How To Understand The Role Of The Captive In An Enterprise Risk Management Program

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Combined:

Transforming Risk: The Captive’s Role in

Sustaining an Enterprise Risk Management Program

Speaker:

Ruth Cardiello, Stamford Health System

Moderator:

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The Captive’s Role in Enterprise Risk Management

• What are the ERM “fundamentals?”

• Why captives are an ideal place to build an ERM foundation and framework

• Why captive boards of directors are the ideal stewards of Enterprise Risk

• How to construct an enterprise-wide ERM program inside the framework of

an existing captive structure

• What health care system ERM programs can teach us

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The Captive’s Role in Enterprise Risk Management

Defining

Risk

:

“Any event or action that will adversely affect an organization's

ability to achieve its business objectives and successfully

execute its strategy.”

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The Captive’s Role in Enterprise Risk Management

Risk Management

is:

“An analysis of the risks, internal and external, for which

insurance and/or self-insurance should be procured and the

administration of the claims management, loss control, and

safety management programs necessary to protect the

assets of the organization from loss.”

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The Captive’s Role in Enterprise Risk Management

Enterprise Risk Management

is:

Everything that

‘Risk Management’ is…but includes a further

analysis of all risks, internal and external, that may prevent an

organization from achieving its objectives. It is an integrated,

structured, and matrix-driven strategy aligning processes, people,

technology, and knowledge with the purpose of evaluating and

managing the daily uncertainties the enterprise faces.

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The Captive’s Role in Enterprise Risk Management

Climbing Over the Barbed Wire Within the Organization

Old Risk

Management

Paradigm

Remaining

Risks Within

the Enterprise

• Classic insurance risk

• Classic self-insurance risk

• Traditional captive

program risk

• Uninsured risk

• Risk not possible to insure

• Business risk

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The Captive’s Role in Enterprise Risk Management

Climbing Over the Barbed Wire Within the Organization

Old Risk

Management

Paradigm

Remaining

Risks Within

the Enterprise

An Enterprise Risk

Management

Program

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The Captive’s Role in Enterprise Risk Management

ERM is best addressed and evaluated through focused internal resources

ERM is a bi-product of a focused multi-disciplinary approach reflecting clinical,

financial, and business development risks inherent in operations

ERM is a integrative initiative that reaches into all aspects of the organization’s

operations

ERM is evolutionary...it is part of a continuous process of self-evaluation and change

ERM requires a strong board of directors involvement and supervision

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The Captive’s Role in Enterprise Risk Management

The Components of a Classic ERM Program

1.

Internal environment

:

how risk is viewed, how risk is assessed, ethical values,

and risk management philosophy

2.

Objective Setting

:

identify potential events affecting outcomes; setting objectives

that support and align with the overall mission and the entity’s risk appetite

3.

Event Identification

:

internal/external events affecting outcomes; identify risks;

identify opportunities

4.

Risk Assessment

:

analyzing risks; assessing how risks can be controlled; risk

assessment on an immediate or residual basis

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The Captive’s Role in Enterprise Risk Management

The Components of a Classic ERM Program

5.

Risk Response

:

selecting avoidance, acceptance, reduction, or sharing of risk by

specific area of operation

6.

Control Activities

:

procedures established to ensure risk responses are carried

out

7.

Information and Communication

:

relevant information identified, captured, and

communicated; communication flows down, across, and up the entity

8.

Monitoring

:

the ERM initiative is monitored and modified; it is a continual

evaluation and improvement process

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The Captive’s Role in Enterprise Risk Management

Why Should an ERM Program Have a Captive Focus?

Most captives are fully-consolidated subsidiaries…the good news and the bad impacts the

organization immediately.

Captives are adept at understanding what can (ought to) be insured or self-insured…ERM is

all about understanding balance sheet management and how to keep risk or transfer it.

Captive boards usually consist of multi-disciplinary talents…you need a broad business view

to control Enterprise Risk.

Most captives manage claims efficiently and professionally…expertise that is needed in the

ERM strategy.

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The Captive’s Role in Enterprise Risk Management

Captives Aren’t Static…Neither Is ERM

ERM is:

ERM is not:

A team endeavor; team members bring expertise from all key operational areas to the process

A system imposed from outside sources; a system limited to the evaluation of financial risk

Part of a dynamic, open organizational culture Part of a silo-oriented, non-dynamic culture Broad...encompassing all operational, business, and clinical

risk elements

Limited...encompassing only insurable risks and exposures

Strategic...forward-looking in both evaluation and outcomes over multiple fiscal periods

Static...evaluating risk only at a fixed point in time A continuous and evolving process; more than risk retention

(self-insurance) or risk transfer (commercial insurance)

A once-a-year exercise focused on insurance program renewals and related strategies

Part of the strategic planning process at its earliest stages Reactive to strategies already in place Designed to withstand scrutiny by outside evaluators and

regulators

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The Captive’s Role in Enterprise Risk Management

Redefining the Captive’s Annual Meeting to Include ERM

A captive’s

Annual

Meeting

The usual agenda

• approval of audit • election of officers • reinsurance renewal • actuarial report • claims report

An ERM agenda

• non-traditional business risk • reputational risk • regulatory risk • insurable vs.

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The Captive’s Role in Enterprise Risk Management

Asking the tough questions about what is insurable and what is not

Forcing the discussion about traditional versus non-traditional risk

Using an ERM risk discussion as a board education tool

Focusing the board’s attention on unpredictable, actuarially-volatile risk

Considering ERM in the context of a captive’s existing capital and surplus

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The Captive’s Role in Enterprise Risk Management

How Health Care Liability Captives Are Changing:

Accountable Care…forcing the amalgamation

of traditional risk management and ERM

programs within health care facilities…

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The Captive’s Role in Enterprise Risk Management

Health Care System Clients of Michael Maglaras & Company

Percentage of Employed Physician Exposures to Total Bed Equivalent Exposures

2001 to 2013

10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

31.7%

53.0%

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The Captive’s Role in Enterprise Risk Management

Medical Professional Liability...What’s the Current Model?

Medical Staff Hospital Employed Physicians Community Physicians Insurance Source: Commercial, Etc. Insurance Source: Hospital-Owned Captive Reinsurance

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The Captive’s Role in Enterprise Risk Management

Medical Professional Liability...What’s the Emerging Model?

Physicians ACO Hospital System Hospital Captive

- Physician reputational risk - Physician practice risk - Emerging regulatory risks

-Fewer defendant “pockets” for a single claim - Challenges to existing surplus

New ERM Risks/Exposures

Reinsurance Market

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Figure

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References

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