Healthcare Liability Trends and the Role of Captive Insurance

Healthcare liability, often referred to as "medical malpractice," refers to the legal responsibility of healthcare providers for damages or injuries resulting from negligence or failure to meet the accepted standard of care. Over the past several years, the risk landscape in health care has grown more complex, driven primarily by rising claim severity. While overall claim frequency has remained relatively stable in many regions, the size of individual verdicts and settlements has increased significantly—particularly in jurisdictions experiencing nuclear verdict trends. As a result, the cost of insurance coverage in the traditional market has risen significantly. Higher premiums, reduced capacity, and selective underwriting have made it more difficult for many providers to secure adequate coverage—particularly in excess layers—as several insurers have scaled back or exited the line entirely.

Lasting effects from the COVID-19 pandemic have further contributed to this environment. While no longer a public health emergency, the pandemic left behind operational and systemic challenges. Many physicians and nurses retired early or left the profession altogether, contributing to staffing shortages that persist today. Those who remain continue to face increased workloads, shorter visit times, and higher patient volumes. In parallel, the use of technology and telemedicine has expanded, introducing new liability exposures related to diagnostic accuracy, privacy, and quality of care. These pressures can increase the likelihood of clinical errors, contributing to more frequent and severe claims. In some jurisdictions, this has coincided with a rise in so-called nuclear verdicts, adding additional volatility to claims outcomes.

Another significant trend is the consolidation of healthcare systems and the changing structure of physician employment. The number of physicians working in independent practice has declined steadily over the past decade. According to the American Medical Association, just 46.7 percent of physicians remained in private practice in 2022. A 2023 report by Avalere Health and the Physicians Advocacy Institute found that, as of early 2024, nearly 78 percent of physicians were employed by hospitals, health systems, or corporate entities. As healthcare organizations take on more direct responsibility for clinical staff, they also assume greater exposure to risks such as employment practices liability, workplace conduct, and systemic failures.

Overlaying all of these developments are broader legal and social trends. The impact of social inflation, an increase in class action lawsuits, and a greater use of punitive damages have collectively driven up the cost of liability coverage across the board. In some cases, even providers with strong risk management practices find that commercial insurance pricing and availability are no longer aligned with their actual risk profile.

In response, many healthcare providers—ranging from hospital systems and physician groups to nursing homes and specialized care organizations—are turning to captive insurance solutions. Captives allow these entities to finance their healthcare liability, medical malpractice, and medical stop-loss risks (such as provider excess loss) in a more controlled and strategic way. In addition to cost savings over the long term, captive insurance can offer greater transparency, improved alignment between risk and capital, and the ability to tailor coverage to specific organizational needs. In today's environment, these benefits are increasingly valuable.

Managing Healthcare Liability Through Captives

Healthcare organizations face a wide range of liability exposures. Among the most common traditional risks are the following.

• Medical malpractice and professional liability
• General liability
• Cyber-security and data breaches
• Regulatory and compliance risks
• Workers compensation
• Property damage

In addition to these well-established risks, emerging exposures are becoming increasingly important in healthcare risk management strategies. These include the following.

• Telemedicine and virtual care
• Pandemics and infectious disease outbreaks
• Artificial intelligence (AI) liability in diagnostics and treatment planning
• Supply chain disruptions, particularly in pharmaceuticals and critical equipment
• Reputational risk stemming from social media or public scrutiny
• Tax exposures related to restructuring, nonprofit/for-profit models, and alternative risk funding arrangements

"Specifically, within the healthcare space, we have seen large hospital systems form captives to better control their risk management through tailored coverages," said Lori Gorman, deputy commissioner of the North Carolina Department of Insurance.

Captive insurance companies—wholly owned subsidiaries formed to insure the risks of their parent organizations—offer a strategic alternative to commercial insurance or pure self-insurance. In the healthcare sector, captives provide flexibility in coverage design, better alignment with internal risk management goals, and potential long-term cost savings.

