The second wave of formations came in the hard market and
physician liability crisis of the late 1990s and early 2000s. This time, physician groups and nursing homes and assisted living facilities made major forays into the captive sector. According to a 2003 American Medical Association (AMA) survey of the 50 US states, some 18 states had serious medical malpractice liability insurance problems. Another 26 states were on alert with indicators suggesting a serious and worsening situation. There were a number of alleged causes for that situation: 1) Litigation: lawsuits, the rising costs of defending malpractice claims and excessive jury awards were increasing potential loss severity; 2) The economy: the ‘bull’ market of the 1990s funded insurers’ market share acquisition and facilitated competition that led to underpricing, while lower returns on investments in a ‘weak’ economy added to deteriorating financial results; 3) Insurers: the addition of new players in the market led to intense price competition and the eventual deterioration of financial results; and 4) Physicians: technological innovations and institutional constraints have limited the amount of time doctors can spend with patients, and this has contributed to medical errors and more lawsuits, and a feeling by patients and their families of a lack of care. This situation led to significantly higher premium costs and an increase in doctors going ‘bare’ (i.e. without liability insurance) or ceasing to practise. This in turn led to a decrease in the availability of medical care, especially in rural areas. The use of captives has helped to partly reverse this trend.
Nursing homes were also affected and were subject to insurance
premiums that were as much as 10 times the level of previous years. Litigation activity against nursing home providers for negligent care and abuse increased dramatically in the late 1990s, particularly in certain states. In Florida, for example, a patients’ rights law had made it easier for patients to sue nursing homes, causing many liability insurers to leave the state and premiums to sky-rocket. I even recall a nursing home client telling me about a billboard that had been erected near its facility by a legal firm, encouraging family members of the nursing home residents to pursue legal action for any perceived injuries. These scenarios opened the door to the alternative market, including the use of captives. Cayman stepped through that door as a supportive friend and the rest, as they say, is history.
This friendship strengthened over time and has now blossomed “Healthcare captives
now form 14 percent of the approximately 5,000 captives worldwide, and the Cayman Islands is the largest domicile for
these captives, with 263 healthcare captives out of a total of 729 licensees.”
28 CAYMAN CAPTIVE
into a fully-fledged romance. Healthcare captives now form 14 percent of the approximately 5,000 captives worldwide, and the Cayman Islands is the largest domicile for these captives, with 263 healthcare captives out of a total of 729 licensees. Collectively, these captives write in excess of $3 billion in premium. These healthcare captives cover risks of healthcare providers from 45 of the continuous US states, with the majority covering risks in the states of Illinois, Pennsylvania, Michigan, Texas and Ohio. Healthcare captives have been formed by non-profit healthcare institutions, large for-profit healthcare systems, small and mid-sized healthcare systems or hospitals, group excess programmes for healthcare institutions, long-term care facilities, physician groups and managed care entities.
But why were these captives formed in Cayman? One of the
reasons given is that the other domiciles don’t have as good a grasp of the nature of the long-tail business as do the regulators in the Cayman Islands, given our long history with healthcare captives. Cayman regulators recognise that as a pure captive, with the parent company’s focus on risk management and claims control,
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