Healing in the age of COVID-19
A year that has been defined by the most significant global public health event for 100 years was always going to make its mark on the healthcare captives that call Cayman their home. Captive International investigates.
The impact of COVID-19 has been devastating in 2020, tearing through communities, battering economies and leaving millions dead and many more hospitalised. Its impact on healthcare captives, however, has been more nuanced.
Rob Bachler, principal and consulting actuary at Milliman in Seattle, says medical costs have generally fallen, not increased, as a result of COVID-19, with much medical care, in particular elective procedures, being deferred. The dramatic reduction in travel has led to fewer car accidents, eliminating many other medical procedures that might otherwise have been needed.
This has been something of a double-edged sword. The lack of elective surgeries in hospitals has deprived some hospitals of income, notes Kevin Poole, managing director in the Cayman office at Artex. On the other hand, it has also reduced the number of malpractice claims.
“Captive owners still need to buy insurance and their captives are still operating well,” says Poole. “Market disruption did impact some captives that were invested in the equity market but losses have since been made up as equity markets have rebounded,” he adds.
Captives appear to be embracing new technologies such as telemedicine, adds Poole, as practices try to adapt to the pandemic. “This will hopefully have a positive impact on costs and claims,” he says.
The impact yet to be felt
Bachler stresses that the full impact of COVID-19 on healthcare captives has yet to play out. “Perhaps a larger concern is not the impact of COVID-19 to date, but three related potential impacts on 2021,” he says.
First, he suggests, some of the care deferred in 2020 will take place in 2021, potentially increasing medical costs for the year beyond what would typically be expected. Second, the deferral of services may lead to worse morbidity in some individuals, resulting in higher costs than would have occurred if care had been provided in 2020.
Finally, captives owners may reduce funding levels and/or redeploy captive surplus after seeing positive results in 2020, without considering the potential for higher than expected claims in 2021 due to COVID-19.
There has been much talk about businesses using their captives to write pandemic coverage, to offer protection in the event of future outbreaks. To date, there has been little sign of this happening in Cayman, says Poole.
“We have not seen any pandemic cover being written into any Cayman-based captives that we manage yet, but that is something that could happen after the January renewals,” he says.
“It is not clear exactly how this coverage would be funded, so it may be difficult to write this through a captive until we see something along the lines of the US Pandemic Risk Insurance Act offering a backstop.”
Michelle Bradley, a consulting actuary at SIGMA Actuarial Consulting, says there are at least two different approaches to writing pandemic coverage via a captive.
“The first is related to the actual business interruptions or closures related to company shutdowns, which may be government-mandated or necessitated by disease spread,” she says. “The second is related to reputational damage and crisis management issues.”
Bradley says SIGMA has been involved in analytics related to both approaches, both of which she believes are viable for captive placement, although they typically require significant knowledge beyond analytic expertise.
“The policy language must be crafted in a clear, precise manner. Regulatory support may be required as well,” she adds.
“We have had multiple enquiries regarding the potential reputational/crisis risk associated with future pandemics,” says Bradley. “These captives are also considering placement for new and emerging risks that have been affected by the continued hardening market—such as property risks and directors and officers risk.”
“Healthcare facilities have enhanced their procedures to respond to pandemics.”
Al Rhodes, SIGMA Actuarial Consulting
Understanding the data
Established captives need to analyse and better understand the impact of the pandemic, and the associated economic changes, on their risks.
“Healthcare entities face the potential for more claims since workers, and even visitors, may be exposed more than other industry segments,” explains Bradley. “In addition to the potential impact on emerging losses, risk-related exposures, such as miles driven, payroll, and/or number of procedures, have also been impacted.”
Data are beginning to emerge that show the rate at which claims are being filed and what the settlement value of those claims will be, notes Bradley. The impact will likely vary significantly according to the type and geographic location of each healthcare entity, she says.
Workers’ compensation captives that provide coverage for frontline workers will have been relatively heavily affected, says Michael Meehan, a consultant at Milliman in Wakefield, MA.
“So too will captives providing any sort of liability with regards to managing outbreaks at facilities such as nursing homes, or medical professional liability as a result of the actions of medical professionals who have been forced in to providing care that is outside their speciality due to the pandemic,” he adds.
“In general, captives want to be more conservative on loss projections for any future COVID-19 claims that arise,” notes Keith Hein, an actuarial consultant at SIGMA. “So far, we have seen few pandemic-related claims.
Our clients are not sure if these claims will result in actual losses.”
“We need to consider claims from prior years,” adds Al Rhodes, president and senior actuary at SIGMA. “We are seeing patterns such as lower expected payments and less movement in case reserves, leading to what would have been unusual development prior to the pandemic.”
Rhodes says one possible reason there has not yet been as much of an increase in claims activity as might be expected based on the news cycle is the increased preparedness of captives going into the crisis, following the Ebola and Zika outbreaks.
“The Ebola and Zika scares led to better pandemic protocols,” he explains. “Healthcare facilities have enhanced their procedures to respond to pandemics.”
Captives have certainly asked questions about the impact of the pandemic during renewals, notes Poole, especially in areas such as long-term care and workers’ compensation. “There has been some concern about the impact of employees having COVID-19 and then developing long-term health issues, for example,” he says.
“This has led to some new pandemic exclusions being introduced. In addition some carriers are evaluating what industries or risks they are willing to insure.”
Meehan says: “Some healthcare-owned captives have modified and expanded their medical professional liability coverage to cover non-employed physicians, such as those brought out of retirement to assist during the crisis.”
“Some of the care deferred in 2020 will take place in 2021, potentially increasing medical costs for the year.” Rob Bachler, Milliman
Bradley believes the outlook for all captives is extremely positive going forward. “The hardening market, as well as an increased interest in addressing emerging, non-traditional risks, is encouraging companies to seek alternative methods of handling risk,” she says.
Rhodes agrees. “The current industry data we are seeing related to the pandemic does not show a need for slowdowns in captive formation,” he says. “Losses related to COVID-19 workers’ compensation claims are averaging only $1,000, with over half closing with no payment. The immunity provisions enacted by various states offer protection for professional liability.
“If a federal pandemic programme is put in place, then some potential captives may opt for that instead of a captive.”
Bachler sees three areas that could lead to growth in captive formation and use for health-related costs. More employers that have active captives for property and liability coverages are recognising advantages to placing a portion of their medical stop loss risk into their captive, he notes.
Companies that are large enough to self-insure but not large enough to justify a single owner captive are increasingly turning to cell captives. Finally, there is more frequent use of captives for less standard coverages, such as aggregate stop-loss that approximates traditional “minimum premium” coverage and stop-loss protection for providers that receive episodic payments or case rates from payers.
Poole agrees that 2021 could see an increase in the number of captive insurer formations, particularly among those that had been planned for 2020 but were put on the back-burner to allow for a greater focus on COVID-19. More broadly, there is likely to be a continuation of existing trends in the healthcare sector, such as mergers and acquisitions and partnerships between healthcare providers with cashflow difficulties, he says.
Poole predicts that new products will emerge as a result of COVID-19.
“We may see the emergence of some pandemic cat bonds and insurance-linked securities solutions in 2021,” he predicts.