"There's a long tradition of captives underwriting the risks of hospitals and physicians, dating back to the early 1970s," said Michael Maglaras, principal of Michael Maglaras & Company. "That's because healthcare liability risk generates a profound amount of premium and claims in the commercial market."

Captives are particularly well suited to underwriting healthcare liability risks because they allow for program customization, facilitate cost efficiency, and provide access to global reinsurance markets. In addition to financial advantages, captives can support improved organizational control through risk retention, loss prevention programs, and data-informed decision-making. Some healthcare captives also directly fund patient safety and quality improvement initiatives—such as clinical risk audits, staff training, or surgical checklist programs—that reduce the likelihood of claims and improve long-term outcomes.

Anne Marie Towle, CEO of Global Risk and Captive Solutions at Hylant, noted, "Captives are uniquely suited to cover professional medical malpractice insurance and are designed to be customized for each hospital or physician group. Many healthcare organizations have utilized captives for decades and access reinsurance capacity through various markets around the world. There is good, predictable data to rely upon in designing a program suited to cover healthcare risks."

How Captives Help Address Today's Healthcare Liability Challenges

Healthcare organizations are navigating a complex and evolving liability landscape. Ms. Towle identified six primary areas of concern currently facing providers: patient safety, data security, regulatory compliance, financial pressures, workforce-related issues, and operational inefficiencies.

Breaking these down, Ms. Towle said that patient safety risks stem from medical errors and healthcare-associated infections. Data security involves increasing cyber-security threats and the potential for data breaches. Regulatory compliance requires staying abreast of evolving laws and avoiding penalties for noncompliance.

She added that financial risks relate to managing healthcare costs and insurance claims, while workforce challenges include ongoing staffing shortages and provider burnout. Operational inefficiencies, she noted, often arise from workflow disruptions and difficulties in integrating new technologies.

"Addressing these challenges requires a comprehensive risk management strategy that includes continuous monitoring, staff training, and investment in technology," said Ms. Towle.

The biggest issue healthcare providers encounter is the increase in claims severity, said Mr. Maglaras. That is translating into large medical malpractice damage awards, he said—often reaching seven to eight digits.

"When medical malpractice damages are bad, they are very bad," said Mr. Maglaras. "So much so that individual damage awards are now so severe that they're reaching the reinsurance layers.

"The impact of claims severity on acute or hospital care ripples all the way through the system, including the likes of nursing home care. That's because plaintiffs' counsel who are successful in bringing medical malpractice action against hospitals will try to do likewise with other organizations and professionals further down the chain, particularly in states where tort reform doesn't currently exist."

Tim Mosler, principal and consulting actuary withPinnacle Actuarial Resources, said that the large jury verdicts have been driven by anger, frustration, and mistrust of healthcare systems. These big awards, he said, tend to impact hospitals more because they have higher limits and capital available to them.

There has also been a spike in sexual abuse and molestation verdicts and settlements in recent years, especially among academic medical centers. The severity of these claims has, in some instances, resulted in multimillion-dollar payouts that exceed available insurance tower limits, leading many insurers to exclude this type of exposure.

"More recently, as the market continues to harden, many businesses, including hospital groups, have placed their cyber liability, physicians liability, as well as other liability coverages within their captive to better manage their risks with tailored coverages and to control costs," said Ms. Gorman.

Emerging risks are also shaping the liability landscape. These include telehealth, robotic surgery, and cyber exposures—particularly ransomware attacks and the use of AI in preliminary diagnosis. Another area of concern is liability risk related to the clinical use of psychedelic therapies, including emerging applications in behavioral and mental health treatment.

"Increasingly, healthcare entities are expanding the use of their captives to cover a broader range of deductibles and retentions, including property and medical stop loss, which serves to reduce the volatility of the total losses by smoothing the impact of short-tail losses using long-tail liability loss funding," said Bruce Whitmore, director and senior consultant for captive and insurance management solutions at Willis Towers Watson. "We are also seeing captives being expanded to take on ventilated layers and quota shares to reduce the cost of commercial risk transfer."

