captives have captured a large share of the traditional professional liability insurance market. And from most indicators, if market conditions continue in malpractice as they are now, this share will grow further.