Doctors and lawyers are taking up more space in the surplus lines professional liability (PL) markets, with growth and consolidation in the healthcare industry and real estate concerns among the legal field fostering hard-to-place clients.
It’s definitely a different world than when Rick J. Lindsey, CEO and chairman of Prime Insurance Co., took over the company reins in 1996. Based in Salt Lake City, Prime covers “everything” from small law firms to large; midwives, emergency crews, and assisted living facilities; and whatever it is that standard lines won’t cover on a given day.
He likens Prime’s services to the Island of Misfit Toys in the classic children’s program, Rudolf the Red-Nosed Reindeer: picking up medical and legal clients that are difficult to place and that the standard lines won’t or can’t accommodate, whether it’s because the market has turned for certain clients, or they experience a large claim and their standard insurer cancels coverage.
“But that’s when insurance should help,” Lindsey says. Often, he finds these clients are a better risk once they come to surplus lines. “Sometimes we write a whole policy or a portion of the coverage alongside their normal policy,” he says. Policy limits range from $500,000 to $5 million.
One long-term Prime client is an emergency room doctor who serves as a river guide in her off hours, using her medical skills to provide and train first aid on the river. When both her hospital employer and the river guide company were not able to provide coverage for her off-duty services, Prime stepped in.
“I see it as a very good risk. She improves safety on the river,” Lindsey says. “For 18 years now, I’ve written her this customized coverage she can’t get anywhere else.”
ProAssurance of Birmingham, Ala., is seeing about 15 percent of the company’s nationwide business in surplus lines: medical professional liability, products liability for medical technology and life sciences, and legal professional liability, says Howard H. Friedman, president of the company’s healthcare professional liability group.
Healthcare insurance in general is evolving “into something larger and more diverse,” and more dependent on technology, creating risk exposures that can’t easily be handled in the standard market. A healthcare system that is made up of a consolidation of several hospitals, employed physicians, and outpatient facilities doesn’t have the flexibility to contemplate every unique risk that comes its way, as opposed to a single hospital without diverse operations, he says.
Clients can include “larger hospitals that have self-insured retentions or a risk-sharing agreement that doesn’t fit into the standard lines market,” Friedman says. He cites as an example a nationwide not-for-profit organization that is looking for a way to indemnify some of its affiliates. “It really is all about customization of those emerging risks.”
Mergers and Acquisitions
Industry analytics show a continual rise in hospital mergers and acquisitions in the past eight years.
A 2013 commissioned report from the American Hospital Association disclosed that there were 551 hospitals involved in a merger or acquisition between 2007 and 2012. More recently, Atlanta-based firm Billian’s Health Data in March reported 134 hospitals involved in a merger and acquisition (M&A) in 2013; 193 hospitals in 2014; and 34 hospitals as of mid-March 2015.
“There is probably no market of American life that is changing more than American healthcare,” Friedman says. The market is evolving rapidly, with risk structures so varied that “you could underwrite one a day and never see that same kind of risk.”
The dynamics within the PL medical surplus lines market are constantly evolving: electronic health records, better coordination of care, and better follow-up are attractive to medical professionals because they can reduce liability, but they also create new exposures, he says.
Excess and Surplus (E&S) insurers are more frequently dealing with clients that have merged to create a conglomerate with a much wider geographical footprint, creating more new risk structures.
Losses have been “pretty stable,” much different from 10 to 15 years ago, Friedman says. “The frequency of claims has been quite stable for a number of years now. Costs are increasing at a moderate rate as overall inflation has been down.”
The marketplace for medical professionals in E&S PL is competitive, although not very alluring for newcomers because of its complex nature, he says. Carriers that try to enter the space without a nationwide E&S capability will be “at an increasing disadvantage,” he says. “This is a very complicated area. It’s not like you can develop the experience and expertise overnight.”
Bob Sargent, president at Tennant Risk Services of West Hartford, Conn., says the E&S PL markets for doctors and lawyers is segmented, but balanced. “We have a healthy level of competition and a high degree of underwriting discipline,” he says. “It takes some work because there are a lot of participants.”
There are more than 25 law firms in Tennant’s hard-to-place category. The PL market for attorneys is segmented based on size, location and area of practice, Sargent says. Traditional, medium-sized law firms are seeing a “very competitive market” while smaller firms and those dealing in real estate are “very hard to place.”
“They’re a target area of the surplus lines market,” he says. “We see attorneys that may have had a couple of claims from real estate [clients] or that are a closing firm.” In Connecticut, he says, lawyers handle real estate closings; there are no title, closing or escrow agencies.
Depending on the area of practice, a law firm could wind up in either the traditional market or surplus, if they have tougher-to-place risks. That would include real estate attorneys, startups, law firms undergoing major changes, or firms in financial distress or seeing a lot of claims activity, he says. The medical surplus market meanwhile is very competitive, depending on location and claims activity. Allied healthcare is also becoming highly competitive.
Pricing in the E&S PL market overall tends to be flat, say both Sargent and Friedman. “But there are variations in both directions,” Sargent adds.
