As part of the Casualty Practice’s increased focus on industry specialization, each edition of Marsh Insights: Casualty will highlight a specific sector and discuss the casualty insurance market trends, developments, and issues facing organizations in that industry group. One such industry that has received significant attention due to recent well publicized legislative activities is health care, our focal point for this issue.
Below is our synopsis of the key macro drivers that may potentially impact the casualty market for health care clients in the foreseeable future, along with a review of current market conditions.
The health care industry is poised for significant change in the coming years, as 2010 federal health care reform has altered the landscape. While the debate over the reform continues—and is likely to continue in the near-term—it is clear that health care organizations must address these expected changes.
The changes will likely include new operating models to improve efficiency, reduce cost, and increase quality outcomes. These are all areas that will improve financials and maximize reimbursement, keys to surviving the new environment. On the operating side, the sector has consistently evolved over time; the changes that lie ahead will perhaps be the most dramatic and transforming that we have seen historically. The stakes have perhaps never been higher.
Key Developments and Trends
Health plans and health care providers will likely assume additional financial risk as a result of health care reform, increasing the potential need for additional insurance products—including provider stop loss and health maintenance organizations (HMO) reinsurance—and risk transfer mechanisms. Other major areas of impact from health care reform include reimbursement levels tied to quality benchmarks, health plan coverage extensions, and the technology and systems needed to satisfy quality, notifications, and administration under the Centers for Medicare & Medicaid Services (CMS) requirements. Cost reduction, a tenant of reform, will come in part from reduced reimbursements, making greater efficiency a major focus for health care organizations.
One likely result is a more robust environment for merger, acquisition (M&A), and consolidation activity. In fact, M&A activity has increased, in an effort to gain market share and pricing power in advance of the upcoming reform and reimbursement rate changes. Additionally, physician group practices are increasingly selling to hospitals and health care systems.
Tort reform, which continues to be debated on a national and state-by-state basis, is another key marketplace driver. For example, Florida is considering tort reform measures as a trade-off for lower Medicaid reimbursement rates. We can likely expect to see more activity in this area in the near future.
Heath care professional liability (HPL) remains the largest third-party liability risk for health care organizations. Many health care organizations continue to see favorable loss emergence in their self-insured or retained liabilities. While trending of historic losses continues, the favorable loss experience has resulted in decreased trend rates. This has helped reduce the funding required for prior and future liabilities. The recognition of these positive loss trends has also, in part, resulted in reductions in premiums paid in the commercial insurance market. The year-over-year increase in claims frequency has moderated somewhat; however, severity continues to increase.
Clinical risk management initiatives are likely to continue as full levels of reimbursement from the CMS will require higher quality outcomes. Private payors may—at some point—enact similar requirements. Senior care facilities are likely to feel the greatest effect from CMS reimbursements. On July 29, an 11 percent reduction in skilled nursing reimbursement was announced, effective October 1, 2011.
Coverage, Capacity, and Premium Rates
Health Care Professional Liability
Health care professional liability products involve long tail exposure, claims-made triggers, non-standard coverage forms, large limit purchases, complicated layering involving multiple marketplaces (typically U.S., Bermuda, and London), captives, fronting policies with statutory limit requirements, and high self-insured retentions. There are approximately 40 insurers with underwriting expertise that currently write HPL programs. Theoretically, there is approximately $1.29 billion available in global capacity to insure an individual risk: $280 million of domestic capacity, $700 million of Bermuda capacity, and $310 million of London capacity. Individual risk towers can require capacity from any or all locales and require significant coordination and marketplace knowledge.
The current HPL insurance market is stable and relatively soft with abundant capacity. Competition remains robust, as incumbent insurers are focused on retaining clients. At the end of 2010, HPL rates renewed at flat to 10 percent decrease. Decreases greater than 15 percent were possible for accounts with favorable loss history and that were aggressively marketed. This soft market persisted throughout the first two quarters of 2011. The conservatism shown by some HPL insurers continues to be outweighed by a higher level of interest from other carriers.
The senior care insurance market continues to be competitive and programs are available on both claims-made and occurrence bases. Physicians, miscellaneous medical facilities, and home health organizations have historically high levels of competition, which leads to positive results for insureds in these segments.
Many insureds are focusing on future renewals and the impact a hardening market—perhaps brought on by changes in health care legislations—would have on their risk transfer strategies. The level of redundant reserves that have existed in the past continue to narrow. Recent reserve takedowns are expected to slow and, ultimately, be eliminated. The current trend is expected to reverse in the future, although not for the near-term, unless altered by a significant catastrophic industry event.
Insurers continue to be flexible in coverage terms and conditions along with the occasional relaxing of some common exclusionary language provisions. Clients that are willing to consider creative program structures are more likely to achieve positive results in these market conditions.
Additionally, some insurers are offering limited levels of first-dollar coverage for media crises expenses and administrative review expenses. Clinical risk management credits from insurers are increasing in popularity with organizations given their historically positive impact on risk transfer costs.
M&A activity between insurers has been prevalent and will continue in 2011. So far this year there have been several mergers and acquisitions between Physician Insurers Association of America companies, insurers, and reinsurers.
Overall, the health care professional liability market remains relatively stable and insureds are able to secure competitive prices at renewal: This trend is expected to continue through the rest of 2011, absent a catastrophic industry event. Beyond 2011, the convergence of increasing loss trends, the lack of reserve takedowns from prior years, and the continued reduction in premiums is likely to cause carriers to attempt to increase rates.
Workers’ Compensation
In the first quarter of 2011 health care organizations averaged a 2.2 percent decrease in workers’ compensation rates; the overall market was slightly softer with an average savings of 3.1 percent. In the second quarter, however, health care organizations experienced a 4.2 percent average increase. The overall market, to contrast, averaged decreases of 4.3 percent. It remains to be seen if the workers’ compensation market will continue to turn and harden for the health care sector, or if the second quarter will prove an anomaly.
Auto Liability
Auto liability premiums for health care organizations are consistent with the overall auto liability market in the United States. Median rates renewed flat for the first two quarters for both the overall market and the health care industry. The market is expected to remain stable.
To summarize, the health care insurance market remains stable and competition remains. Health care reform and the changes it will bring to the market will continue to be the market key driver. In the short term, insureds will continue to benefit from a relatively soft market with abundant capacity.
To discuss your health care organization’s unique exposures, or to learn more about the issues affecting the sector, please contact your local Marsh representative to schedule an appointment to speak with one of our health care casualty experts.