RPS: US healthcare liability market 'isn’t broken but it’s starting to bend'

The U.S. healthcare liability insurance market is in a state of mounting strain, with shrinking capacity, more intentional underwriting and a margin for error in submissions and placement strategy that has “never been slimmer”, according to Risk Placement Services (RPS).

In its outlook report on the segment, the wholesale broker described a market defined by an imbalance between supply and demand.

Demand for healthcare liability coverage continues to grow, while capacity – particularly at upper tower layers – keeps contracting, resulting in longer placement timelines, more ​market participants per program, and a “premium on broker expertise”, said the firm.James McNitt, RPS’s healthcare practice leader, said the surface-level picture could be misleading.

“On the surface, not a lot has changed since last year,” he said. “But ‌when you look at the types of deals we’re working on every day, a lot really has changed. The capacity is tighter, the underwriting is more intentional and the stories you have to tell to get a deal done are more important than ever.”

And the firm said it expects capacity to remain tight in areas like hospitals and social services, with the E&S market continuing to absorb risks that the admitted market has pulled back from.

Pricing will reflect the cost of claims rather than competitive dynamics in the segments facing the most stress, said RPS.

“The variables that could change this outlook include carrier ​consolidation, which could move faster and cut deeper than expected, as well as changes in the legal environment, which could shake up the market in either direction,” it continued.

UNDERWRITING THE BROKER

One notable shift highlighted by RPS is that carriers are ​now scrutinizing the broker as closely as the risk itself, as they price into the transaction “trust, track record and institutional expertise”.

“Carriers are underwriting the broker, not just the risk,” McNitt said. “They’re leaning ⁠on expertise and relationship with the broker submitting the account and putting a lot of weight behind their trust in that individual and their organization.”The pressure is most acute in the hospital segment, where RPS said the construction of large programs has become ​a far more laborious process.

Margaret Jacobs, senior vice president at RPS, noted that the broker is finding fewer and fewer solutions in certain states for hospitals, and that placements are coming in very differently than a year ago, with pricing that went for $10,000 per million ​last year now potentially reaching $20,000 per million or more.

HOSPITAL TOWERS

Capacity per carrier has shrunk dramatically, with the days of a single carrier offering $20 million in capacity on a hospital program now effectively over.

Maximum capacity per carrier is typically now $5 million, meaning that a hospital seeking $50 million in coverage may need to stack 10 or more carriers to complete the tower.

Abuse coverage has become a particular challenge, with hospitals that once purchased abuse limits throughout their programs now encountering markets that will not offer abuse as part of a standard hospital policy, leading many insureds toward a “split tower” approach.

“Insureds are buying as ​much abuse limit as they can in a tower and then topping off the rest of the tower without abuse,” he said. “And it’s not my expectation that that’s going to turn around anytime soon.”

PHYSICIANS FACE CORRECTION

The physician liability market looks comparatively stable on ​the surface but RPS warned it is “building toward a correction.”

Kyle Pass, senior vice president at RPS, pointed to rising claim severity in high-exposure specialties such as obstetrics, gynecology, neurosurgery and pediatrics, and warned that admitted carriers and risk retention groups underpricing business to retain renewals or win new ‌accounts will increasingly ⁠feel that pain over the next couple of years.

A major shift is also under way in how physician groups are covered, with carriers increasingly moving group policies from separate-limit to shared-limit structures, in which all physicians in a group draw from a single aggregate limit.

This reduces carrier exposure but creates new risk for the group itself leading to greater need for physician excess coverage.

RPS also flagged telemedicine as an emerging blind spot. More of the exposure has been pushed into the E&S market as the growth of telemedicine has outpaced the ability of regulators and insurers to fully characterize the risk.

ALLIED HEALTHCARE REMAINS ‘BRIGHT SPOT'

Allied healthcare – covering pharmacies, home health agencies, outpatient clinics, therapy providers and diagnostic centers – continues to attract strong carrier appetite, said RPS.

Pass described allied healthcare as the area carriers are all trying ​to get into, with an “incredible amount of capacity” available and ​what he called “a race to the bottom” on many deals.

Allied ⁠staffing, however, sits apart from the broader allied healthcare market, said Karen Bennett, senior vice president at RPS.

She said allied staffing holds the most underwriting integrity of any allied class, noting it can be a tough class given that agencies often contract with hospital systems with strong negotiating power that transfer liabilities through those contracts.

STRESSED SOCIAL SERVICES

Human and social services – spanning foster care, adoption agencies, youth ​organizations, substance abuse treatment, mental health agencies and group homes – represent a challenging segment of the healthcare market to insure, said the report.

Breck Seitz, senior vice president at RPS, said the ​industry has an opportunity to be more ⁠consistent in defining what falls under social services, given the category spans everything from affordable housing to higher-acuity behavioral or foster care risks.

RPS described capacity contraction across the segment as severe, with carriers that once offered $10 million limits pulling back to $5 million or less, and several program markets exiting entirely.

The shift from occurrence-based to claims-made coverage has accelerated alongside an increasing trend of carriers advancing retro dates on abuse coverage.

“Certain carriers are advancing the retro date on abuse coverage,” said Jacobs. “It is happening selectively but is picking up pace.”

Sublimits on abuse, assault, molestation, self-inflicted ⁠injury and other ​specific incidents have become increasingly common as carriers seek to limit aggregate exposure and can render excess coverage “effectively worthless” when a large claim hits, said RPS.

Bennett ​added: “There are nonprofit foster care agencies right now that are genuinely uncertain whether they can stay in business due to uncovered liabilities. Something has to give and it will probably come down to the legal climate.”

SUBMISSION QUALITY DECISIVE

RPS said investing in submission quality is the “single most impactful thing a retail broker can do”.

Seitz said ​complete submissions and accurate historical loss explanations have never been more important.

“Data is telling stories right now. You have to know where all the large losses are and be able to explain what is different today that makes it better, not worse,” said the executive.