“Controlling Our Destiny” The Life of a 25 Year Old Captive

Laurence J. Fallon, Esq.Vice President & Chief Risk/Quality OfficerCarle Risk Management CompanyJune 18, 2008

Health Systems Insurance, Limited

Carle Foundation and Carle Clinic Association

Cayman Domiciled Insurer

1984 to Present

The Carle “System”:

• The Carle Foundation– A not-for-profit integrated healthcare delivery

system with Carle Foundation Hospital, a 305 bed Level I Trauma and Level III Perinatal Center serving as the centerpiece

• The Carle Clinic Association– A for–profit multispecialty clinic comprising

330 physicians representing 50 different medical specialties located in 10 different central Illinois communities

The Call to Action:• Previous “Medical Malpractice Insurance

Crisis” of the late 1970s

• Instability of medical malpractice insurance premiums

• Different insurers for Hospital and Clinic

• Sentinel claim in which “finger pointing” between the physician and Hospital staff resulted in a “runaway” verdict

• Anticipation of another “hard market” or “malpractice crisis”

The Mission of the Captive:

• Health Systems Insurance, Ltd. (“HSIL”) was established by The Carle Foundation to guarantee access to a predictable and stable source of reasonably priced professional and general liability insurance for the Carle enterprises including Carle Clinic Association as a third party insured of the captive.

The Vision of the Captive: The insurance premium for the Foundation and

Clinic be consistent and related to the organizations’ own claims histories.

The insureds be willing to make an initial 10-year commitment to the company to allow time to realize expected premium predictability.

The Quality Assurance and Risk Management programs be combined and enhanced. This enhancement must eventually reward the insureds (through premium stability and reduction) for practicing quality medicine.

Getting Started:

• Planning/feasibility study started in 1983 and the company became operational January 1, 1984

• The Carle Foundation provided the $1.8 million in capital necessary to start the company and is the sole shareholder of HSIL.

• Both the Foundation and Carle Clinic have representation on the governing Board

• The Board includes external members with significant insurance experience

• The Board believes HSIL should be well-capitalized and be operated in a fiscally conservative manner

• Engagement of necessary resource providers:– Actuary– Auditor– Broker– Captive Manager– Claims Manager– Investment Manager– Legal Counsel– Reinsurer(s)

First Steps:

• Creation of necessary legal documents: – Memorandum of Association– Articles of Association– Share Certificate– Determination Letter– Monetary Authority approval of Board members– Policy or policies

• Establishment of necessary business documents:– Bylaws– Policies & Procedures– Business Plan– Investment Managerial Guidelines– Resource provider service agreements– Reinsurance agreement(s)

A Bit of History

12 Years of Lawsuit Filings

0

5

10

15

20

25

30

35

'96 (18)

'97 (22)

'98 (23)

'99 (25)

'00 (28)

'01 (24)

'02(27)

'03(28)

'04(35)

'05(24)

'06(18)

'07(14)

12 Years of Case Reserves

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07

12 Years of Claims Settlements

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07

10 Years of Premiums

'99-'009%

'00-'017%

'01-'0234%

'02-'0336.5%

'03-'0442.1%

'04-'0555%

'05-'0619%

'06-'072%

'07-'08-2.5%

The Earlier Years:

• Reasonable claims frequency and severity

• Stable reserves and settlements

• Positive trial results

• Few “big name” plaintiff attorneys

• Limited retention of the captive ($500,000)

• Strong reinsurance “partnership”

• Reasonable investment returns

►Reasonable and predictable insurance premiums

The 21st Century:• Increasing frequency and severity (industry wide)• Escalating reserves and settlement values• Less predictable trial results (large unexpected

verdict)• More “big name” plaintiff attorneys• Higher retention of the captive ($3-4,000,000)• Changing reinsurance relationships• Fair investment returns• Coverage dispute with excess insurer►Escalating and unpredictable insurance premiums

Maintaining Vigilance and Focus:• Significant capital infusion to stabilize the captive

