Repatriating Canada’s Blood Services Coverage

Canadian Blood Services (CBS), which has two wholly owned captive insurance companies – one in Bermuda and one in British Columbia – is planning to repatriate the entire amount of its Cdn$1 billion in reinsurance coverage into its B.C. captive.

CBS placed Cdn$750 million worth of its excess-of-loss reinsurance coverage into its B.C. captive in September 2006. Future plans include moving the remaining Cdn$250 million in primary reinsurance coverage, now placed in Bermuda, into B.C.

Weston Gale, the vice-president, general counsel and corporate secretary of Canadian Blood Services (Ontario), hinted at the CBS’ future direction when he answered a question at the Strategy Institute’s Canadian Captive Forum 2007 held in Toronto on Feb. 14, 2007. The questioner asked whether the CBS would consider merging all of its reinsurance into B.C., instead of splitting up its $1 billion between two captive domiciles. “That’s the next phase,” Gale responded simply. “Stay tuned.”

Gale noted that in 1998, when the CBS established its insurance captive, Bermuda provided the best available option to finance risk for a totally new blood service. “But for the Bermuda [reinsurance] markets, we couldn’t have done what we did back in 1998,” Gale said. “But times change, and we couldn’t have done what we did without B.C. this time. As times change, we look at different jurisdictions, seek out the particularities of what you want in coverage and find them in different jurisdictions around the world.”

The CBS is a federally incorporated, not-for-profit organization that took over Canada’s blood system in 1998. Its services include a total of almost 1 billion whole blood, platelet and plasma donations to more than 2 million recipients annually. It serves more than 750 hospitals from 41 permanent collection sites.

Risks for the CBS include blood pathogens tainting the blood supply, faulty manufacturing processes, the introduction of biologics and bio-pharmaceuticals into the system and the Canadian public (once again) losing confidence in the blood supply system.

FOUNDING THE CBS CAPTIVE

The CBS was founded after Canadian Red Cross, the previous administrator of Canada’s blood supply, was found to have used blood contaminated with hepatitis C between 1986 and 1990. The Red Cross was fined Cdn$5,000 for its role in the tainted blood supply; in addition, Allan Rock, the health minister in 1997, announced at that time that the Red Cross would not be participating in a new blood agency that ultimately became the CBS.

In 1998, courts in Ontario and Quebec approved a Cdn$1.2-billion federal-provincial compensation plan for victims of tainted blood, covering approximately 6,600 victims between the period of January 1986 and July 1990. In July 2006, Prime Minister Stephen Harper announced a further Cdn$1 billion for 5,550 people who contracted hep C, but who were not covered in the 1998 compensation scheme.The Krever Commission, which inquired into the tainted blood scandal, recommended a new, “no-fault” insurance scheme be established for the CBS. “That was not going to happen in this country,” Gale said, adding that CBS instead opted for insuring its risk by means of captive insurance arrangement.

At the time, B.C. was not an attractive captive domicile because of its regulatory restrictions, Gale recalled.

EARLY RESTRICTIONS

For example, the CBS in 1998 was looking into establishing a captive in B.C. that would provide nationwide insurance coverage for all blood agencies in Canada. But there were two separate blood services in Canada at the time – Hemo Quebec, working solely within the Quebec jurisdiction, and CBS, which sought to provide blood services and products in all provinces and territories outside of Quebec.

In B.C., captives can only write related-party business; pure third-party business is not permitted. Under these rules, therefore, CBS could only write business related to its own agency; it could not write business related to a ‘third party’ such as Hemo Quebec, which was an entirely separate agency. This restriction, in part, led CBS to consider establishing its captive in Bermuda.

Another factor leading the CBS to consider the Bermuda option was that the Canadian insurance industry had started to show signs of entering a “hard market” period, generally characterized by higher premiums and restricted coverage. “As you can imagine, after the (tainted blood scandal) tragedy, the commercial insurers were not particularly interested in the kind of risk we had to offer,” Gale observed. “They were not banging down our door to see if they could offer us coverage.”

