In the past few years, commercial insurance premiums for healthcare organizations have increased significantly across most insurance lines. Unfortunately for many, these increased costs only add to significant expense inflation across the organization. To control expenses more effectively, more institutions are launching captive/self-insurance programs or re-evaluating their current programs. A captive or self-insurance program allows the insured to exert significant control over the costs of risk management while maintaining the capability to insure against common risks in the industry such as medical malpractice and general liability. Aside from the ability to offset high commercial insurance premiums, using a captive/self-insurance program helps an organization increase control and customization over their risk.

The application of a captive or self-insurance structure can provide an organization with significantly more transparency than that of a typical commercial insurer. Whereas a commercial insurance provider handles the risk analysis and provides you with a premium quote that is created through an often-unspecified process, the use of a captive insurance company allows the organization to tailor their coverage to address the risks and meet cost targets. These benefits are imperative in the field of healthcare, where exceptional organizational transparency and proper financial management can define an institution’s success.

Holistic and Customized Planning for Short and Long Term

Whether starting a new program or re-evaluating an existing program, premium dollars otherwise paid to a commercial insurer will accumulate. Therefore, a thoughtful investment strategy is critical. Changes within the capital markets and economic pressures have resulted in existing captive/self-insurance owners revisiting their investment program to optimize the remunerated benefits that come from having a captive/self-insurance program.

There are many providers that will be working in collaboration for your captive/self-insurance program. The captive manager, accountant, actuary, and investment manager should all be working in conjunction and understanding what each are doing to optimize the program. An effective investment manager through effective communication will utilize the data and information from these other providers to determine the liquidity needs, liability duration, and overall investment risk capacity the captive can bear, this is foundational to implementing a baseline investment strategy. As the captive sees changes within risk retentions, new risk lines being introduced, and shifts in capital markets, your investment manager should constantly oversee applicable strategy changes to ensure the investment program is in line with the captive’s liability profile.

To create an optimized investment program, an investment manager should be taking a holistic view of the captive/self-insurance program to unite business strategy, financial health, and investment strategy to enhance the outcomes. The first step should be the discovery process to understand the role the investment portfolio plays in the captive/self-insurance program’s financial health, keeping in mind your strategic plans and financial projections, and providing a financial backdrop for developing a recommendation. The next step is analyzing the liabilities and investments within the context of overall financial health while seeking to understand the influence of market volatility and different asset allocation profiles on the captive/self-insurance program’s financial outlook. These insights can equip the decision makers to better comprehend their ability to tolerate investment risk and quantify the financial effect of changing investment strategy. With the foundational knowledge of the captive/self-insurance program and an understanding of how investment strategy impacts the broader financial health, a tailored investment strategy should then be implemented.

This tailored investment strategy will consist of a reserve matching portion and a capital growth portion within the investment portfolio. Utilizing actuarial data and asset liability modeling, the reserve matching portion should be a custom fixed income portfolio that matches your liabilities’ duration with the ability to maintain adequate liquidity to support claims. In addition to this reserve matching portion of the portfolio, there can be assets that are not directly backing any liabilities, often referred as surplus. Growth assets should be working towards enhancing surplus growth through an introduction of diversifying assets that may include equities and alternatives. Further growth within the surplus can support potential excess liquidity needs, allow for greater captive/self-insurance utilization through increased retentions or new risk lines, and potential for future dividends of excess capital to the parent.

The process should not stop here as there should be ongoing monitoring and dialogue to ensure the implemented strategy remains appropriate and supportive of the current liability profile of the captive/self-insurance fund.

An effective investment program should support your unique liability and liquidity needs, identify capacity to grow your surplus, and be able to adapt as the markets and your captive/self-insurance program evolves.

Illustrating the Process

To visualize, let’s review the progression for a PNC client with a wholly owned captive used to insure professional liability, general liability and medical malpractice claims made against the health system. Prior to reevaluating, there was no division between reserve matching and growth assets.

Using actuarial reports and asset liability modeling, the client was able to develop and employ a strategy that optimally aligns with the health system’s underlying liability risk profile. PNC constructed a reserve portfolio that provides a natural liquidity support for cash flow needs, while balancing income generation with preservation of principal. This reserve portfolio was constructed with a unique and customized fixed income portfolio of individual securities designed to align the captive’s liabilities’ duration with the investments’ duration. After constructing this reserve portfolio and identifying what assets are surplus, the client was able to construct a portfolio with these surplus assets where there are opportunities for growth while providing downside protection and incremental investment income.

By re-aligning the investment structure, they were ensuring that the captive would have the liquidity needed for future claims, a growing surplus for potential excess liquidity needs, minimizing volatility in the captive’s assets, and projections showing greater future dividend payoffs to the parent. This also established an ongoing process to make sure the captive’s investment strategy could evolve with the changing needs of the organization. 

Begin with a Detailed Enterprise Financial Modeling Review

PNC can help its healthcare clients optimize their captive/self-insurance programs using our Enterprise Financial Modeling (EFM). EFM is a process where we conduct an asset liability study to assess liquidity needs, liability duration considerations, investment risk capacity, and key organizational financial health projections. This will ensure the investment strategy in your captive/self-insurance program is being used effectively to meet your goals. Along with this process, you will have access to dedicated individuals with years of healthcare and insurance experience that have a deep understanding of healthcare organizations, the complexities of insurance asset management, and actively participate in the captive industry to keep abreast of the dynamic needs and evolving trends in insurance and risk management. 

Our solutions can be tailored to meet your unique needs. Get more information about our customized investment solutions for healthcare organizations here or contact Todd McCullough, Managing Director of PNC Healthcare Asset Management, at