By The Insurer
Ever-increasing severity claims and renewed underwriting discipline will see medical professional liability (MPL) pricing continue on its upwards trajectory for at least the next 18 to 24 months as carriers get to grips with a new market environment.
Rates rising by high single digits to 30 percent or more
Claims costs increasing at greater levels than ever seen before
Increased underwriting discipline rather than capacity withdrawal driving change in market conditions
Carriers putting down layers of $10mn or $15mn instead of the historic $25mn; ventilation of participation on towers more commonplace
Buyers increasing self-insured retentions to offset escalating cost of excess capacity
Tougher pricing environment expected to last until at least 2021
At the beginning of last year, MPL underwriters were facing up to a new reality where claims were on the rise, both in terms of frequency and severity, while the well of redundant reserves was beginning to dry up.
And while underwriters were hopeful of pushing up pricing, a surfeit of capacity prevented them from doing so. In the last 12 months however, the situation has changed, and underwriters are now imposing what in some cases have been hefty rate rises on clients.
For physicians, rates are going up in by single-digit percentages to “maybe a 10 percent increase”, Kirsten Beasley, head of healthcare broking, North America for Willis Towers Watson, told The Insurer.
But managed care errors and omissions business is seeing “profound” rate increases which, in some cases, are in excess of 30 percent, explained Beasley.
The senior care segment is seeing “pretty robust increases”, the executive added.
“[They’re] definitely double-digit and in some cases 25 percent and greater.”
“On the hospital side, it’s extremely variable. You can apply this comment to any segment really, but it’s extremely variable and highly dependent on risk-specific issues, particularly for loss affected accounts. For an account that’s had a wonderful year that’s not had a loss, is in a good [jurisdiction] and well structured, then it’ll be a 10 percent increase. For accounts that are loss affected, it depends and is highly variable,” Beasley explained.
Rate rises across the board
According to Terry Dreyer, senior vice president for healthcare at Allied World, “the entire market place is seeing increases”.
“I don’t think there’s a pocket within the market that’s not impacted by the current pricing appetite from carriers. It’s compounded by the fact that the universe of insureds has, on the whole, been shrinking since the Affordable Care Act.
Mergers and acquisition activity among the client base has had a significant impact on the MPL market, shrinking the pool of insureds.
Once standalone physicians are now working in practices, while some are also being employed by hospitals. That gives them the opportunity to purchase their medmal insurance through the hospital’s programme rather than as an individual. With private equity money making itself felt in the healthcare industry, there has also been M&A within the hospital industry itself.
“I think that with the exception of a couple of markets, all carriers are applying a more disciplined approach to insured programme structure. That’s looking at deductibles, limits, coverage, and pricing,” explained Dreyer.
Shelle Hendrickson, head of healthcare in Axa XL’s Bermuda insurance business, confirmed rates are on the rise, but said “increases are dependent on the risk, loss and jurisdictional prole of a given account”.
“However, on average rate increases are high single to low double digit. In some cases, clients have responded by increasing self-insured retentions in an attempt to offset the cost of excess capacity,” Hendrickson added.
Capacity deployment changing
Capacity actually remains plentiful in the marketplace, despite some notable withdrawals from the market in response to the deteriorating conditions
“While there’s still plenty of capacity available, how it’s being deployed is a bit different,” said Liz Spink, Lockton’s healthcare and higher education practice leader.
“Rates are going up, so pricing is changing and I think attachment points are shifting. The underwriting process is much, much more critical and detailed, and to the point of being invasive. That’s a strong word but for some of our larger healthcare systems and some of our senior living clients, it definitely feels different now than it has in the last 10 years…The level of data that [underwriters are] looking for is much heavier than it has been in recent years.”
While carriers are struggling with profitability on their medmal book, some are also taking significant reserve charges to offset deteriorating prior-year portfolios.
Medmal-focussed ProAssurance is one notable example, with the company having made significant moves in the past 18 months to address a deteriorating performance from its portfolio.
"There is active recalibration of pricing to more appropriately reflect an escalating exposure environment to arrest and reverse deteriorating results for insurers" - Shelle Hendrickson, Head of Healthcare at Axa XL's Bermuda Insurance Arm
On Wednesday (22 January), the company issued a profit warning to investors after confirming its fourth-quarter 2019 results will include an estimated $39mn of prior year adverse development in its specialty P&C segment owing to a deteriorating loss experience driven by its large national healthcare account.
Furthermore, the company is facing an expected fourth-quarter 2019 accident year loss ratio for its specialty P&C segment of between 134 and 148 percent.
Swiss Re Corporate Solutions is another that has struggled, with the company announcing its exit from US medmal business in August last year before selling some of its book to Berkshire Hathaway’s MedPro.