The Bermuda market, on the other hand, “stepped up to the plate – they were very quick, very responsive, both from the perspective of the [local] regulator and all of the reinsurance markets,” Gale noted. This proved to be important, because CBS had to have its captive and reinsurance in place before it could start its new blood services. The CBS’s timeline to find reinsurance at the time was therefore very short.

CBS was able to take advantage of the fact that many reinsurers were based in Bermuda. Establishing a captive in that jurisdiction thus resulted in a kind of “one-stop-shopping” opportunity for reinsurance buyers. Over time, five Bermuda reinsurers ended up offering a total of Cdn$750 million in excess loss coverage.

Plus, “we were able to achieve some very unusual terms and conditions in the Bermuda market that were not available anywhere else,” Gale said.

When the CBS captive was first capitalized at Cdn$250 million, for example, Bermuda reinsurers offered a multi-year program – essentially a five-year program, with an option to renew for five more years. “There was no other jurisdiction that would offer us that kind of long-term coverage, which was very important to us,” Gale noted.

Also, Bermuda reinsurers agreed to terms that would allow the CBS to provide claims service in a controlled and timely manner. The agreement eliminated concerns about the legal repercussions of admitting liability, which typically cause governments to be slow in responding to claims, Gale observed. In its arrangements with Bermuda reinsurers, CBS confirmed it would not undermine its reinsurance coverage if it publicly admitted to making mistakes that resulted in a compromised blood supply.

In light of what happened with the Red Cross, Gale noted, “it was unacceptable in the previous environment for the operator not to be able to say, ‘We blew it, and we’re sorry.'”

CLAIMS CONTROL

Finally, the Bermuda reinsurers guaranteed CBS control over the claims even if the primary layer of coverage had been exceeded. “We had control of the claim,” Gale said. “The primary layer, which is managed by the [CBS’s] wholly-owned subsidiaries, manages the entire Cdn$1 billion of coverage, notwithstanding the fact that they were providing only Cdn$250 million of it,” Gale noted. “Should the primary layer determine that the excess layer [provided by the Bermuda reinsurers] should be accessed, then the excess layer would be accessed – a very unusual provision.”

But just as conditions favoured the Bermuda captive domicile during the CBS start-up in the late 1990s, they started to favour establishing a B.C. domicile after the World Trade Center bombing and the resultant hard market in the early 2000s.

For one thing, Hemo-Quebec was no longer part of the equation, as it was during the time CBS was first established. Thus, in this context, the B.C. jurisdiction’s restriction against third-party coverage no longer applied.

Second, Bermuda reinsurers faced a hard market cycle after 9-11, which meant that they were dealing with a lack of capacity. As a result, Bermuda reinsurers were starting to indicate that they didn’t have enough capacity to provide the CBS its Cdn$750 million in excess-of-loss coverage.

In the meantime, territorial and provincial governments in Canada agreed, because of the additional safety b uilt into the CBS system, it could bear greater risk for things that might go wrong with the blood system. In doing so, they recognized that the CBS captive prevented them from a great deal of liability to risk exposure.

Also, the CBS wanted to take advantage of a regulatory environment in which the regulator was knowledgeable about all of the players involved in Canada’s blood services system.

“The regulator in British Columbia was very open-minded about bringing this excess layer of coverage back to British Columbia,” Gale said, noting this translated into flexibility around capital requirements. “In Canada, the regulator was prepared to exercise a certain amount of discretion, recognizing how the system works. There were many intangibles we could talk to the regulator about that were understood.”

Of course, B.C. was the only jurisdiction in Canada that could license the captive. But, as Gale said: “It’s good for us to have a domestic solution. adian jurisdiction could do it. It was good to have a domestic solution that was acceptable to all stakeholders.”