• Actuarial peer review

• Change in investment managers

• Settlement of coverage dispute

• Renewed commitment to risk management and quality initiatives for the insureds

• Operations and claims management strategic reviews

►Greater operational and financial understanding and transparency

Key Organizational Initiatives:

• Comprehensive Claims Management Program– Talented claim management staff– Effective reporting systems

• Build relationships• Strong communication tools

– Detailed incident investigation• Clinical resources

– Liability/exposure analysis• Claims Review Committee• Defense counsel accountability

• Blending Claims & Risk Management– Identify and empower a “physician champion” and a

visible/credible executive leader – Undertake “Risk Assessments”– Create “Action/Accountability Plans”

• Partnering with Quality & Patient Safety– Communicate and work collaboratively– Identify and educate about shared issues with a goal

of prevention

A Joint Venture Option:

• Carle Risk Management Company (“CRIMCO”): a for-profit joint venture between the Foundation and Clinic

• Provides claims, risk and insurance management services to the HSIL insureds

• Reserves and settles claims within Board determined parameters and requests reimbursement from HSIL

• Works closely with the Quality and Patient Safety staff of the Foundation and Clinic

►Structure focuses on elements of risk that pose exposure to the organizations and to the captive

CF & CCA CEOs

CF QualityCCA Quality

Chief Risk Officer

Risk Management Coordinator

Director & General Counsel

Claims Administrator

Clinical Risk Manager

Interventional Risk Manager

Workers Comp TPA

Patient Relations Staff

Claims Committee

CRIMCO BOARD

Our Model:

Key Components:

• Mission Statement– Defines the scope, responsibility and accountability of the

venture– Acknowledges the participants it pledges to serve– Reinforces the relationship with external resources

• Bylaws that define leadership– Physicians/patient care providers– Financial leaders– Operations leaders

• Fosters the “buy-in” of the participants• Assures communication to the CEO(s) or Board(s)• Engages claims/risk management staff

Strong External Partnerships:

• Actuary– Choose the right one…..for good times and bad– Remember their analysis is tied to the data you

supply– No one has a crystal ball, but if they are good they

will plan for the unforeseen– The answer is in their report somewhere– Their conclusions are key to the running of your

captive• Auditor– They put all of the pieces together– They are key in your relationship with the monetary

authority

• Broker– Be diligent when making a choice– Go with depth and resources– Look for the service after the sale = accountability– Negotiate the best fee and secure the best service– Ask for the additional services you need to succeed• Captive Manager– Choose wisely…. they will be doing much of the day-

to-day financial/oversight work– They must be able to assist you in coordinating with

the other external consultants– A knowledgeable one with a good working relationship

with the monetary authority is important

• Claims Manager– In house or external– Settle/defend strategy will affect the financials of

the captive

• Investment Manager & Legal Counsel– Make sure you clearly communicate your

captive’s investment philosophy, realizing it may be constrained by legal and regulatory requirements

– The experts in captive insurance law and regulation are limited in number

– They have likely faced the situation before

• Reinsurer(s)– Financial standing matters– Check their reputation among more than just the

broker community– We’re your reinsurer and we’re here to help you

• Reporting/customer service• Industry experience• Claims auditing

At the End of the Day:• It is about talent and trust not only dollars and cents

– Consultants/service providers have to be accountable to meet the goals of your captive’s business plan.

• Do not hesitate to undertake Request for Proposal(s) (RFP)– If you are not receiving the level of service you and/or

your Board expect– If the consultant/service provider is not responsive– Process can be time consuming but it exposes all of

the issues for evaluation– Fiduciary responsibility dictates that this process be

undertaken routinely

• The dynamics of the insurance market will impact the commitment to the captive– Soft market – some will question whether to “stay the

course”• Seek enhancements to coverage or multi-year

terms– Hard market – all will be thankful for a stable

insurance vehicle• Think about including other coverages in the

captive

“Controlling Our Destiny”

Thank You