Why a harder market is expected for healthcare risks in 2013
As we enter 2013, there will be a great deal written about what to expect in the coming year with respects to Property & Casualty (P&C), Professional Liability and other crucial insurance coverage premiums for the healthcare industry. Brokers, insurance carriers, lawyers and consultants will all weigh in on their expectations for the coming year. These opinions can be valuable, however they often begin to sound the same. While I risk simply becoming another “voice” in this plethora of opinions, I do have some idea as to what 2013 has in store for healthcare risks.
These opinions are not meant for mega-health systems that have entire departments working on the risk management and insurance issues faced by their respective organizations. Those firms are well positioned to meet many of the challenges that lie ahead and almost always have numerous risk management experts chasing them to offer their advice and services. Rather, I hope to offer some insight and an opinion to providers, large and small, who do not have the extensive resources that many of the larger organizations can access.
In short, after a sustained “soft market” and pricing competition for almost all areas of P&C coverage, this trend has come to a rather abrupt halt. The Property market is showing signs of rate increases and Workers’ Compensation writers are seeking significantly higher prices, even in the face of rate suppression by some states. And as of the writing of this piece, I see no signs of that changing.
Both the General and Professional Liability markets are not seeing the same rate and pricing pressures, but there is a return to more traditional underwriting. In short, that means that accounts with losses will see price increases. Those without losses can expect little better than a “flat” renewal. There will always be exceptions, but the days of regular and consistent premium reductions are over, at least for the moment. Dramatic premium reductions are likely to be an effort “to buy into” the account or industry segment. While tempting, these should be very carefully scrutinized.
On the Management Liability front, some carriers are seeking pricing increases in excess of 25%. The private company Directors’ & Officers’ Liability (D&O) market, once an easy segment for cost-control, is seeing this change dramatically and quickly. Chubb and AIG, the two leading writers of the private D&O insurance, are continuing to firm their pricing due to increased claim activity and diminishing investment returns with shareholders targeting stronger results. New players stand ready to try and “pick off” some opportunities, but this too can be risky. Many “new” carriers to the D&O world have not demonstrated a long-term commitment to the risk. And while I do not advocate for accepting the higher rates when they are unwarranted, be careful with inconsistent players in this market.
Also, many traditionally region Professional Liability carriers are anxious to grow beyond their traditional comfort zones. Insurance carriers that have long been viewed as “physician markets” are trying to capture a larger audience by expanding into institutional risks. This trend began slowly a few years ago, but it has gained real momentum as of late. This will prove a bit of a damper on PL rate hikes, but their ability to effectively insure these “larger” risks remains to be seen.
There are several reasons for this changing dynamic for insurance pricing. Most healthcare buyers will hear that the lack of investment returns for the insurance carriers is a major reason for this change. That is certainly a factor and one that is beyond the control of any underwriter. However, I think that there are several other factors having an equally important impact.
Market capacity remains very strong. That means there is plenty of money in the collective insurance carrier’s bank accounts. That fact, in my opinion, would seem to diminish the “lack of investment return” excuse for the premium increases. Claim reserve takedowns, a more common event in the past several years, would also seem to bolster carrier’s returns in the face of the poor investment return headwinds. One Moody’s analyst called the reserve takedowns from the period 2003-2008 “the gift that keeps giving.” However, the rate of these releases is slowing and will not likely be able to offer the same “cushion” to the carries as in recent years.
Some of these same analytical firms are calling for an industry loss ratio (the percentage that reflects how much an insurance company pays out in claims and related claims expenses for every dollar they collect in premium) to be as high as 107% for the just concluded 2012 accident year. Projections for 2013 seem to point to a loss ratio of about 105%. This is a better result than 2012, but still an underwriting loss.
This reality leads me to the single most influential factor that I believe will sustain rate and premium increases in 2013, albeit modest increases. Travelers Insurance CEO Jay Fishman has been one of the most vocal industry leaders when it comes to the need for carriers to seek rate increases and subsequently hold onto these increases in years to come. In late 2012, Mr. Fishman said “we will continue to seek improved pricing and take underwriting steps necessary to improve profits…” For one, I admire and appreciate Mr. Fishman’s candor. More importantly, I think it sounds a note of caution for buyers of insurance that they need to be ready for a more challenging premium environment in 2013. In a more personal example, a client of my firm that has not had a loss in nearly a decade is looking at a 4% initial renewal offer from their carrier. In years past, this would have been laughable and invited immediate competition. In 2013, however, that may not be the case.
My overall conclusion is that insurance companies are seeking rate and pricing increases because they have the opportunity to do so, and the market demands that they do exactly that. Price fluctuations are a normal part of our global economy. However, the nearly decade long “soft market” for the insurance industry has made us all a little lazy and, in the case of some brokers and buyers, unsure of how to deal with and operate in a less price friendly environment. Capital markets will demand that insurance carriers raise their stock prices or take advantage of the market opportunity to strengthen their balance sheets even further. In its purest sense, the market will let them capture higher prices. Therefore they will try to do so.
I am sure that other brokers will point to my cautionary prediction as an opportunity. Some will say “this guy doesn’t know what he is talking about. We will save you 5-10%.” Be that as it may, I encourage the buyer of insurance to engage in conversation with your underwriter as well as with your broker. The role of a broker is not only about “getting you the cheapest deal.” Instead, we must make sure that our client’s and prospects know what to expect for their organizations. The strategic, operational and financial needs of our clients and prospects demand that we do so. This also means that the commercial insurance consumer spend more time having honest conversations about their risk profile, understanding the market better and planning beyond your next renewal. Short-term thinking will be the enemy of the consumer.
I do not have a pessimistic view of this market. As with all markets, there are opportunities for buyers to strengthen their relationships with their underwriters and insurance carrier partners. Taking some extra time and effort to educate the markets on the risk profile of a firm will pay dividends as underwriters are looking to make better educated underwriting decisions on their books of business. In my opinion, simple renewal or marketing submissions are no longer the optimal way to control your premiums. A dedication to a more comprehensive view and understanding of an organization’s overall cost of risk is highly advisable, and it will become the most effective way to save time and premium dollars.
About the Author
Pete Reilly is the Healthcare Practice Leader at WGA with extensive knowledge in healthcare systems, including hospitals, long-term care facilities, and medical practice groups of all sizes.