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Alternative Structured Insurance for Healthcare and Senior Living Facilities

Alternative structured insurance policies

What is alternative structured insurance?

Alternative Structured insurance can be a financially rewarding way for larger organizations to fund future losses — In fact they are often the preferred way for these organizations to insure. They are also sometimes the only option for healthcare and senior living facilities who need General Liability (GL) and Professional Liability (PL) insurance, but are unable to obtain traditional coverage from carriers because they are located in a “judicial hellhole,” or underwriters have identified them as “high risk” for another reason. In this article, we’re going to explore a number of alternative structures, their suitability for different parties and the pros and cons of funding losses in this way.

Some of the reasons traditional insurance coverage may not be suitable are:

  1. The facility is a large, well-funded business, or part of a larger, well-funded organization. In that case it makes good business sense to fund the risk themselves, reduce expenditure and take advantage of taxation incentives.
  2. The facility has recently settled a medical malpractice or damages claim with a large payout, or is being flagged by carriers as a high-risk client. Underwriters either won’t accept them or are demanding unaffordable premiums. In this case, a form of self-insurance may be the only way the facility can remain in business. It may also provide them with a path toward rebuilding their reputation.
  3. The facility is in a “litigation hell hole” — an area which has been identified as high risk by many carriers who are limiting their PL/GL exposure there. A suitable policy for the facility can’t be found, due to the limited number of products available in their area.
  4. An operator is looking to purchase an additional facility and doesn’t want be held up on the purchase while waiting for a quote from the insurance company. It would simplify the process by just being able to add it to their existing alternative structured policy and they would know what their operating costs for insurance were.
  5. An operator who is planning to eventually sell a facility and doesn’t want to have to purchase an extended reporting period for 36 months or more at 200% of the current premiums.

Different forms of Alternative Structured Insurance

There are a number of different ways that alternative structured insurance can be set up and different aims and objectives of these programs. We could group them in two categories:

  1. Programs to cover ongoing operations; and
  2. Programs to cover historical exposures

Programs to cover ongoing operations

  1. Program business
    Program business refers to a specialized niche of the insurance industry, where insurance policies are underwritten and managed by Managing General Underwriters (MGUs) or Managing General Agents (MGAs). These entities have expertise in specific industry sectors or product lines, and they possess underwriting authority which has been granted by insurance carriers.MGUs and MGAs act as intermediaries between the insurer and the policyholder, performing various roles, including underwriting, policy issuance, premium collection, and claims management. They typically focus on niche markets, where their expertise and specialization allow them to create tailored insurance products and provide value-added services to their clients. This specialization enables them to better understand the unique risks and needs of their target market, thus offering more competitive and comprehensive coverage options.Here are some key aspects of MGUs and MGAs in program business:
    1. Niche Focus: MGUs and MGAs specialize in specific industries, product lines, or market segments, such as professional liability, aviation, marine, environmental, or cyber insurance. Their specialized knowledge allows them to create unique insurance products and underwrite risks that traditional insurers may find too complex or be uncomfortable with.
    2. Underwriting Authority: Insurers grant MGUs and MGAs underwriting authority to evaluate, price, and bind insurance coverage on their behalf. This delegated authority enables MGUs and MGAs to make quicker decisions and provide faster and more personalized service to their clients.
      Risk Management Services: Due to their specialized knowledge, MGUs and MGAs often provide value-added risk management services, such as loss control and mitigation, training, and claims management, to help their clients mitigate risks and prevent losses.
    3. Distribution Channels: MGUs and MGAs may distribute their insurance products through various channels, such as retail agents, brokers, or directly to the insured. They may also develop exclusive relationships with specific insurers, allowing them to offer specialized coverage options that may not be available in the broader insurance market.
    4. Regulatory Compliance: MGUs and MGAs are subject to state insurance regulations and must maintain proper licensing and compliance with applicable laws. This includes ensuring that the insurance policies they underwrite adhere to the guidelines set forth by the insurance carriers and state regulatory authorities.
  2. Risk Sharing Groups Defined Risk Programs also known as shared-risk or risk-sharing programs, are insurance arrangements where both the insurer and the insured share the financial responsibility of covering losses. These programs are designed to align the interests of both parties and encourage risk management practices.There are several ways in which these deals can be structured:
    1. Deductibles and Retentions: In this arrangement, the insured agrees to cover a certain portion of the loss before the insurer’s coverage kicks in. Deductibles are typically a fixed amount, while retentions are expressed as a percentage of the total loss. By sharing the risk in this way, the insured has an incentive to mitigate potential losses, while the insurer benefits from reduced claim payouts.
    2. Co-insurance: Co-insurance is a method where the insurer and insured share the risk by covering a predetermined percentage of the total loss. For example, the insurer may cover 80% of the loss, while the insured covers the remaining 20%. This incentivizes the insured to take preventive measures, as they bear a portion of the loss, while the insurer benefits from lower overall payouts.
    3. Experience Rating: Experience rating is a pricing method that takes the insured’s past loss history into account when determining the premium. If the insured has a lower loss history, they may be eligible for a lower premium. Conversely, if the insured has a higher loss history, they may pay a higher premium. This arrangement encourages the insured to maintain good risk management practices and rewards them for doing so.
    4. Risk Purchasing Groups (RPGs): groups of organizations with similar risks that collectively purchase insurance from an insurer or a group of insurers. By joining an RPG, healthcare and senior living facilities can access more comprehensive coverage, often at a lower cost than if they were to purchase insurance individually. RPGs typically offer tailored insurance programs, risk management resources, and group purchasing power, which can lead to cost savings and improved coverage for their members.
    5. Risk Retention Groups (RRGs): RRGs are a type of group captive insurance company owned by its policyholders, who are typically businesses within the same industry or with similar risk profiles. RRGs enable policyholders to share the risk and pool their resources to obtain more favorable insurance rates and coverages. RRGs can also provide a more customized approach to risk management for its members. Stop-Loss Insurance: This is a type of reinsurance contract that protects the primary insurer from catastrophic losses. The insurer and the insured agree on a threshold, and once the total claim amount exceeds that threshold, the reinsurance kicks in to cover the excess amount. This arrangement helps the insurer manage their risk exposure while still offering coverage to the insured.
  3. Self Insured With Rated Paper.
    Under this arrangement, the insured pays a fee and deposits collateral which allows the insurance company to issue a policy. A Self-Insured With Rated Paper arrangement, also known as a “fronting policy,” is a risk management strategy used by organizations that want to self-insure their risks but need to meet regulatory requirements or satisfy contractual obligations that mandate insurance coverage from a licensed, rated insurer. Under this arrangement, the insured organization assumes financial responsibility for its losses, while an insurance company writes a policy to cover them. The insurance company, known as the “fronting insurer,” issues the policy to the self-insured organization, which is then responsible for funding the losses and claim payments that arise under the policy.The fronting policy serves as evidence of insurance coverage, helping the self-insured organization meet regulatory requirements or contractual obligations that require insurance from a licensed, rated insurer. However, since the insured organization is financially responsible for the losses, the fronting insurer’s actual risk exposure is minimal.

    Key features of Self-Insured With Rated Paper arrangements include:

    1. Regulatory and Contractual Compliance: This arrangement allows self-insured organizations to meet regulatory requirements or contractual obligations by having a licensed, rated insurer issue the policy, providing evidence of insurance coverage.
    2. Loss Funding: The self-insured organization is responsible for funding all losses and claims payments under the fronting policy, effectively retaining the risk.
    3. Risk Management: Self-insured organizations can maintain control over their risk management and claims handling processes while satisfying insurance requirements.
    4. Administrative Costs: The fronting insurer typically charges a fee for issuing the policy and providing any administrative services, such as policy issuance and regulatory reporting. The self-insured organization should consider these fees when evaluating the overall cost of a Self-Insured With Rated Paper arrangement.
    5. Collateral Requirements: Fronting insurers may require collateral from the self-insured organization to secure their potential financial obligations under the policy. Collateral can be in the form of cash, letters of credit, or other assets, and the amount required depends on the insurer’s assessment of the risks involved.A

Self-Insured With Rated Paper arrangement can be a viable option for healthcare and senior living facilities that wish to self-insure their risks while meeting regulatory or contractual insurance requirements. It is important for organizations to carefully evaluate the costs and benefits of this arrangement and work with experienced insurance professionals to structure the fronting policy effectively.

