A challenging insurance market has weighed heavily on healthcare plan providers, many of which saw significantly higher rates, stricter terms and conditions, and several coverage restrictions, especially for their errors and omissions (E&O) coverage. Increased antitrust litigation and greater regulatory oversight of health plans have created further pricing and coverage challenges, and even led to some insurers exiting the market.

As market conditions became more challenging, many healthcare plan companies were faced with limited options to insure their managed care errors or omissions (MCEO) risks. Some opted to increase retentions. Others explored alternative risk transfer methods, including captives, to transfer their risks in a more cost-effective way that would also provide increased control over the risks they wanted to transfer or retain.

Captives are frequently used as a solution to challenging short-term market conditions. However, companies may be reluctant to set up a captive without a longer-term strategy due to the required financial and operational investment.

Captive benefits go beyond difficult market cycles

Aside from offering a more cost-effective coverage option during a period of challenging market conditions, a captive can deliver other benefits to healthcare plan providers, including:

1. Opportunity for agile shifts

The cyclical nature of the insurance market means that challenging conditions and pricing tend to resurface periodically. Companies that already have a captive set up are able to quickly pivot and start to use their vehicle to insure risks that are either difficult to place through commercial channels or very expensive. But it is critical for healthcare plan providers to understand the nuances of the MCEO market. An experienced risk advisor with a deep understanding of this niche market can help you determine which risks you decide to retain and which risks you decide to insure through a captive, helping you to optimize corporate assets during a difficult insurance market. Further, in the event of regulatory changes that impact insurance availability or pricing, having a captive already set up allows you to be more agile in changing the way you insure your risks.

2. Ability to script bespoke coverage

While many commercial insurers work with their clients to create tailored insurance programs, a captive typically allows for increased flexibility. Especially attractive for healthcare plan companies is the ability to provide consistent coverage across different jurisdictions, including for risks that are difficult to quantify and those that are typically excluded by commercial insurers. Further, captives typically allow their owners to fund higher retentions than are readily accessible on the commercial market.

3. Potential to invest in ESG and other initiatives

Many healthcare plan providers are looking for innovative ways to improve their environmental, social, and governance (ESG) posture, including improving the health of their population through investments to identify and address social determinants of health. Well-run captives often end up with a surplus of capital. Captive owners may be able to invest these funds in innovative projects, including ones intended to improve the health of their members, employee engagement programs, or diversity, equity, and inclusion initiatives.

Things to consider before setting up a captive

The first step to determine whether a captive is the right fit for your organization is to carry out a feasibility study. The feasibility study results can provide critical decision-oriented information, including a rundown of startup costs you are likely to incur, and an estimate of annual operating expenses, such as regulatory, legal, actuarial, audit, and captive management fees. Once a go-forward decision had been made, a captive manager with deep understanding of various tax implications and state regulatory requirements can assist you through the registration process and help you understand your contractual obligations.

While the difficult E&O insurance market is one of the primary reasons for healthcare plan providers to investigate whether a captive is the right option for them, these vehicles can provide several additional benefits that outlast challenging market cycles.

Severe weather events, especially hurricanes and superstorms, can lead to catastrophic losses for both individuals and organizations. Low pressure systems that stall over areas can trigger significant flooding, while consistent, frequent, heavy rainfall or quick snow melt following a storm can cause dangerous surface water runoff. Further, persistent arid conditions or electrical storms can lead to wildfires. 

While property damage, business interruption, and third-party liability can be costly and disruptive, severe weather can also give rise to significant pollution risks. These risks can be difficult to prevent, and are often overlooked. Since most traditional insurance policies limit or exclude pollution losses, many businesses are not covered for this type of loss.

What are the environmental risks of severe weather?

Aside from damaging properties and infrastructure and posing a threat to occupants, emergency response teams, and recovery workers, severe weather events can also lead to significant environmental risks, including:

1. Storms can lead to large volumes of water entering properties or breaching containment facilities, potentially dispersing waste and contamination. Fuel that spills from ruptured tanks and wrecked vehicles can contaminate structures and land. These potential hazards to emergency responders, building occupants, and cleanup crews may hamper recovery efforts. In addition, the inundation of historically contaminated ground, such as Superfund sites, or destructive flood waters can exacerbate existing contamination or create new sources. Such events have resulted in multi-million dollar environmental losses to facilities and properties with relatively environmentally benign operations.

For example, Superstorm Sandy’s floodwaters caused generator tanks in a NYC hospital’s subterranean parking garage to burst, releasing fuel oils and disrupting asbestos within the structure. Contaminated stormwater that flooded the property led to significant mold growth throughout the facility. The environmental remediation resulted in an eight-figure loss on top of real property damage.

2. Low pressure systems or persistent heavy rain can overcome efforts to contain surface water runoff at construction sites or facilities where there has been significant ground disturbance, such as solar farms. Resulting sedimentation and turbidity in neighboring water bodies can pose third-party liability to site owners and contractors responsible for run-off mitigation.  

