“ Controlling Our Destiny” The Life of a 25 Year Old Captive

1. “Controlling Our Destiny” The Life of a 25 Year Old Captive Laurence J. Fallon, Esq. Vice President & Chief Risk/Quality Officer Carle Risk Management Company June 18, 2008

2. HealthSystems Insurance, Limited Carle Foundation and Carle Clinic Association Cayman Domiciled Insurer 1984 to Present

3. The Carle “System”: • The Carle Foundation • A not-for-profit integrated healthcare delivery system with Carle Foundation Hospital, a 305 bed Level I Trauma and Level III Perinatal Center serving as the centerpiece • The Carle Clinic Association • A for–profit multispecialty clinic comprising 330 physicians representing 50 different medical specialties located in 10 different central Illinois communities

4. The Call to Action: Previous “Medical Malpractice Insurance Crisis” of the late 1970s Instability of medical malpractice insurance premiums Different insurers for Hospital and Clinic Sentinel claim in which “finger pointing” between the physician and Hospital staff resulted in a “runaway” verdict Anticipation of another “hard market” or “malpractice crisis”

5. The Mission of the Captive: • Health Systems Insurance, Ltd. (“HSIL”) was established by The Carle Foundation to guarantee access to a predictable and stable source of reasonably priced professional and general liability insurance for the Carle enterprises including Carle Clinic Association as a third party insured of the captive.

6. The insurance premium for the Foundation and Clinic be consistent and related to the organizations’ own claims histories. The insureds be willing to make an initial 10-year commitment to the company to allow time to realize expected premium predictability. The Quality Assurance and Risk Management programs be combined and enhanced. This enhancement must eventually reward the insureds (through premium stability and reduction) for practicing quality medicine. The Vision of the Captive:

7. Getting Started: • Planning/feasibility study started in 1983 and the company became operational January 1, 1984 • The Carle Foundation provided the $1.8 million in capital necessary to start the company and is the sole shareholder of HSIL. • Both the Foundation and Carle Clinic have representation on the governing Board

8. The Board includes external members with significant insurance experience • The Board believes HSIL should be well-capitalized and be operated in a fiscally conservative manner

9. Engagement of necessary resource providers: • Actuary • Auditor • Broker • Captive Manager • Claims Manager • Investment Manager • Legal Counsel • Reinsurer(s)

10. First Steps: • Creation of necessary legal documents: • Memorandum of Association • Articles of Association • Share Certificate • Determination Letter • Monetary Authority approval of Board members • Policy or policies

11. Establishment of necessary business documents: • Bylaws • Policies & Procedures • Business Plan • Investment Managerial Guidelines • Resource provider service agreements • Reinsurance agreement(s)

12. A Bit of History

13. 12 Years of Lawsuit Filings

14. 12 Years of Case Reserves

15. 12 Years of Claims Settlements

16. 10 Years of Premiums

17. The Earlier Years: • Reasonable claims frequency and severity • Stable reserves and settlements • Positive trial results • Few “big name” plaintiff attorneys • Limited retention of the captive ($500,000) • Strong reinsurance “partnership” • Reasonable investment returns • Reasonable and predictable insurance premiums

18. The 21st Century: • Increasing frequency and severity (industry wide) • Escalating reserves and settlement values • Less predictable trial results (large unexpected verdict) • More “big name” plaintiff attorneys • Higher retention of the captive ($3-4,000,000) • Changing reinsurance relationships • Fair investment returns • Coverage dispute with excess insurer • Escalating and unpredictable insurance premiums

19. Maintaining Vigilance and Focus: • Significant capital infusion to stabilize the captive • Actuarial peer review • Change in investment managers • Settlement of coverage dispute • Renewed commitment to risk management and quality initiatives for the insureds • Operations and claims management strategic reviews • Greater operational and financial understanding and transparency

20. Key Organizational Initiatives: • Comprehensive Claims Management Program • Talented claim management staff • Effective reporting systems • Build relationships • Strong communication tools • Detailed incident investigation • Clinical resources • Liability/exposure analysis • Claims Review Committee • Defense counsel accountability

21. Blending Claims & Risk Management • Identify and empower a “physician champion” and a visible/credible executive leader • Undertake “Risk Assessments” • Create “Action/Accountability Plans” • Partnering with Quality & Patient Safety • Communicate and work collaboratively • Identify and educate about shared issues with a goal of prevention

22. A Joint Venture Option: • Carle Risk Management Company (“CRIMCO”): a for-profit joint venture between the Foundation and Clinic • Provides claims, risk and insurance management services to the HSIL insureds • Reserves and settles claims within Board determined parameters and requests reimbursement from HSIL • Works closely with the Quality and Patient Safety staff of the Foundation and Clinic • Structure focuses on elements of risk that pose exposure to the organizations and to the captive

23. Our Model:

24. Key Components: • Mission Statement • Defines the scope, responsibility and accountability of the venture • Acknowledges the participants it pledges to serve • Reinforces the relationship with external resources • Bylaws that define leadership • Physicians/patient care providers • Financial leaders • Operations leaders • Fosters the “buy-in” of the participants • Assures communication to the CEO(s) or Board(s) • Engages claims/risk management staff

25. Strong External Partnerships: • Actuary • Choose the right one…..for good times and bad • Remember their analysis is tied to the data you supply • No one has a crystal ball, but if they are good they will plan for the unforeseen • The answer is in their report somewhere • Their conclusions are key to the running of your captive • Auditor • They put all of the pieces together • They are key in your relationship with the monetary authority

26. Broker • Be diligent when making a choice • Go with depth and resources • Look for the service after the sale = accountability • Negotiate the best fee and secure the best service • Ask for the additional services you need to succeed • Captive Manager • Choose wisely…. they will be doing much of the day-to-day financial/oversight work • They must be able to assist you in coordinating with the other external consultants • A knowledgeable one with a good working relationship with the monetary authority is important

27. Claims Manager • In house or external • Settle/defend strategy will affect the financials of the captive • Investment Manager & Legal Counsel • Make sure you clearly communicate your captive’s investment philosophy, realizing it may be constrained by legal and regulatory requirements • The experts in captive insurance law and regulation are limited in number • They have likely faced the situation before

28. Reinsurer(s) • Financial standing matters • Check their reputation among more than just the broker community • We’re your reinsurer and we’re here to help you • Reporting/customer service • Industry experience • Claims auditing

29. At the End of the Day: • It is about talent and trust not only dollars and cents • Consultants/service providers have to be accountable to meet the goals of your captive’s business plan. • Do not hesitate to undertake Request for Proposal(s) (RFP) • If you are not receiving the level of service you and/or your Board expect • If the consultant/service provider is not responsive • Process can be time consuming but it exposes all of the issues for evaluation • Fiduciary responsibility dictates that this process be undertaken routinely

30. The dynamics of the insurance market will impact the commitment to the captive • Soft market – some will question whether to “stay the course” • Seek enhancements to coverage or multi-year terms • Hard market – all will be thankful for a stable insurance vehicle • Think about including other coverages in the captive

31. “Controlling Our Destiny”

32. Thank You