  1. Captives: These are the Holy Grail of alternative structures, as they can be the most financially rewarding way for a large organization to fund their losses. Simply stated, a ‘Captive’ is an insurance company that the insured sets up and runs themselves. Their taxable income is reduced, as pre-tax income is transferred from the parent company to the Captive as an advance on litigation costs and expenses. This money can then be invested by the captive to earn income.There are several types of captives, each with its own characteristics and purposes:
    1. Single-Parent Captive (Pure Captive): A single-parent captive is owned and controlled by one parent company and provides coverage exclusively for the parent company and its subsidiaries. This type of captive is the most straightforward and is used to insure the risks of the parent organization and its affiliates.
    2. Group Captive: A group captive is owned by multiple parent companies, typically within the same industry or sharing similar risk profiles. These captives are formed to provide insurance coverage for the collective risks of the parent companies. The costs and potential savings are shared among the participating members.
    3. Risk Retention Group (RRG): (also covered under risk sharing groups) An RRG is a type of group captive that operates under the Liability Risk Retention Act of 1986. It is owned by its policyholders, who are typically from the same industry or share similar risks. RRGs are authorized to write liability insurance for their policyholder-owners in multiple states without the need for multiple licenses, offering an efficient way for companies to pool their risks and share costs.
    4. Protected Cell Captive (PCC): A PCC is a single legal entity with separate “cells” or “accounts” for different insureds. Each cell is legally segregated from the others, ensuring that the assets and liabilities of one cell are not affected by the financial performance of other cells. PCCs allow multiple insureds to benefit from a shared captive structure while still maintaining financial independence.
    5. Rent-A-Captive: A rent-a-captive is an existing captive insurance company that offers its services to other companies on a rental basis. Companies can access the benefits of a captive structure without the need to establish and capitalize their own captive. Rent-a-captives usually charge a fee for their services and can be a more cost-effective option for smaller organizations or those seeking a short-term solution.
    6. Special Purpose Vehicle (SPV) Captive: An SPV captive is created for a specific purpose, such as securitizing insurance risks or issuing catastrophe bonds. These captives are generally used in more sophisticated risk management and financing strategies and are often employed by larger organizations.
    7. Micro Captive: A micro captive is a smaller captive insurance company that elects to be taxed under Section 831(b) of the Internal Revenue Code. This allows the captive to exclude its underwriting income from taxable income, subject to certain conditions and limits. Micro captives can be a tax-efficient solution for small to mid-sized organizations looking to establish their own captive insurance company.

Programs to cover historical exposures

  1. Stand alone ERP (extended reporting period)
    This is designed to transfer responsibility to pay losses that may have occurred in the past. Stand-alone Extended Reporting Period (ERP) insurance, also known as “tail” coverage, is a specialized insurance policy that extends the reporting period for claims under a claims-made liability policy, such as professional liability (PL) or directors and officers (D&O) liability insurance. This type of coverage is particularly relevant when a claims-made policy is terminated, non-renewed, or replaced with another policy that does not provide retroactive coverage.

    Under a claims-made policy, coverage is provided only for claims that arise from incidents occurring during the policy period and reported to the insurer during that same policy period. When a claims-made policy ends, there is a risk that claims stemming from incidents that occurred during the policy period but reported after the policy has expired will not be covered.

    To address this coverage gap, stand-alone ERP insurance extends the period during which claims can be reported and still be covered, even though the original policy has expired or been terminated. The extended reporting period does not provide coverage for incidents occurring after the original policy’s termination date; it only covers claims arising from incidents that occurred while the policy was in force.