Captive Insurance Structures in Health Care

Healthcare organizations use a variety of captive insurance structures, depending on their size, risk profile, and strategic goals. While single-parent captives and risk retention groups (RRGs) are the most widely used, other arrangements—such as cell captives or risk pooling ventures—may also be considered in specific contexts.

Single-parent captives are typically formed by larger healthcare systems that generate sufficient premium—often exceeding $2 million annually in casualty lines—and want greater control over claims handling, risk financing, and loss prevention. These captives are wholly owned subsidiaries that insure the risks of their parent organization.

RRGs, created under the federal Liability Risk Retention Act of 1986, offer an alternative structure for covering liability exposures. They are often used by smaller physician groups or regional healthcare entities that lack the scale for a stand-alone captive. RRGs allow like-minded healthcare organizations to pool liability risks and operate across state lines, though they are limited to writing liability coverages.

"The type of arrangement to use is strictly based on and customized to each client," said Ms. Towle. "Some join with others in the healthcare industry to form a group arrangement or a risk retention group captive. Some systems that are large enough with their risk will establish a single-parent captive or rent a cell. It truly is specific to the amount of premium and risk retained by a healthcare organization."

Risk pooling arrangements are sometimes used in the healthcare sector to manage liability exposures across multiple organizations, particularly in contexts like long-term care or aligned specialty groups. While traditional group captives are more common in other industries, healthcare entities may occasionally pursue collaborative risk financing strategies through structures like risk retention groups or tailored joint ventures. "There are strong reasons for hospitals to pool their risk in a group structure," said Mr. Mosler. "On the one hand, they can reduce their individual exposure through collective scale. On the other hand, they also take on the risk of other participants' claims, which can present challenges."

Cell captives, including protected cell and series structures, are emerging as viable alternatives for smaller healthcare organizations or those entering the captive space gradually. These models allow organizations to rent access to an existing captive facility, offering benefits like lower start-up costs and shared infrastructure without full ownership.

Captive Benefits in Health Care

Several key benefits come with using a captive to insure healthcare liability risk.

• Focus on risk management: Captives enable organizations to adopt a more proactive and integrated approach to managing their risks, including healthcare liability, by designing and controlling their own insurance program.
• Tailored coverage: Captives allow for customized insurance solutions that can address unique exposures or emerging risks—coverage that may be unavailable or prohibitively expensive in the traditional commercial market.
• Increased flexibility: Captives provide greater flexibility in funding structures, risk retention levels, and policy terms, helping organizations align risk financing with their operational needs and tolerance for volatility.
• Potential cost savings: By retaining risk and recapturing underwriting profits, healthcare organizations may reduce total cost of risk, including insurance premiums, brokerage fees, and frictional costs built into the commercial market.

Sara Brundage, partner at Honigman LLP, said that captives allow healthcare providers to tailor insurance coverage to their unique risk profiles—coverages that may not be available through traditional insurers, or that may only be offered at higher premiums for less favorable terms. She added that captives can also help control overall insurance costs by reducing premiums and recapturing underwriting profits.

Ms. Brundage noted that captives often provide access to more favorable, manuscripted policy terms—custom-negotiated language that may be accepted by reinsurance markets but unavailable in the commercial market. Captives also reduce dependence on volatile commercial insurers, particularly during hard market conditions, she said.

She explained that captives have already played a critical role in helping healthcare organizations respond to evolving liability risks. For example, they have extended coverage to pandemic-related losses during COVID-19, secured comprehensive cyber-liability programs when commercial insurers limited capacity or raised premiums, and expanded coverage to address certain criminal acts following the Dobbs decision.

In addition, Ms. Brundage said that some captives have been customized to cover cross-state practice exposures and documentation challenges related to telehealth. Others have been specifically formed to address high-severity specialty risks that are often excluded from traditional malpractice insurance.

