Healthcare organizations, already under financial pressure from the changing reimbursement system, now face a hardening D&O liability insurance marketplace. In this article, CRC offers insights on how retail agents can help their insureds navigate the difficult environment.
Hardening in the overall marketplace for directors and officers liability insurance is becoming a particular problem for hospitals and other healthcare facilities. As underwriters seek to increase rates and tighten terms and conditions on public and private company D&O [read more about the changing D&O market overall in CRC Group’s D&O State of the Market], many healthcare organizations face a double-whammy. Not only are their balance sheets under financial pressure from a changing reimbursement system, but healthcare firms also must cope with higher costs for coverages they need to keep delivering care.
A hardening management liability market has not occurred in nearly 20 years. The last truly hard market for D&O was between 2001 and 2003, when rates for all classes of business increased. But the current marketplace is somewhat different. Insurers are showing varying appetites, making decisions on an account-by-account basis. Some insurers are renewing accounts but adding or changing certain exclusions, such as bodily injury/property damage, bankruptcy, or antitrust regulation. A few markets are aggressively seeking growth in certain classes while walking away from others unless they can get the desired rate.
Private companies at renewal in most states can expect to see 5% to 15% increases for D&O coverage, depending on geography. Some particularly litigious venues around the country are prompting insurers to seek rate hikes of 25% to 30%. In general, classes of business such as surgical centers and allied health facilities are less difficult to place than rural, private and nonprofit hospitals. For the majority of accounts, exploring the marketplace is necessary to obtain the broadest coverage and best pricing.
Symptoms of Bigger Problems
The main issue for many healthcare accounts relates to patients. Many rural, private and nonprofit hospitals are struggling to increase the number of patients they serve. At the same time, changes in the reimbursement system introduced by the Centers for Medicare & Medicaid Services (CMS) are making it more difficult for such facilities to maintain their revenue.
According to the National Rural Health Association, 35% of hospitals generally operate at a financial loss. NRHA notes that 69% of rural hospitals have negative net operating income, and Medicare reimbursement reductions are causing hospitals to close their doors (source).
Major reasons for these trends are regulatory and demographic. First is a momentous shift from fee-for-service healthcare to value-based healthcare nationally, evident in the reduction in treatment reimbursement rates from Medicare and Medicaid. Second is a growing concentration of older patients in rural areas who require increasing levels of care and, for some, negative outcomes that can trigger litigation. With more pressure on limited resources, many rural, private and nonprofit hospitals are experiencing financial stress.
Financial stress in healthcare can cause a downward spiral leading to lower care quality, greater risk of lawsuits, and eventually to bankruptcy, a merger or an acquisition. For some hospitals, their local communities will not allow them to go under, floating a bond offering or providing local financing. This response, while well-intended to preserve an institution’s place in the area’s economy, tends to prolong the hospital’s problems because its operations are unsustainable.
Losses Driving Rates
Hospitals’ operating conditions aside, losses on claims continue to drive rates in the healthcare D&O marketplace. No single source of loss appears to be responsible for insurers’ move to raise rates, but rather a variety of losses are appearing across the healthcare space.
Private company D&O policies typically include coverage for employment practices liability, with separate retentions for EPL claims. A sharp increase in lawsuits alleging gender discrimination and sexual harassment in various industries is also hitting the healthcare sector in D&O. This is driven in part by the #MeToo movement of victims reporting sexual misconduct. Other sources of loss include concern about organizations’ failure to maintain adequate data security, and some hospitals are seeing more lawsuits involving opioid painkillers. As a result, more underwriters are imposing sublimits on harassment or misconduct claims and outright exclusions on activities involving opioids.
Antitrust claims are another area that D&O insurers are watching closely. Some regional and large hospital chains have been the target of antitrust lawsuits accusing them of anticompetitive behavior (source). Among these are health systems in California, North Carolina and Washington state. Federal antitrust law provides for treble damages, which raises the stakes for hospitals that are already under pressure and creates an incentive to settle such cases (source).
Behind the loss trends is a longer-term deterioration of profitability for liability insurers. During the past five years, D&O liability premiums have grown modestly, but they have been outpaced by increases in losses and loss containment costs. According to A.M. Best Company, in 2014 the P&C industry’s direct loss and direct cost containment ratio was 58.4%, compared with 66% in 2015, 65% in 2016, nearly 80% in 2017 and more than 73% in 2018. Direct written premium in D&O between 2014 and 2018 only grew 3%, to $6.6 billion (source).
What Agents Can Do
Retail agents can help their insureds in the healthcare industry by taking steps that include:
- Starting the renewal process early. Complex, changing marketplaces take time to navigate. Gathering the necessary documentation early can help make coverage conversations more productive.
- Knowing the organization’s financial condition. Financial statements are a key concern in the underwriting process, so having clarity on those is essential to discuss coverage options.
- Understanding the organization’s future course. Can the healthcare institution survive independently, or is it likely to require outside capital, or a partner that will merge with or acquire it? Consolidation is occurring in healthcare, as well as other industries, but underwriters generally will insist on increasing the retention for accounts contemplating a merger or acquisition.
- Bringing more narrative to the financial story. The more detail an account can put into a submission, the greater its chances of getting consideration from underwriters. Presenting a compelling story about an organization’s risk profile can help in obtaining more favorable rates, terms and conditions.
- Working with a specialist. A knowledgeable wholesale partner is a valuable guide to navigating the insurance marketplace. A specialist wholesaler’s technical expertise, experience with market cycles and close market relationships often make a difference in getting the best value for premium.
As healthcare industry financial pressures continue, D&O underwriters are reacting, which is causing insurance market changes for many healthcare organizations. Retail agents should prepare their insureds to see potentially steep rate increases, tighter coverage terms, and reduced capacity. Finding the best coverage in any evolving marketplace is challenging. A specialist partner with experience in healthcare D&O risks can ensure better financial outcomes.
For more information, please contact your CRC Group producer.
- Ed Antonucci is a Director in CRC’s Chicago office and member of the ExecPro Practice Advisory Committee.
- Bob Allen is President of Pro Praxis Insurance, an independent underwriting management company that is a division of CRC Group.