    Key features of stand-alone ERP insurance include:

    1. Duration: Stand-alone ERP insurance policies can be purchased for varying lengths of time, typically ranging from one to five years or even longer, depending on the insured’s needs and the nature of the risks involved.
    2. Coverage Limits: Stand-alone ERP policies usually maintain the same coverage limits as the original claims-made policy. It is important to note that the limits are not increased or reset during the extended reporting period.
    3. Claims Reporting: The policyholder must report claims promptly during the extended reporting period for them to be covered. It is crucial to be aware of and adhere to the reporting requirements outlined in the stand-alone ERP policy.
    4. Cost: The cost of a stand-alone ERP policy is generally based on a percentage of the expiring policy’s premium. The percentage can vary depending on the duration of the extended reporting period and the insurer’s assessment of the risks involved.

Stand-alone ERP insurance can be valuable for professionals and organizations in various situations, such as retirement, a change in the business structure, or switching insurance carriers. By providing coverage for claims reported after the termination of a claims-made policy, stand-alone ERP insurance helps to mitigate potential gaps in coverage and protect the insured party from financial losses resulting from uncovered claims.

  1. Loss Portfolio Transfers (LPTs)
    Loss Portfolio Transfers are financial reinsurance agreements that allow healthcare and senior living facilities to transfer their insurance liabilities to a reinsurer. By transferring liabilities to the reinsurer, the facility can achieve greater financial stability and better manage their risk exposure. LPTs enable facilities to reduce their balance sheet liabilities and free up capital, allowing them to focus on delivering quality care to their patients and residents. – transferring responsibility to pay losses that have occurred in the past.

    LPTs enable the ceding company to transfer the responsibility for claims payments, administration, and the associated risks to the reinsurer for a pre-negotiated premium. In return, the reinsurer assumes the liabilities and takes responsibility for future claim payments related to the transferred risks.

    Key features of Loss Portfolio Transfers include:

    1. Risk Transfer: LPTs transfer insurance liabilities and risks from the ceding company to the reinsurer, allowing the ceding company to better manage its risk exposure and focus on its core business activities.
    2. Financial Stability: By transferring liabilities to the reinsurer, LPTs can help improve the ceding company’s financial stability by reducing balance sheet liabilities and freeing up capital that can be used for other purposes, such as investment in growth opportunities or strengthening reserves.
    3. Claims Management: The reinsurer assumes responsibility for the administration and payment of claims related to the transferred risks. This can help the ceding company reduce administrative costs and streamline its claims management process.
    4. Timing: LPTs are often used when a company wants to address a specific set of insurance liabilities, such as those arising from past underwriting years or discontinued lines of business. They can be executed at any time, depending on the ceding company’s needs and objectives.
    5. Negotiability: LPTs are highly negotiable agreements, with the terms and conditions, including the premium, being determined through negotiations between the ceding company and the reinsurer. This allows for flexibility and customization based on the specific needs and risk profiles of both parties.

LPTs can be particularly beneficial for healthcare and senior living facilities looking to reduce their insurance liabilities, improve financial stability, and streamline claims management. However, it is essential to work with experienced insurance and reinsurance professionals to ensure the LPT is structured effectively and provides the desired benefits.

Pros and Cons of alternative structured solutions

Alternative structured insurance policies offer various advantages and disadvantages to healthcare and senior living facilities. Below, we outline the pros and cons of these alternative structures:


  1. Customized Coverage: Alternative structured insurance policies can be tailored to the unique needs and risk exposures of healthcare and senior living facilities. This customization allows for more comprehensive and appropriate coverage compared to traditional insurance policies.
  2. Cost Savings: By pooling resources or self-insuring, healthcare and senior living facilities can potentially save at least 20% on premium costs. Group purchasing power in RRGs and RPGs, as well as the retention of underwriting profits in captive insurance, can lead to lower overall insurance costs.
  3. Improved Cash Flow: Alternative insurance structures, like captive insurance and LPTs, can result in improved cash flow for the facility, as they allow for more control over claims and potential retention of underwriting profits.
  4. Simplified Administration: Integrated risk programs and RPGs can reduce the administrative burden associated with managing multiple insurance policies by consolidating coverages under one policy or provider.
  5. More Continuity: As insurance carriers involved have less exposure, there is less turnover in carriers and less fluctuation in premiums. The annual burden of having to continually source new premiums and provide all the information required is also dramatically reduced.
  6. Quality improvement due to increased awareness: When you participate in the loss, you get first hand information that you can take back to your operators and have them take steps to mitigate any further claims, which leads to an improvement of quality. Live feedback. The opportunity for owners to really take advantage of the feedback from complaints and share it directly with the operators. Leading to a reduction in liability incidents, improvement in quality score. Contribute more than the 20% savings to operations.


