5 Hard-Market Health Care Sector Considerations — Other Than Price
When risk managers and their insurance partners find themselves in a hard market, characterized by severe limit restrictions and sharp premium price hikes, it’s hard not to focus on price.
After all, much energy is expended on the part of actuaries, brokers and underwriting executives on selecting the right price for the risk.
And when premium prices jump the way they are now, with some lines seeing 100% increases, that focus can become even more consuming as the cost becomes more and more painful.
That being said, according to Shep Tapasak, senior vice president of specialty underwriting with ProAssurance, there are several other important considerations, other than price, as some lines transition into a hard market and organizations seek to protect their capital.
Consideration 1: Coverage Restrictions and Exclusions
Keep in mind that Tapasak and his specialty underwriting colleagues at ProAssurance have a dedicated focus on health care. That’s a broad field, representing 17% of the economy, but life sciences, health care professional liability and senior care are in that underwriting mix.
As we sailed through a decade of soft markets, characterized by ample capacity and low premium prices in the vast majority of lines, carriers were pushed into a “coverage creep” dynamic, as Tapasak described it.
Fighting for market share in the soft market, the carriers offered add-ons to existing policies.
Cover such as cyber, patient evacuation and legal services were added on as deal sweeteners as carriers, ProAssurance included, sought to differentiate themselves from their competitors.
Now, much of that is changing.
Using cyber as just one example, the standalone cyber product is much more evolved than it was eight or nine years ago. So, a hard market means that kind of cover is no longer being as widely offered as an add-on.
In another example, as a pandemic rages, pandemic exclusions are being written into policies, and patient evacuation in senior care, previously an add-on, is no longer treated as such.
“So, we’re definitely seeing the pandemic exclusions,” Tapasak said.
“And, then, on top of that, we do all concern ourselves with whether there might be another wave of the virus. It all just creates a high degree of uncertainty for our industry.”
Consideration 2: Tightening Limits
According to Tapasak, in the health care space, what excess and surplus carriers are willing to offer in their strata of coverage is very much in flux.
As recently as a year ago, Tapasak said an excess carrier seeking to be part of a health care organization’s general liability or professional liability towers might offer limits of $20 million.
There is a lot of uncertainty now, but the same carrier might only be willing to offer a $10 million limit for the same group’s tower.
For large groups seeking large limits, the situation is even tougher, and brokers are scrambling.
“Where I think the industry will have some issues are at the hundred million and up level because the capacity has shrunk down dramatically,” Tapasak said.
Consideration 3: Increased Use and Size of Deductibles
Large physician groups that might have been accustomed to first-dollar coverage are going through some changes due to these uncertain times, Tapasak said.
That’s not necessarily a bad thing.
It’s a risk management axiom that insureds which have some skin in the game and are willing to take sizable risk retentions tend to see better frequency and severity results.
That’s because they’re not passively transferring risk for premium dollars; they’re taking an inquisitive and active role in how their operations manage risk.
“So we’re definitely expecting to see more large medical groups move to large deductibles or retentions,” Tapasak said.
For even larger health care organizations, say hospital systems, Tapasak said insurers are no longer willing to trade premium dollars for loss dollars.
In some of the more challenging legal jurisdictions, such as Baltimore, Cook County, Ill., or Southern Florida, carriers insuring health care liability risks want little to do with insured retentions that are well below loss histories.
“Agents are working very hard to try to reduce the impact of premium increases, so we’re seeing some significant increases in retentions across the board for pretty much all types of hospital groups,” Tapasak said.
Consideration 4: A Move from Admitted to Surplus Carriers
This consideration in Tapasak and ProAssurance’s health care practice applies more to small- and medium-sized physician’s groups than it does to large hospital systems.
More modestly sized physician groups that have relied on admitted insurers in the past 10 years now find themselves pushed by the hard market into the embrace of the excess and surplus insurers.
For practices hectored by troublesome loss histories, this is not necessarily the end of the line.
“For the most part, this would be exposures and groups where the experience has been maybe problematic or there is some outlying type exposures that the admitted carriers are saying they’d rather not venture into that area,” Tapasak said.
“And that’s one of the good things about excess and surplus—it allows for a greater degree of flexibility in addressing evolving exposure. So, it’s actually kind of a positive in my view,” he added.
Consideration 5: Occurrence-Based Coverage vs. Claims-Made Coverage
This consideration is more of an actuarial practice nuance, but Tapasak said it could be coming into play for some health care organizations.
During soft markets, for more innocuous risks, underwriters will offer occurrence-based coverage.
That means they promise to pay claims for incidents occurring while the policy was in place. Claims-made coverage, as its name implies, offers coverage only for claims made while the policy was in place.
Think of it as a defensive tactical move on the part of the carriers.
“So it is possible that we’re going to start to see some of this occurrence coverage move back to claims-made again,” Tapasak said.
“It’s not necessarily a restriction. It just makes actuarial estimates a little easier, because you’re putting a bit more of a wall around your reporting features,” he said.
It’s also a bulwark against the dreaded “batch” claims health care risk managers face.
Let’s just say a surgeon uses an infected robotic medical device and harms 50 patients in the span of a month. On an occurrence-based policy that could mean the carrier is on the hook for all 50 cases, regardless of when they are alleged by the plaintiff or reported as claims by the health organization.
The bottom line, whether it’s in health care or any other sector, is that liability lines are going through a major adjustment. They’re being buffeted by social inflation and a pandemic; all this while adjusting to years of underpricing due to soft markets.
The considerations Tapasak points to aren’t novel; they’ve been employed before during other market swings.
But they are useful levers for insureds and their risk management partners to lean on in their attempt to shield their capital from market forces that are in a state of volatility.
Here is Tapasak again, with that veteran specialty underwriter’s perspective: “If I’m operating an underwriting loss during a soft market and I want to improve my results, I can certainly focus on getting more premium for the same exposure, but that’s only one tool in the tool box,” he said.
“The other tool is focusing on ways to reduce and better predict my loss costs. So essentially, both areas help to translate to improved financial results.” &