Some of the new operating structures coming out of the medical E&S field are “fascinating,” Sargent says. “We have service-providers adding a tech element to what they’re doing. We’re seeing a lot of outsourcing of medical services. We have a facility management company that joint-ventures with physician groups,” he says. He’s also seen physicians looking for new sources of income through consulting or working with medispas. “It’s changing quite a bit. It’s very interesting.”
The strength of surplus lines lies in being creative and handling exposures and risks that are different or unique, says Sargent. “It could be high risk, but it could just be different.”
“We spend a lot of time customizing coverage. It’s interesting because you have a client who has a unique exposure, and a standard policy is not going to do the job. You have to talk to the underwriter and say, ‘How do we customize something or change to what the client needs?'”
For example, Tennant has a financial services client that is outsourcing by providing a professional service and a technology platform to another party. They need customized coverage to wrap it all in a package that can be flexible and innovative. Other clients have more interesting risk structures.
“We have a consulting firm using drones as part of their work,” Sargent says.
The company’s website lists other hard-to-place clients: an attorney specializing in real estate transactions, with prior claims history, who was non-renewed; a physician providing specialty medical advice over the Internet, who needed medical malpractice coverage; and a plaintiff’s attorney firm specializing in securities class actions that was declined by the standard attorney errors and omissions (E&O) markets.
While the Affordable Care Act has had some effect on the medical industry by driving a lot of the consolidation efforts, it’s not the main game-changer in the medical PL market, Friedman says.
“The ACA is really a sideshow to what’s going on at the ground level for healthcare,” Friedman says. “At the bottom is the fact that America can deliver far more healthcare than it can afford. We don’t have to bend the cost curve – we have to break it.”
Part of that is bringing the delivery of healthcare down to lower-cost providers. As medical insureds get bigger and more technically involved, the industry is evolving to find the most cost-effective solutions, like allied healthcare.
“We spend more on healthcare than any other industrialized country as a percentage of GDP,” Friedman says. “As the Baby Boomers get into full retirement age, we’re going to spend 22 percent of our GDP on healthcare.” That alone is forcing organizations that deliver healthcare to find new more cost-effective ways to do it. “It’s forcing groups to find their way into the E&S market,” Friedman says.
The E&S market will continue to increase “dramatically,” not because companies are renewing business but because emerging business has no place else to go, Friedman says.
Sargent, who is a past president of the National Association of Professional Surplus Lines Offices Ltd. (NAPSLO), says that from the association’s point of view, the value of wholesale brokers operating in the E&S area is also changing the game. “They bring the expertise to help both the client and the underwriter come up with solutions.”
Stephen Sills, CEO and chairman of CapSpecialty Inc. of Middleton, Wis., is also seeing more retail brokers for doctors and lawyers taking that business to wholesalers. Part of it is a nationwide change toward service-based businesses.
“As the country becomes more professional – as you will, a service economy – people are held to a professional standard,” Sills says. Many professionals in medical and law are buying E&O because more of them have their own business, or are consulting.
A lot of the E&S market growth is also due to a marked move by retail brokers and independent retail agents going to wholesale brokers for their surplus lines business. That’s both due to the wholesalers’ specialization in all types of PL, particularly E&O, as well as a general move among professionals toward service-based business.
Meanwhile, the consolidation of doctors’ private practices into healthcare organizations is also fueling competition.
The company’s miscellaneous medical insurance for small- and mid-sized businesses starts with premiums as low as $2,000 and boasts up to $11 million in capacity, according to its website.
As more doctors give up their offices to become part of a large organization, they’re opting in to corporate coverage and giving up those individual policies. Contributing to that is the movement of patients toward allied healthcare and accountable care organizations, he says.
“There’s kind of a scramble,” Sills says. “They’re not buying less, but the question is where it’s being bought; the large conglomerate is footing the bill.”
The loss of those smaller policies is hurting mutual insurance companies, he says. On the other hand, E&O policies in general are getting more popular as the country moves toward a service economy, and more people are looking for personal coverage, particularly cyber protection, Sills says.
It’s different in the legal realm, where lawyers are still buying individual and small-group PL. “The small-practice attorneys are not going away,” he says. Historically hard-to-place attorneys include those with big claims and certain practice areas, like real estate, securities law and plaintiff’s lawyers.
“There will always be certain niches of lawyers in the surplus lines professional liability business; there are more independent practitioners. But in the medical world there’s more consolidation,” Sills says.
PL for mental health practitioners is one of CapSpecialty’s biggest lines. Sills says the company is the “largest” writer of psychiatric malpractice nationwide – a highly competitive field for E&S insurers as there’s a dearth of psychiatrists in the country, creating a fairly tight playing field. Still the company is holding its own in the niche.
Enough psychiatrists still seek individual PL policies to keep the segment profitable, whether they’re in private practice or semiretired and working in mental health clinics or university settings. “Psychiatrists are still very much independent practitioners. There are some that practice in groups, but there are mainly independent doctors of psychiatry,” he says.
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