Navigating Medical Malpractice Insurance: How Self-Insurance Works

As healthcare systems grow, their leadership teams may consider creating a captive insurance company to manage their risk and control insurance costs. A captive allows hospitals or large physician groups to self-insure, offering unique benefits and responsibilities. Traditional insurance companies, like MagMutual, can provide expertise and resources to support the setup of a captive. Healthcare systems using captives might also buy additional insurance, or reinsurance, to reduce the capital required to cover potential risks. 

Captive Insurance Basics

Although there are different types of captive insurance companies, they all function in a similar way. Captives are registered and regulated by the Department of Insurance (DOI) in the state or territory where they are domiciled. Once approved, a captive can begin accepting risk, with a captive manager responsible for handling claims, payments and regulatory reporting to the DOI.  

The captive manager drafts its insurance policies and manages claims according to those policies. They also can choose which risks to cover and have the flexibility to transfer certain risks to another insurer through reinsurance.  

Managing Risk Exposure

The types and levels of risk covered by a captive are detailed in its plan and insurance policy. The captive can either retain all of the risk or reinsure a portion of it to limit its exposure. 

For example, a captive that covers $1 million per claim and $3 million annually might retain only the first $250,000 of each claim, transferring the remaining $750,000 through  reinsurance. This strategy helps manage risk while ensuring that the organization doesn’t need to set aside excessive capital.

Benefits of a Captive

One of the primary benefits of a captive insurance company is greater control. A captive allows an organization to decide which risks to insure and how claims are managed. A captive manager assists with setting reserves and handling payments within the captive limits of liability. Also, premiums paid to the captive might be reflected differently on financial statements, which can be advantageous. 

Potential Risks of a Captive

All forms of self-insurance come with risks, and captives are no different. One significant risk is the potential for inaccurate predictions about future losses, which could lead to unexpected costs. Additionally, a captive may lack the resources of a traditional insurance company that handles a higher volume of claims and has greater capacity to spread costs. Finally, establishing and managing a captive requires extra effort, resources and likely additional staff — similar to operating an insurance company. 

Is a Captive Right for You? 

Captive insurance is ideal for organizations with stable, predictable risks that don't fluctuate significantly year over year. These organizations should also be prepared to manage higher administrative costs and some financial uncertainty in exchange for potential savings on insurance premiums paid to commercial insurers. 

MagMutual: Your Trusted Insurance Partner

If you’re considering whether a captive insurance company is the right fit for your organization, contact MagMutual today. Our experts are ready to guide you through the entire process, ensuring you fully understand your options and make the best decision for your unique insurance needs. Our team of specialists is always available to answer your questions and provide personalized guidance. Reach out to Kevin Carnell at [email protected] or Johnathan Brutlag at [email protected] to learn more about how MagMutual can support your organization’s insurance needs.