For example, a renewable energy company needed to grade several hundred acres. A neighboring land owner alleged that the renewable energy company owner and their contractors failed to contain rainwater runoff from the facility, causing sedimentation of wetlands, streams, and lakes. A jury awarded the neighboring landowner more than $100 million in compensatory and punitive damages, which the company said it would appeal.

3. Weather patterns that result in severe drought or dangerous electrical storms can trigger localized or widespread wildfires or facility fires that pose a significant risk of pollution and associated third-party liability. Air emissions from burning fuel or chemicals, the release of materials stored on-site, or the act of fighting the fire with aqueous film-forming foam (AFFF) can all result in on-site and off-site pollution. It’s important to note that per- and polyfluoroalkyl substances (PFAS), contained in AFFFs and elsewhere, is an emerging contaminant and a focus of regulators and plaintiff attorneys.

For example, a lightning strike caused a fire at a pesticide manufacturing facility. The local fire department and emergency response teams decided to let the fire burn itself out. The fire led to the release of stored chemicals, which caused significant pollution. The associated remediation resulted in an eight-figure cleanup and the site was subsequently added to the Superfund list.

3 actions to manage your environmental risk

As catastrophic weather events continue to increase in frequency and severity, you should consider the following actions to manage your environmental exposure:

• Assess your exposure. Identify locations, operations, and projects that are situated in areas exposed to severe weather events. Evaluate the hazardous materials stored onsite and assess your containment measures. Take time to understand the potential pollution exposure associated with neighboring properties that could impact your business in the event of a major weather event. Understand there will be increased costs in responding to contamination events in today’s inflationary environment.
• Bolster emergency response plans. Ensure that your emergency response plans incorporate mitigation measures and response actions to address possible pollution events triggered by severe weather. It is prudent for organizations — whether or not they have obvious potential contamination risks — to establish strong community relationships and response plans for themselves and nearby residents and businesses.
• Evaluate risk transfer programs. Work with your risk advisor to conduct a gap analysis of your traditional property and casualty insurance programs. This can help you understand the extent of coverage available for pollution loss for severe weather events in your current company insurance program. Closely assess exclusions, sub-limits, deductibles, and other insurance provisions to quantify the extent of risk transfer available for contamination events against identified exposures.

Consider environmental insurance 

Since many environmental risks are not covered by traditional insurance, consider specific environmental impairment liability coverage, which is designed to respond to losses arising from pollution on, at, under, and migrating from or through insured properties or operations. These policies can help companies transfer risks related to the release of pollutants arising from a severe weather event, including comingling and runoff of existing contamination. 

Environmental impairment liability coverage can help mitigate the financial burden associated with the remediation costs, business interruption, third-party liabilities, and legal expenses arising from these pollution events, including:

• Costs to remediate pollutants in soil, groundwater, surface water, and the atmosphere, including indoor environmental conditions, such as mold and legionella released through severe weather.
• Business income loss as a result of the need to pause or modify operations during the remediation of pollution and due to indoor environmental conditions.
• Third-party claims for bodily injury or property damage, including the loss of use or diminished value, due to contamination caused by the sudden, gradual, and comingling of pollutants released during a storm event.
• Legal expenses associated with defending against third-party claims or regulatory actions arising from pollution incidents caused by catastrophic weather events.

With costs from catastrophic weather events on the rise and increased societal awareness of environmental contamination matters, now is the time to understand your organizations’ exposures and align your insurance program to your existing risks.

From greening the built environment to investing in nature, here’s what to look out for in New York Climate Week.

New York Climate Week, launching on Sunday September 17, will once again focus minds on the urgent business of tackling climate change. With the world having experienced its hottest July on record, and summer infernos blazing from Greece to Hawaii, the scale of the challenge could not be more apparent.

In 2023, New York Climate Week will revolve around ten main themes: built environment, energy, environmental justice, transport, finance, sustainable living, nature, politics, industry and food.

In our support of industry, an important topic for Marsh is the mapping of climate vulnerabilities in supply chains. Recent issues, such as how the drought in the Panama Canal has affected shipping, highlight the importance of this topic – and bring to light the kind of risks explored in relation to the Suez Canal in Marsh’s report last year.

Here are four additional themes on the New York Climate Week program we’ll be watching closely.

1. Built environment
 
2. Energy
 
3. Nature
 
4. Finance

New materials and methods can make buildings greener and more resilient – but they can also create new risks. The involvement of insurers is critical for enabling construction projects to mitigate the risks and speed the uptake of these methods and materials.

Examples include cross-laminated timber, a strong and lightweight construction material that can have a low carbon footprint, if the wood used to make it comes from well managed forests. However, it is a relatively novel material, leading to insurance industry discussions about quantifying and managing the risk.

Cement is among the hardest-to-abate industries, but various ways to lower its carbon footprint are being developed – such as replacing a portion of the cement in concrete with various waste byproducts from industry or agriculture. From an insurance perspective, it is important to be confident that non-standard concrete mixes are insurable during the construction period and for the structure’s operational life.