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Medical malpractice and professional liability insurance are both essential forms of coverage for professionals, but they address distinct types of risk exposures. Increasingly, organizations and practitioners are turning to captive insurance companies to underwrite these coverages, seeking greater control, customization, and cost savings.

Key Differences Between Medical Malpractice and Professional Liability

Medical malpractice insurance specifically covers claims arising from physical harm to patients due to alleged negligence or errors by healthcare providers. In contrast, professional liability insurance (sometimes called errors and omissions insurance) focuses on protecting professionals against claims of financial loss or reputational harm stemming from their advice, services, or failure to perform professional duties.

How These Coverages Are Utilized in Captive Insurance Companies

Medical Malpractice in Captives

Medical malpractice is one of the most common coverages placed in captive insurance companies, especially for hospitals, physician groups, and healthcare systems. The traditional commercial market for medical malpractice insurance has historically been expensive and, at times, restrictive in terms of coverage capacity and flexibility. By forming a captive, healthcare organizations can:

• Customize Coverage: Captives allow healthcare providers to tailor policies to their unique risk profiles, including covering specific specialties or procedures that may be excluded or heavily surcharged in the commercial market.
• Retain Underwriting Profits: When claims are lower than expected, the surplus remains within the captive, benefiting the owner rather than a third-party insurer.
• Access Reinsurance Markets: Captives can directly access wholesale reinsurance markets, often securing more favorable terms and pricing than would be available through traditional insurers.
• Enhance Risk Management: Captive structures provide detailed claims data and insights, enabling organizations to identify loss trends and improve patient safety and quality management initiatives.
• Stabilize Costs: Captives offer a buffer against volatile commercial insurance pricing, allowing for more predictable budgeting and long-term cost control.

Today, approximately 75% of hospitals use some form of alternative risk management, with more than 60% of healthcare provider liability exposures funded through captives or other non-traditional vehicles. This trend reflects the growing importance of captives in managing medical malpractice risk.

Professional Liability in Captives

Professional liability coverage is also frequently placed in captives, especially for non-medical professionals such as accountants, architects, engineers, and consultants. The advantages include:

• Policy Flexibility: Captives enable organizations to craft policy language and limits that address the specific risks inherent in their profession, which may not be fully addressed by off-the-shelf commercial policies.
• Cost Efficiency: By retaining predictable, lower-severity claims and purchasing reinsurance for catastrophic exposures, captives can reduce the total cost of risk over time.
• Alignment with Risk Management: Captives incentivize robust internal risk management practices, as strong performance directly benefits the captive owner through retained profits and surplus distributions.

Combined and Layered Approaches

Some organizations use captives to cover primary layers of risk (such as the first $1 million of a claim), while purchasing excess coverage from the commercial market. Others may use captives to provide “gap” coverage for exposures excluded by commercial insurers. In both cases, captives offer the flexibility to blend self-insurance with external risk transfer in a way that best fits the organization’s risk appetite and financial objectives.  Premium thresholld for viability typically starts at $500,000. 

Both medical malpractice and professional liability insurance are frequently underwritten through captive insurance companies, particularly by organizations seeking to control costs, customize coverage, and retain underwriting profits. Captives have become a cornerstone of risk management strategies in healthcare and other professional sectors, providing a powerful tool for organizations to address their unique exposures while supporting long-term financial stability and operational resilience.