How To Understand The Role Of The Captive In An Enterprise Risk Management Program

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Suzanna Arline Holt
3 years ago
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2 Combined: Transforming Risk: The Captive s Role in Sustaining an Enterprise Risk Management Program Moderator: Michael Maglaras, Michael Maglaras & Co. Speaker: Ruth Cardiello, Stamford Health System

3 Today We ll Discuss: The Captive s Role in Enterprise Risk Management What are the ERM fundamentals? Why captives are an ideal place to build an ERM foundation and framework Why captive boards of directors are the ideal stewards of Enterprise Risk How to construct an enterprise-wide ERM program inside the framework of an existing captive structure What health care system ERM programs can teach us 3

4 Defining Risk : Any event or action that will adversely affect an organization's ability to achieve its business objectives and successfully execute its strategy. 4

5 Risk Management is: An analysis of the risks, internal and external, for which insurance and/or self-insurance should be procured and the administration of the claims management, loss control, and safety management programs necessary to protect the assets of the organization from loss. 5

6 Enterprise Risk Management is: Everything that Risk Management is but includes a further analysis of all risks, internal and external, that may prevent an organization from achieving its objectives. It is an integrated, structured, and matrix-driven strategy aligning processes, people, technology, and knowledge with the purpose of evaluating and managing the daily uncertainties the enterprise faces. 6

Climbing Over the Barbed Wire Within the Organization Old Risk Management Paradigm Remaining Risks Within the Enterprise Classic insurance

7 Climbing Over the Barbed Wire Within the Organization Old Risk Management Paradigm Remaining Risks Within the Enterprise Classic insurance risk Classic self-insurance risk Traditional captive program risk Uninsured risk Risk not possible to insure Business risk Reputational risk 7

8 Climbing Over the Barbed Wire Within the Organization An Enterprise Risk Management Program Old Risk Management Paradigm Remaining Risks Within the Enterprise 8

9 What Do We Know About ERM Fundamentals? ERM is best addressed and evaluated through focused internal resources ERM is a bi-product of a focused multi-disciplinary approach reflecting clinical, financial, and business development risks inherent in operations ERM is a integrative initiative that reaches into all aspects of the organization s operations ERM is evolutionary...it is part of a continuous process of self-evaluation and change ERM requires a strong board of directors involvement and supervision 9

10 The Components of a Classic ERM Program 1. Internal environment: how risk is viewed, how risk is assessed, ethical values, and risk management philosophy 2. Objective Setting: identify potential events affecting outcomes; setting objectives that support and align with the overall mission and the entity s risk appetite 3. Event Identification: internal/external events affecting outcomes; identify risks; identify opportunities 4. Risk Assessment: analyzing risks; assessing how risks can be controlled; risk assessment on an immediate or residual basis 10

11 The Components of a Classic ERM Program 5. Risk Response: selecting avoidance, acceptance, reduction, or sharing of risk by specific area of operation 6. Control Activities: procedures established to ensure risk responses are carried out 7. Information and Communication: relevant information identified, captured, and communicated; communication flows down, across, and up the entity 8. Monitoring: the ERM initiative is monitored and modified; it is a continual evaluation and improvement process 11

12 Why Should an ERM Program Have a Captive Focus? Most captives are fully-consolidated subsidiaries the good news and the bad impacts the organization immediately. Captives are adept at understanding what can (ought to) be insured or self-insured ERM is all about understanding balance sheet management and how to keep risk or transfer it. Captive boards usually consist of multi-disciplinary talents you need a broad business view to control Enterprise Risk. Most captives manage claims efficiently and professionally expertise that is needed in the ERM strategy. Captives are skilled at risk quantification and pricing...talent needed to price what may be uninsurable in the commercial marketplace. 12

13 Captives Aren t Static Neither Is ERM ERM is: A team endeavor; team members bring expertise from all key operational areas to the process Part of a dynamic, open organizational culture Broad...encompassing all operational, business, and clinical risk elements Strategic...forward-looking in both evaluation and outcomes over multiple fiscal periods A continuous and evolving process; more than risk retention (self-insurance) or risk transfer (commercial insurance) Part of the strategic planning process at its earliest stages Designed to withstand scrutiny by outside evaluators and regulators ERM is not: A system imposed from outside sources; a system limited to the evaluation of financial risk Part of a silo-oriented, non-dynamic culture Limited...encompassing only insurable risks and exposures Static...evaluating risk only at a fixed point in time A once-a-year exercise focused on insurance program renewals and related strategies Reactive to strategies already in place Only evaluated and reviewed internally 13

Redefining the Captive s Annual Meeting to Include ERM A captive s Annual Meeting The usual agenda approval of audit election of officers reinsurance renewal

14 Redefining the Captive s Annual Meeting to Include ERM A captive s Annual Meeting The usual agenda approval of audit election of officers reinsurance renewal actuarial report claims report investment report An ERM agenda non-traditional business risk reputational risk regulatory risk insurable vs. uninsurable risk 14

15 Adding ERM to the Captive s Meeting Agenda Asking the tough questions about what is insurable and what is not Forcing the discussion about traditional versus non-traditional risk Using an ERM risk discussion as a board education tool Focusing the board s attention on unpredictable, actuarially-volatile risk Considering ERM in the context of a captive s existing capital and surplus 15

16 How Health Care Liability Captives Are Changing: Accountable Care forcing the amalgamation of traditional risk management and ERM programs within health care facilities an example worth watching 16

17 Health Care System Clients of Michael Maglaras & Company Percentage of Employed Physician Exposures to Total Bed Equivalent Exposures 2001 to % 53.0% 50.0% 40.0% 31.7% 30.0% 20.0% 10.0% 0.0%

18 Medical Professional Liability...What s the Current Model? Medical Staff Community Physicians Hospital Employed Physicians Insurance Source: Commercial, Etc. Insurance Source: Hospital-Owned Captive Reinsurance Market Reinsurance Market 18

19 Medical Professional Liability...What s the Emerging Model? Hospital System ACO Physicians Hospital Captive Reinsurance Market New ERM Risks/Exposures - Physician reputational risk - Physician practice risk - Emerging regulatory risks - Fewer defendant pockets for a single claim - Challenges to existing surplus 19

15 December 2015. General Risk Control and Management Policy

15 December 2015. General Risk Control and Management Policy 15 December 2015 General Risk Control and Management Policy Content 1. Purpose 3 2. Scope 3 3. Risk Factors - Definitions 3 4. Basic Principles 4 5. Comprehensive Risk Control and Management System 4 6.