What’s Happening in the Market Place? Is it a Perfect Storm?

[ Reprinted with permission from The Association for Healthcare Risk Management of New York, Inc., Risk Management Journal, Volume I 2024 ]

When I first began writing this in December 2020, my outline addressed utilizing healthcare Captives in a transitional marketplace, sighting the increase in claims severity, increase retentions, the reduction in limits/capacity and restrictive coverage terms and what this would mean to Captives. 

Since then, the entire marketplace has changed, and all of the classic  symptoms of a transitional market exist. The reasons are many, some are mentioned above. I termed it a ‘perfect storm’ that combined a  transitional market with loss severity and frequency, and the  unprecedented pandemic. This article will examine what we are seeing in the market and the way healthcare providers are using Captives to help with your risk transfer. 

The New York marketplace is seeing the same as other parts of the country. There are extenuating issues associated with the state, for example section 18 of the Medical Malpractice Reform Act (NYS section 18), the excess coverage for physicians. This will add finding a market to front for an offshore option to your process. Remember an RRG’s can reinsure the Captive. 

Medical Professional Liability

In 2020, the medical professional liability industry underwriting results deteriorated for the seventh straight year. The top ten Medical Professional liability carriers have a combined loss ratio of 113%, according to the Conning Report. This translates into poor profitability for the carrier with barely any investment income opportunity. The exit of major carriers from the market was a clear sign of where we are. With new capital and carriers coming in the market, what’s next? Let’s watch!

Claims severity and frequency are the culprits with inadequate rate/premiums. There have been more than 30 verdicts in excess of $10 million generated – an aggregate total of more than $1 billion in medical liability verdicts. While 2019 represented a decline in the number of $10 million and over verdicts, the underlying trend reveals that the number of large verdicts continues to increase, according to the MPL Medical Professional Association.

In 2019, we saw continued changes with claims. For example, a verdict that awarded $35 million in Long Island prompted the judge to send the jury back to deliberate, saying the plaintiff’s pain and suffering awards were out of line with what the state appellate courts have allowed in similar cases. All this comes on the heels of prolonged market softness when carriers were competing on price and underfunded to absorb the losses.

Every major insurance carrier or reinsurer supports that the market has transitioned, underwriting the risk for exposures (total loss cost underwriting). Insurance carriers started notifying brokers and insureds as early as December 2019 of this new direction.

The underwriters are analyzing exposures the way they viewed them in 2008, or for that matter in the 1990’s. Some of these exposures were not prevalent in the earlier market shifts including opioids, telemedicine, physician contract relationships and the COVID-19 pandemic. However, severity in obstetrics and neurosurgery, and misdiagnosis in the emergency room are consistent issues today as in past market transitions.

A perfect storm was developed

Reinsurers and insurance carriers were placing moratoriums on new business. What did COVID-19 mean to their books of business?

• Carriers developed questionnaires for clients and conference calls were mandated.

• Some markets excluded any losses as a result of COVID-19, and some placed specific, maintenance deductibles per patient

• Some of these exclusions were specifically related to professional liability and general liability, or employer’s liability

• There were lots of discussion about ‘Batch wording’ and how it responds to COVID-19 losses

• The concerns were across the board on automobile liability, executive management lines, cyber liability, etc.

• We are continuing to monitor for new changes the pandemic may have on the marketplace

Many clients were not concerned because they had Captives, and what did these market conditions mean to them?

As a result of COVID-19, the balance sheets of most acute care facilities saw March and April 2020 revenues decrease drastically. May 2020 seemed to be a better month, with governmental supplements supporting hospitals.

Reinsurers were asking questions about confidence levels of funding. Tort immunities were granted Federally and on a state-by-state basis. The questions became whether they would apply to offshore Captives, should the Captive move back onshore, and can we assume these excluded exposures ourselves?

The economy, insurance marketplace, pandemic and the social unrest across the country made it a top priority to inform management that 100% reinsurance may not be possible.

How Captives May Mitigate Challenges

With all of issues discussed above, did some Captive owners think they did not have to worry because they had a Captive? To properly assume the risk of COVID-19 in a Captive, if reinsurers have excluded the coverage, you need to properly fund for the risk /exposures. What type of wording would the Captive have if excess limits are involved? You need to get their permission for drop down features. Concurrency and contract certainty will be important when considering the Captive retaining COVID-19 exclusions.

Healthcare organizations view risk differently than large manufacturing risk, or Fortune 500 corporate giants. Some of the industries that were most affected by the virus/pandemic on a systematic basis, like the hospitality industry, began analyzing the risk. They developed corridor layers, etc. to assume these risks. As a reminder, it’s advisable to develop drop down wording for excess layers. Questions they are asking include; Did reinsurers know enough to exclude the exposure of COVID-19 at this juncture? What type of claims were expected? Was there a standard of care developed, and how can negligence be proven?