ProAssurance and Swiss Re Corporate Solutions are not the only carriers to have made moves to rehabilitate their medmal books, however.
“The healthcare industry is experiencing a sustained increase in frequency and severity of claims activity and there is a material trend of increased and evolving exposures, diversified risk and an overall inflation of claims indemnity and expenses over the last decade while rates have decreased or remained relatively flat,” Axa XL’s Hendrickson told The Insurer
“Healthcare carriers are justifiably and assertively assessing sustainability of current market conditions and there is active recalibration of pricing to more appropriately reflect an escalating exposure environment to arrest and reverse deteriorating results for insurers,” Hendrickson added.
The loss trends have unsurprisingly translated to deteriorating underwriting results across the market segment.
According to AM Best, the US medical professional liability market fell to an underwriting loss in the last three years that statutory data is available for, with a combined ratio of 102.3 percent in 2018. And the expectation is that the picture will not have improved once 2019 results are in for the line of business.
Underwriting discipline dominating
Beasley explained that the MPL market has been characterized by rising rates since last year, and the expectation is that trend will at least continue through 2020.
“This hard market is not characterized by substantial capital withdrawal from our space, even though there have been noted withdrawals,” said Beasley, adding: “This is really about underwriting discipline and rigor which makes it somewhat unique when compared with history.” - Kirsten Beasley, Head of Healthcare Broking, North America for Willis Towers Watson
Beasley continued: “[The market has] been marked by capacity cutbacks, not only because of the withdrawals from a couple of key markets, but also the practical cutback of capacity from the markets that are still playing in this space.
“Even though they might have historically had $25mn in capacity, and that might have been on all their sell sheets and literature, they’re only practically deploying at max $15mn of that. Whilst there are those carriers that are still willing to deploy their $25mn, the cost of that capacity is going up substantially. It’s coming at a price for our clients, and so we’re really encouraging our clients to buy their capacity in chunks of $10mn or $15mn.”
Largest carriers still offering higher limits
The US medmal market is dominated by a core group of major players. As AM Best data shows, the top 20 MPL carriers based on direct premiums written (DPW) accounted for 69.9 percent of the market in 2018, up slightly from the 68.4 percent in the previous year.
Berkshire Hathaway Insurance Group, which includes the medmal focussed MedPro, had the largest share with its $1.56bn of DPW in 2018. There was a significant drop off to second with The Doctors Company generating $690mn of MPL DPW in 2018, with CNA in third with $528.7mn. ProAssurance and Coverys were in fourth and fifth respectively with $474.8mn and $446.2mn of DPW.
Other significant market participants include Chubb, Liberty Mutual, WR Berkley, Axa XL, WR Berkley, and Allied World among others.
Sources said it was companies such as MedPro and The Doctors Company that were still prepared to put down $25mn lines on programmes, but that doing so came at a high price for buyers. Other carriers operating in the segment will no longer countenance putting down such hefty lines, instead offering $10mn or $15mn limits.
“In the environment today, there is a greater sense of syndication of risk and that is now being embraced and supported by brokers where before it was simply easiest to do it in blocks of $20mn or $25mn,” said Dreyer.
“Those clients that have lead $25mn layers, or bought towers with layers of $25mn, are now being broken up into layers of $10mn and $15mn,” said Willis Towers Watson’s Beasley.
“There are many more players taking a position on the tower as well,” added Beasley.
"The underwriting process is much, more critical and detailed, and to the point of being invasive" - Liz Spink, Lockton's healthcare and higher education practice leader
Some carriers, Spink said, remain willing to offer those $25mn limits, but it is also heavily dependent on jurisdiction.
“[If] you’re not in Cook County or Dade, you can still get your $25mn layer, [but] there have been several carriers that have pulled back and $10mn is the most they want to provide,” Spink said.
While fewer carriers are willing to provide $25mn layers, Aon’s Martha Jacobs, the broker’s national healthcare practice leader, said some insurers may instead take several positions on a tower, thereby “ventilating” their exposure.
“You might have a ventilated situation with a carrier coming in with $10mn to $15mn, and then skipping a couple of layers and putting another one in above,” explained Jacobs, who supports this approach from the carriers.
“[I remember] when carriers were on different programmes and had on an aggregate basis across the rm $75mn or $100mn, and that’s a big cheque to write,” Jacobs said, noting that “a $25mn layer is a big cheque to write too”.
“[Carriers are] looking at ways to minimise their exposure rather than looking at cutting that cheque. I’m a big fan of keeping limits at a more reasonable level, whether that’s $10mn or $15mn,” Jacobs added.
Deteriorating legal environment
Carriers’ changing attitude to the limits they are prepared to deploy owes much to what Hendrickson described as “a deteriorating legal environment”. As she explained, this has been fuelled by social inflation and litigation funding.
