Captive

What Are Captive Medical Malpractice Insurance Companies?

Medical malpractice insurance is essential for protecting a medical provider’s career and assets, but skyrocketing premiums or one-size-fits-all plans can leave practitioners worried about their bottom lines. To fix this problem, an increasing number of practitioners are turning to captive medical malpractice insurance companies, which let doctors create customized plans while protecting their assets and increasing their incomes.

How It Works

Instead of offering insurance plans to the general market, captive medical malpractice insurance companies offer coverage to specific individuals or business entities, typically its owners. Captive medical malpractice insurance companies must be licensed and regulated in the same way as a commercial insurance company; however, the people paying the premiums can often profit from the success of their insurance company.

Custom Coverage

One of the largest benefits of captive insurance is that each customer can create a customized plan. Many commercial plans have substantial loopholes, which may leave individual practitioners or specialty practices who deal with high-risk patients uncovered for certain illnesses or injuries. These practitioners can use captive plans to fill in those holes without assuming significant financial risk.

Financial Safety

Captive medical malpractice insurance companies can save money and even turn a profit for their owners. There is an up-front cost for this service, and it takes time for profits to appear. However, once the captive builds enough assets, owners can invest those assets and make money on them. Even if the company does not invest, the structure of a captive insurance company rewards doctors who practice carefully by allowing them to reclaim some of their premiums after they retire. In addition, captive insurance companies are typically tax exempt.

Physicians Choice Insurance Group is a licensed entity regulated by the state insurance department operating all tasks expected of an insurance company evaluating the risks, writing policies, setting premium levels and accepting premium payments.

A captive insurer is generally defined as a limited liability insurance company that is wholly owned and controlled by its insured’s; its primary purpose is to insure the risks of its owners, and its insured’s benefit from the captive insurer’s underwriting profits.

These points do not clearly distinguish the captive insurer from a mutual insurance company. A mutual insurance company is technically owned and controlled by its policyholders. But no one who is merely a mutual insurance company’s policyholder exercises control of the company. The policyholder may be asked to vote on matters requiring policyholder action. But this usually means that the policyholder will be presented with a proxy and advised by the board that runs the company as to how to exercise its vote. As soon as the insurance ceases, so does the policyholder’s ownership status. The policyholder has not invested any assets in the insurance company and does not actively participate in running it.

Captive insurance is utilized by insureds that choose to

• put their own capital at risk by creating their own insurance company,
• working outside of the commercial insurance marketplace,
• to achieve their risk financing objectives.
  

Reviewing these three essential features of captive insurance will help to clarify the nature of a captive insurance company.

Captive Insurer Put Their Own Capital at Risk

Any insured who purchases captive insurance must be willing and able to invest its own resources. The insured in a captive insurance company not only has ownership in and control of the company but also benefits from its profitability.

A policyholder in a mutual insurance company is theoretically entitled to receive dividends if the company makes a profit. In reality, however, mutual insurance companies generally accumulate rather than distribute their surplus.

Working Outside the Commercial Insurance Marketplace

Insureds in a captive choose to put their own capital at risk by working outside of the traditionally regulated commercial insurance marketplace. The traditional insurance regulatory environment tries to “protect” the insured from the insurer. Regulations are expensive to implement, costly to monitor, and sometimes fail. Their main thrust is to restrict what an insurer may do and how it may be done.

Captive insurers often have significantly less capital than commercial insurers and no protection for the insureds from state guaranty funds. But those who use captive insurance choose to participate in the risks and rewards associated with using their own risk capital, rather than paying to use the capital of commercial insurers. They make this choice believing that captive insurance offers something superior to commercial insurance. And commercial insurance is not always available. Since they are not traditional commercial insurers, captives are considered a part of what is often called the “alternative market,” or “alternative risk transfer (ART) market.”

To Achieve Risk Financing Objectives

When the products offered by insurers do not meet an insured’s risk financing needs, the best option might be to form a captive insurer. The main reasons why organizations wish to better control their risk management programs are excessive pricing, limited capacity, coverage that is unavailable in the "traditional" insurance market, or the desire for a more cost efficient risk financing mechanism.

Medical malpractice premiums continue to rise while insurers continue to exit the market. Risk Retention Groups (RRGs,) a specific form of Captive, are becoming an increasingly attractive alternative. However, because of the complexity and cost of starting such a Captive, they have traditionally only made sense for very large medical practices.