Let’s look at an example of what could happen to your Captive and questions you should consider:

• Are there any opioid exclusions and what is the underwriter looking for? What kind of losses can be attributed to opioids? Some of the attorney generals across the country were bringing criminal actions against hospitals and doctors (note: criminal acts are typically already excluded from most policies)

• The market is responding by some carriers exiting; those carriers exiting had done so prior to the pandemic. Are your Directors and Officers (D&O’s) (the corporation) being held to standards of the CDC or, the Federal government? Will they be held negligent? Are there D&O allegations?

• We all collected large amounts of data and information, and it’s unclear what purpose that served. Do we now know how much the average defense cost for a COVID-19 claim is, do we know if employers liability will continue to be scheduled on umbrella policies?

What the Markets Think

We talked with a few underwriters to get their input on reinsurance and Captives in this market:

Erin Mullen, Manager of Coverys Custom Accounts

"Coverys thinks Captive financials, loss triangulations and the jurisdiction are important to their underwriting process. They think the COVID-19 concerns are lessening. As far as New York market specifically, they think the distinction between Upstate and Downstate is a critical factor when they consider the risk. Coverys has a physician’s RRG product that is very active in New York."

Pat Cirelli, VP, Healthcare Professional Liability Berkshire Hathaway Specialty Insurance (BHSI)

"Information important to BHSI includes funding studies, loss data and triangulations and the Captive’s policy language. BHSI is supportive of Communication and Resolution Programs (CRPs) and values partnerships, understanding patient safety and risk mitigation efforts."

Cathy McDermott, Vice President of Facultative Medical Professional Liability at Transatlantic Reinsurance

"What’s important to TransRe? We want to hear the Captive’s story as told by them (face to face or virtual meeting). During this meeting we like to hear about loss mitigation tactics, claims outcomes/results and financial performance. Complete ground up loss data, recently valued NOT capped losses, cutoff at the retained amount. The Judicial Hellhole report cites New York City as #2 Judicial Hellhole in the nation. Venue is important to TransRe. Cathy is an advocate for defending cases where feasible."

Noeleen Doelger, Chief Operating & Financial Officer of Healthcare Risk Advisors (HRA)

"HRA, along with its sister company, Hospitals Insurance Company, a New York medical malpractice carrier, provide malpractice risk transfer and alternative risk solutions to hospitals and physicians. An integrated approach to claims and risk management is important to her organization, they understand the New York market place clearly. They support, like the other reinsurers, off-shore Captives, and Vermont domiciled. As a leader in this industry, HRA/HIC believe it’s important that clients are committed to a partnership."

Success with Captives in a Transitional Marketplace

In summary, if you want your Captive to work for you in this transitional marketplace, here are some tips:

• Put together a good team that includes an actuary, Captive manager and consultant, reinsurers, broker and your senior leadership team (include a clinical/ patient safety persons)

• Check all wording, policy forms, buffer layers, binders, drop down features, utilize your Captive for gaps, coverage shortfalls, but do so properly. Remember there is a

  difference between assuming risk and going bare

• Consult your attorneys to determine if off-shore Captive meetings can be held remotely

• Pick the right domicile, if you need to address physician risk, HMO reinsurance, etc.

• Read the binders and terms, if you are reinsuring the Captive make sure everyone is on the same page. It is not a syndicated excess program where every insurance carrier can have their terms, they are reinsuring your Captive form

• The definition of professional services and products liability, definition of an event or claim reporting requirements and cyber exclusion, must have concurrency

• Discuss who will write the policy with your leadership team, broker, reinsurer and general counsel, and recommend a team effort

Many clients/insureds feel a moral obligation to domicile their Captives in their respective states. The question should be is what the best domicile for a risk transfer program is. As a reminder in 2018, three major hospitals were accused of making profits on a Captive. The end result a Captive feasibility study is money well spent.

About the Author

Bonnie Boone is a producer and client executive for Gallagher’s risk management practice group. She develops strategy and places professional liability and other casualty lines for a broad range of large clients. Her expertise includes large physician groups, healthcare organizations (hospitals, MCO), large academic medical centers/ universities, financial institutions, manufacturing companies, reinsurance facultative and treaty and start- up bio tech companies. Her focus is on captives, cash flow-loss sensitive programs, and coverage analysis in these areas. She co-chairs the Managed Care Practice Group. She also manages overall coordination of Gallagher’s resources as well as account management for her business and is responsible for producing new business.