Mr. Whitmore said, "Captives replace inefficient tranches of risk and, compared to traditional deductibles and retentions, help ensure that funds are available to satisfy verdicts and settlements as they come due. In addition, the financial accountability and governance requirements of captives promote more strategic and holistic risk financing across the healthcare enterprise.”

Leading Domiciles for Healthcare Liability Captives

Lloyd's of London has been one of the largest capacity providers for medical malpractice coverage since the early 1970s. Its long-standing relationship with the healthcare sector has played a vital role in the establishment and continued growth of healthcare liability captives—particularly as claim frequency and severity have increased over time. In 2020, Lloyd’s wrote approximately $600 million in healthcare liability insurance.

The Cayman Islands represent one of the most prominent offshore domiciles for healthcare captives. Medical malpractice is the primary class of business, with 136 registered companies accounting for $3.2 billion in premiums written as of the third quarter of 2024. Bermuda has also emerged as a key jurisdiction, with healthcare captives making up approximately 10 percent of its registrations.

US domiciles—such as Vermont, North Carolina, and Utah—continue to serve a significant and growing share of the healthcare captive insurance market, particularly for organizations seeking domestic regulatory familiarity. Other US domiciles have also played an important role, particularly in supporting physician groups, regional health systems, and long-term care providers. Their proximity to domestic markets, flexible regulatory environments, and responsiveness to healthcare sector needs have made them valuable partners for a wide range of captive insurance strategies.

Phases of Healthcare Liability Risk Management

There are several key steps that healthcare organizations can take to mitigate liability risk, generally falling into four phases.

First, organizations must identify and assess the full spectrum of risks they face, including clinical, legal, operational, and reputational exposures.

Second, they should implement preventive measures and corrective actions to control those risks. This may involve protocol development, policy revisions, staff training, and investments in risk-reducing technologies.

Third, a comprehensive enterprise risk management (ERM) framework should be established and supported by a robust, organization-wide strategy. This ensures cross-functional alignment and clearly defined risk ownership.

Fourth, continuous monitoring and improvement are essential. Risk management plans must be regularly evaluated and updated in response to new data, adverse events, or regulatory changes.

Across all phases, particular emphasis should be placed on patient safety and legal exposure. By leveraging industry data and applying modeling techniques—such as Monte Carlo simulation—organizations can evaluate liability scenarios and more accurately estimate their potential financial exposure.

Trends Driving Growth in Healthcare Liability Captives

Several factors are contributing to the continued expansion of healthcare liability captives.

• Ongoing premium increases in the commercial insurance market
• The rise of telemedicine and digital health
• Healthcare mergers and acquisitions, which create more complex and varied risk pools
• Increased attention to reputational risk within healthcare organizations
• The emergence of artificial intelligence in clinical settings, requiring customized liability policies

"I believe that captive coverage for healthcare liability risks will only continue to expand," said Mr. Mosler. "As verdicts and premiums increase and traditional insurance markets decline coverage, that trend will gather pace."

Joe Rosenberger, chief captive analyst at the North Carolina Department of Insurance, said, "We anticipate growth in healthcare captives as organizations seek greater control over rising liability costs and emerging risks like AI-driven diagnostics, telehealth exposures, and privacy concerns.

"In North Carolina, our regulatory framework is built to support innovation. We expect to see more alternative structures, such as series captives and cells, used to address specific, niche healthcare risks in a cost-effective way."

Recent data underscores this trend. In 2024, Vermont licensed 41 new captive insurance companies, marking one of its top growth years since 1981. Health care was among the leading sectors, contributing significantly to this expansion. Currently, healthcare and manufacturing together account for approximately 30 percent of Vermont's diverse captive portfolio, driving steady formation activity.

On a global scale, Marsh's 2023 Captive Landscape Report indicates that casualty premiums—including medical malpractice—increased by 14 percent among Marsh-managed captives. Additionally, employee benefits, such as medical stop-loss coverage, account for about 20 percent of Marsh's global captive portfolio, highlighting the central role of healthcare-related risks in driving captive insurance growth.