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These Three Trends Could Dramatically Drive Up Healthcare Liability Rates

Healthcare organizations under cost-containment pressure don’t want to see premiums rise, but increased risk, costly claims, and stagnant rates threaten to destabilize the insurance market.
By: | July 2, 2018 • 5 min read

In an environment shaped by shifting economics and uncertainty surrounding the fate of the Affordable Care Act, hospitals and health care providers of every size and type are under pressure to deliver high quality care at the lowest cost. The carriers who insure them have to offer coverage that meets providers’ expanding needs, all while facing similar economic constraints — in addition to ongoing soft market conditions.

No one wants to see their rates go up, especially hospitals and health care providers with good loss histories. But even the best-managed risk is not immune to macro market trends.

“Healthcare organizations understandably don’t want to see premium increase, and insurers are eager to retain business despite rising losses and increasing exposure. That pattern is not sustainable over the long term,” said Lainie Dorneker, president of IronHealth, Ironshore’s healthcare unit.

The struggle to profitability underwrite health care professional liability risk has already driven a few large insurers to exit the market, leaving fewer choices for customers.  Without meaningful pricing correction across the board, the market risks destabilization.

Three trends in particular make rising healthcare liability rates a necessity:

1. Health care providers’ changing risk profiles make them more difficult to insure.

Consolidation, advancing technology and longer patient lifespans all introduce more risk for healthcare organizations.

According to consulting firm Kaufman Hall, a record 115 health system mergers or acquisitions took place in 2017, and 30 have already taken place in the first quarter of 2018. Hospital mergers, acquisitions of independent physician and specialty practices, and strategic partnerships across the healthcare sector help those organizations stay competitive, but they also build aggregate risk for insurers.

“Such actions have served to heighten the duration and magnitude of health care organizations’ risk profile,” Dorneker said.

Healthcare facilities now carry more risk than ever before.  Hospitals continue to expand their scope of services, and they also employing more and more physicians.  This increased exposure growth, on its own, puts pressure on hospital’s self-insured retentions.   But the fact that the physicians’ independent insurance limits are no longer available effectively erodes the attachment point of commercial insurance.  Moreover, the cost of medical care, which is the fundamental measure in life-care plans, has increased approximately 4 percent.

“Even with significant exposure increase and the rising cost of medical care, self-insured retentions have remained relatively constant since 2002. This erodes the utility of the retention and increases the coverage demand on the organization’s lead liability insurer,” Dorneker said.

2. Severe claims are happening much more frequently.

Lainie Dorneker, President of IronHealth, Ironshore’s Healthcare Unit

While claim frequency has remained fairly stable, severity is trending upward.

“The frequency of claim severity, especially related to eight-figure losses, has risen dramatically,” Dorneker said.

Savvier plaintiffs’ bars, jurors’ lottery mentality, litigation funding, batch claims, and advanced medical technologies are all factors converging to drive up claim costs. Average payouts for medical professional liability claims have reached an all-time high; the highest settlements have reached more than $100 million.

“Plaintiffs’ attorneys will often use a ‘profits over people’ argument to foster the idea that healthcare providers care more about saving money than they do about saving lives. They position their client as the victim of a greedy corporation in order to garner higher settlements or awards,” Dorneker said.

Ironshore’s recent study of hospital professional liability loss trends indicates that the frequency of closed claim counts with financial greater than $5 million is increasing by 10 percent every year, while the frequency of closed claims with financials greater than $10 million has risen 7 percent.

While the overall frequency of claims relating to a single incident has remained stable, the frequency of related claims — or “batch claims” — is on the rise. Batch claims result from separate but similar incidents that injure multiple patients and are attributable to the same act, error, or omission or to related acts, errors, or omissions.

Allegations may involve a single surgeon who performed dozens of unnecessary procedures “for profit,” or a single piece of malfunctioning equipment that caused harm to multiple patients. Ultimately, juries may find healthcare organization to be directly negligent or vicariously liable for such incidents.

3. Eroding loss ratios threaten the viability of some health care liability carriers.

As claims with paid indemnity increase, the allocated loss adjustment expenses (ALAE) have increased as well. According to Ironshore’s analysis of healthcare liability claims, “claims with indemnity reflected 55 percent of total claims in 2006 and reached 66 percent of total claims in 2013.  Comparatively, the paid ALAE ratio was 24.5 percent in 2012, a 2.9-point increase from 21.6 percent in 2006.”

Inflation is partly responsible for the rising costs of adjustment expenses. The overall consumer price index for medical care has increased by about 2 percent annually, while the cost of medical care has increased by about 4 percent. Combined with the resistance to raising premium rates, higher ALAE have contributed to poorer loss ratios.

“Many hospital professional liability carriers’ gross ultimate loss ratios are over 100 percent on a current accident year basis,” Dorneker said.  “Many healthcare providers’ premium rates have not been adjusted for general inflation, much less medical cost inflation. So even rates that have remained flat have, in effect, decreased. That trend is not sustainable in today’s environment.”

Work with Best-In-Class Insurers for Long-Term Success

Challenges facing the healthcare professional liability market reflect the broader insurance industry landscape. The triple-threat of Hurricanes Harvey, Irma and Maria, the California wildfires, and a devastating earthquake made 2017 the costliest year on record. Event-related claims could be as high $135 billion.

In the traditional insurance cycle, rates typically rise after such a CAT-heavy season. But the traditional cycle is broken. With very few exceptions, rates across all lines have barely budged.

“Prior-year reserves are drying up, and calendar-year losses are impacting balance sheets,” Dorneker said.

Given these challenges, hospitals and health care organizations need insurers that are in it for the long haul. Carriers will need to work directly with brokers and clients to educate them about trends that may impact their premiums, prepare them for changes, and reaffirm the strength of coverage and services they’ll receive in exchange.

“Through proactive management of our portfolio and a diverse suite of products, IronHealth is well-positioned to navigate these challenges,” Dorneker said. “We aim to provide best in class products and claims services along with market stability that benefits both insurers and insureds in the long run.”

To learn more, visit http://www.ironshore.com/healthcare/

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Ironshore. The editorial staff of Risk & Insurance had no role in its preparation.





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Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.