The insurance market in the long-term care (“LTC”) industry has experienced a longer than expected “soft market” related to liability insurance, such as your general and professional liability insurance. A “soft market” is where you can typically expect to experience lower insurance premiums, more insurers competing for your business, broader coverages, typically lower deductibles and higher limits, and a decrease in underwriting criteria. In a “hard market”, you can expect the opposite, higher premiums, stricter coverages and potentially more exclusions, higher deductibles and lower limits, and higher level of scrutiny in their underwriting. Most LTC providers remember the “hard market” in the early 2000s!
Unfortunately, with the onset of several catastrophic events last year the “hard market” is expected to return for the LTC industry. A leading global advisory, broking, and solutions company, Willis Towers Watson, recently issued their Insurance Market Insurance Marketplace Realities: Overview 2018 Spring Update on Commercial Insurance in North America report (April 12, 2018), which referenced:
“The rate increases that followed last year’s catastrophes are beginning to moderate…
…Between hurricanes Harvey, Irma and Maria and the California wildfires…the latter half of 2017 brought record-breaking losses in the market”
“The long-term care (LTC) and senior living (SL) insurance marketplace stands in stark contrast to the marketplace for the health care industry as a whole due, in part, to the rising frequency and severity of claims.” According to the report, the pricing forecast in this report for the senior living and long-term care sector will experience hikes between 5% to 20%."
Remember, during a “hard market” commercial insurance typically starts to become unaffordable with the fluctuations in premiums. It is at this time that looking at alternatives to the insurance market is something to think about. One alternative is through a captive insurance company (“Captive”); however, as a Medicaid/Medicare recipient, make sure that you meet your reimbursement requirements outlined in the PRM/HIM-15.
PRM/HIM-15 Reimbursement Guidelines
The PRM/HIM-15 has sections specific to insurance: Commercial, self-insurance, or captive insurance (“Captive”). For those States with cost-based reimbursement, you need to make sure that any self-insurance or Captives meet the requirements outlined within the PRM/HIM-15. Also, if your State has any Medicaid add-on’s related to insurance, you need to ensure that you meet the requirements specific to Captives and/or self-insurance.
LTC facilities experience Medicaid audits and you do not want scrutiny over your self-insurance or Captive structure. If this expense becomes disallowed, it could affect your per diem rate and may expose you to fines.
What is a Captive?
A Captive is a formalized type of self-insurance. It allows a great amount of flexibility and control of your company’s insurance risks, as well as providing a mechanism to control finances.
A captive is a licensed insurance company, owned by you and insures part or all of your entities’ risks. It:
- is capitalized and the premium is actuarially determined to ensure sufficient funds are available to cover its risks
- issues insurance policies and assumes the risk of any of its insureds, exactly like a commercial carrier; however, you maintain the control and financial benefit. Insurance costs are tax deductible, just as it is when paid to a commercial carrier
- is its own entity, pays its own expenses (including taxes), maintains its own books and records and if properly managed, is its own profit-center
To be successful, a Captive should not be entered into for a short-term fix, but as a long-term business opportunity that is flexible to meet the changes of your business.
Why form a Captive?
A few advantages in creating a Captive for your organization, include:
- Financial Advantages:
o Cash flow efficiencies
Stabilize fluctuations in your annual premium
Determine your premium payment amount and frequency, as well as risk retention level
o Utilize investment income: Claims are often paid over an extended period, let your Captive benefit on the investment income (and build surplus) from your insurance premium, instead of a commercial carrier
o Direct Access to Reinsurance Markets: A Captive may purchase a select level of loss protection from reinsurance companies to meet your comfort level and/or requirements
o Underwriting and Retention Funding Flexibility: Many organizations may experience different appetites for risk and at different levels of retention of that risk. A Captive is flexible and can insure each of your related entities:
At different retention levels to meet contract requirements (i.e. if a company requires a specific limit for a certain population)
Pricing levels depending on exposure or needs of a specific entity, and/or
Modify payment frequency for various reasons
- Organizational Advantages
o Create Coverage Tailored to Your Organization’s Specific Needs: Many organizations experience shifting or evolving risks as their business grows or take new directions. Exposures that the commercial market is not willing to offer/cover or is making it cost-prohibited, a Captive may be able to cover.
o Broaden coverage: Include any excluded coverages from your commercial carrier
- Risk Management Advantages
o Incentive for Loss Control: Develop loss/risk management controls that is specific to your organization and paid by the Captive. It’s no coincidence that Captive owners usually see a decrease loss experience in the years following its Captive formation. Risk management protocols are established specific to your organization to examine the cause of losses and allows you to act to reduce the frequency and severity of any identified risks
o Greater Control Over Claims: YOU CONTROL your exposure and make the decision on how claims are handled. You do not handle the day-to-day operations of your Captive, but you set the precedent on how specific claims are to be handled. Captive owners most often experience a huge decrease in claims, as they are now in control, instead of a commercial carrier whose only interest is their own bottom-line