“Claims that historically settled for $10mn or $15mn are now spiking to $20mn and above,” said Hendrickson.
“At one point in time large settlements were a result of single claimant losses in high hazard jurisdictions or batch related claims but now we are experiencing increasing single claimant losses across low, medium and high hazard jurisdictions as well as batch related claims.”
High hazard jurisdictions, also known as judicial hellholes, are counties or states that are not aligned with principles of law or basic judicial tenets. These jurisdictions include New York City, New York; Cook County, Chicago; City of St Louis, Missouri; Philadelphia Country, Philadelphia; and Dade Broward, Florida; as well as entire states such as California, Louisiana, Georgia, and Oklahoma.
“With no perceived material tort reform in sight we expect that this claim environment will continue. That noted, the healthcare industry still enjoys a fair level of tort protection in several states,” said Hendrickson.
However, as Allied World’s Dreyer noted, even jurisdictions regarded as relative safe havens are no longer strangers to nuclear or mega verdicts.
“What’s driving [the] pricing shift is severity claims,” said Dreyer.
“It’s nothing new - the market has been talking about this since at least 2016. But those severity claims aren’t in the traditionally tougher venues, they are occurring in what were safe havens for cat losses in places like Iowa"
“That factor, coupled with the abundance of capacity out there, has created an environment where companies were getting tagged on these shock losses but they had no ability to maneuver around it. They only had a few options, one of which was to cut capacity. So they have tried to limit manage their way through it because risk selection alone doesn’t preclude you from a cat claim,” explained Dreyer.
These shock losses are a major cause for concern.
“Unfortunately for insurers and the actuaries, they’ve seen more mega and jumbo verdicts in the last 18 to 24 months than in the last 13 years combined,” said Lockton’s Spink.
“That’s certainly driving pricing changes and terms and conditions changes,” Spink added.
The key question is how can underwriters accurately price for a risk when the threat of a shock award is so strong.
Last year, a Baltimore, Maryland-based woman whose baby suffered permanent brain damage at birth won a $229.6mn malpractice judgment against John Hopkins Bayview Medical Center – the largest ever award of its kind.
While state law caps malpractice verdicts to $200mn, the award sent shivers down the spine of the medmal market knowing that it sets another dangerous precedent for potential future claims.
“The concern I hear pretty consistently from clients is that the jury pool is different now compared with how it has been in the last 10 to 15 years,” said Aon’s Jacobs.
There is a sense that loss trends are going up for a variety of reasons. One is the plaintiffs bar being increasingly well co-ordinated, and another that the jury pool is becoming more sympathetic to those taking a stand against giant, faceless corporations.
“The numbers that some of these claims are coming in at, the shock factor isn’t there any longer. There’s too much of a desensitizing of the jury pool, and the younger generation. They don’t feel a $40mn verdict is a big deal. There’s been a desensitizing to those sorts of numbers and it’s also leading to this creep of numbers going up higher. There’s also a more aggressive plaintiffs bar,” Jacobs added.
Unfortunately for the MPL market, the future does look too promising with the claims picture expected to deteriorate further.
Litigation financing – whereby parties can fund legal cases without paying for them in exchange for handing over a share of any future payout – has made it far easier for plaintiffs to go to court. With private equity firms and hedge funds having made moves into the litigation financing market, there is growing concern the number of lawsuits will increase further.
“I would expect for the claims activity to continue to be more severe and more frequent as we move through 2020 and into 2021,” said Hendrickson.
As such, pricing will continue to increase.
“I do think the pricing support will continue through to 2022 given the staggered carrier entrance in this space over the past 10 years,” said Dreyer.
The vast majority of players in this space don’t have a book size where they can afford to take a multitude of catastrophic losses at $20mn and not break stride,” he added.
“I think we’re at the beginning of what the new norm is going to look like in healthcare liability [and] I think we’ll see this [pricing correction] into next year,” added Spink.
Alternative risk solutions
With pricing in the commercial market on the rise, there is growing interest in captives or risk retention groups (RRGs), although these discussions are not yet materializing into a surge of formation of such vehicles.
“We’re having more conversations on risk nance solutions such as captives or RRGs. Whether they’re being fully implemented, it’s still too early to see as we’re on the cusp of this new market,” said Lockton’s Spink.
Willis Towers Watson’s Beasley said her company has also been having a growing number of conversations with clients about alternatives to the traditional insurance market.
“We have had a lot of inquiries and captive feasibility studies that we’re undertaking on behalf of our clients and in conjunction with them in varying segments. It could be single-parent captives, or group captive opportunities, especially in distressed areas,” Beasley explained.
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