  1. Complexity: Establishing and managing alternative structured insurance policies can be more complex than purchasing traditional insurance. This may require additional resources, such as hiring specialized staff or consultants.
  2. Regulatory Compliance: Alternative insurance structures, like captive insurance and RRGs, are subject to specific regulatory requirements that can be complex and time-consuming to navigate.
  3. Financial Responsibility: In self-insurance structures, such as captive insurance, the facility takes on a higher level of financial responsibility for its risks. This can result in increased financial exposure if claims exceed expectations or available funds.
  4. Initial Costs: Capitol (need for collateral) Establishing alternative insurance structures, like captive insurance or RRGs, may require significant upfront investment, which may not be feasible for all healthcare and senior living facilities.
  5. Potential for Coverage Gaps: If alternative insurance structures are not properly designed or managed, they may result in coverage gaps, leaving the facility exposed to financial loss.

    Overall, alternative structured insurance policies can offer many advantages to healthcare and senior living facilities, including customized coverage, cost savings, and improved risk management. However, these structures can also be more complex, require additional resources, and involve greater financial responsibility.

Who are alternative structures suitable for?

Alternative insurance structures can offer significant benefits for some healthcare and senior living facilities, while they may not be as advantageous for others.

Here are some factors to consider when determining if an alternative structure might be a good fit:

Best suited for alternative structures:

  1. Facilities with Unique Risks: Healthcare and senior living facilities with specialized services or unique risk profiles may benefit from alternative structures, as these can provide tailored coverage that better addresses their specific exposures.
  2. Larger Facilities or Groups: Larger facilities or groups of facilities may have the resources and capacity to manage alternative insurance structures effectively, and they can leverage economies of scale to achieve cost savings through pooling or self-insurance.
  3. Facilities with Strong Risk Management Practices: Facilities that have robust risk management practices in place may be better suited to alternative structures, as these organizations are more likely to effectively control and manage their risks, reducing the likelihood of claims and potentially lowering insurance costs.
  4. Financially Stable Facilities: Facilities with strong financial positions may be better suited to assume the risks associated with alternative structures, such as the financial obligations of captive insurance or the shared risk of RRGs.
  5. Facilities paying large premiums: The cost to self insure, plus your losses reaches a point where it is less than the premiums you pay.
    Not well-suited for alternative structures:
  6. Smaller Facilities: Smaller healthcare and senior living facilities may not have the resources, scale, or capacity to effectively manage alternative insurance structures, making traditional insurance policies a more practical option.
  7. Facilities with Limited Risk Management Experience: Facilities that lack the experience or resources to implement and manage strong risk management practices may find it challenging to navigate the complexities of alternative insurance structures.
  8. Financially Challenged Facilities: Facilities facing financial challenges may not be well-suited for alternative structures, as they may be unable to assume the financial obligations associated with these arrangements, such as funding a captive insurance company or meeting ongoing commitments to an RRG or RPG.

    The suitability of alternative insurance structures for a healthcare or senior living facility depends on various factors, including the facility’s size, risk profile, risk management capabilities, and financial stability. In our experience, facilities should carefully evaluate their specific needs and resources and consult with insurance professionals to determine the most appropriate insurance solution for their organization.

    If you or your clients are candidates for alternative structures, we’d love to work with you. Contact Michael RIchards on 855 351 7487

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    alternative structures

    Westwood President, Michael Richards has extensive experience in setting up alternative structures for larger clients. Here are some examples:


    If you think your client could be large and stable enough to benefit from starting or participating in a captive or has a special need for another alternative structure, contact Michael Richards now by phone: 855 351 7487.