Senior Living Industry Update Winter 2021

Exploring the hardening insurance marketplace in 2021 and beyond

As we enter 2021, a number of compounding factors are driving the current insurance marketplace. First, there has been a substantial increase in the number of large weather-related loss events. Second, interest rates remain near historical lows, and third, the industry is dealing with an increasing loss trend in liability lines. Each of these factors will continue to drive up prices and reduce coverage availability. Add a global COVID-19 pandemic and tightening in the reinsurance marketplace—the market is experiencing a high sense of uncertainty. This uncertainty is contributing to the feeling that this is a time where the market has entered into a new phase of recalibration. Many would call this recalibration a hardening market for certain lines of coverage and industries in the U.S.

This hardening market is an underwriting-driven marketplace. In a traditional hard market, capital (and consequently capacity) is reduced, thereby limiting the availability of insurance. This marketplace is driven by the need for underwriters to make a profit from underwriting versus relying on investment income. Carriers remain intensely focused on underwriting discipline, ensuring they secure the right terms and pricing on certain lines of coverage that have historically not performed from an underwriting standpoint.

The pace of the United States' economic recovery and the outcome of the active hurricane season could alter some of the underlying fundamentals of the current marketplace. However, in all likelihood, the conditions that exist today are not changing anytime soon, and it will take carriers some time re-underwriting their books of business to overcome the challenges associated with the current marketplace. Accordingly, all market indications point to a continuation of premium increases for the balance of the 2021.

Utilizing Gallagher Drive®, our proprietary data and analytics platform, our brokerage team can provide specific rate guidance for your line of coverage, industry and geography. Combined with deep expertise in your particular industry and business, Gallagher can help you navigate today's hardening market. Because of the highly nuanced nature of this market, it is imperative that you are working with an insurance broker who specializes in your particular industry or line of coverage.

General and professional liability

The year 2020 was the most challenging year the senior living industry has ever seen. COVID-19 created occupancy challenges across the industry, impacting top-line revenues along with increased expenses due to staffing challenges, infection control/ cleaning protocols, increased demand for PPE, and a general and professional liability insurance marketplace that was up between 25%–30% on average. These factors have put an enormous amount of pressure on the industry and, from an insurance standpoint, rate increases are positioned to continue throughout 2021.

Prior to COVID-19 and the last 18–24 months, we had been in a soft market for about 15 years, with year-over-year (YOY) average renewals achieving flat to decreased rates during the majority of that time. However, over the past five years, as loss cost trends continued to rise at an average of between 9%–11%, market rates remained mostly flat with slight increases in certain instances over that time period. When compounded, there was a significant gap in the rates insurers were charging compared to the losses they were experiencing.

The impact COVID-19 has had on the insurance market is substantial, as carrier exits have created capacity shortages resulting in a much more narrow pool of carrier options committed to the space. This has allowed the remaining carriers to push higher rate increases in an attempt to bridge the gap between current rates and expected losses, resulting in large rate spikes YOY.

Carriers are very concerned for expected increases in litigation we will see in 2021 as a result of the pandemic. There have already been a significant number of lawsuits filed, and more are being filed every day. However, on January 29, 2021, a federal court in the Central District of California issued a tentative order dismissing a COVID- 19-based lawsuit against a senior care facility based on application of the PREP Act. The complaint alleged the defendants failed to implement infection control measures and follow health guidelines that would have prevented the spread of COVID-19, which caused the death of a resident. The court found, however, that the PREP Act was a complete bar to the plaintiff's action and that the case should be dismissed.¹While this initial finding is a great victory for the senior living industry, and will hopefully set a precedent for future litigation and verdicts down the road, the court case ruling is currently on appeal and ongoing as of March 2021. This case should continue to be monitored, as the outcome may impact future litigation. Also, as cases are brought at the state court levels, there are varying positions on immunities granted to senior living and healthcare providers that will impact the rulings in these cases. A summary of the current immunity statuses can be found at the JDSPURA resources here.

In addition to the increases in rates, the majority of carriers have incorporated restrictions in coverage, like exclusions for pandemic/COVID-19/communicable disease. The underwriting guidelines have also increased significantly, with all carriers requiring additional COVID-19 supplemental applications/questionnaires.

Key carrier considerations:

Underwriters are looking at every account on a case-by-case basis, and using conservative actuarial modeling and predictive analytics to develop their pricing/structures. The result of this underwriting approach is substantial increases for senior living operators due to the uncertainty of how COVID-19 may impact future losses and carrier profitability.
Carriers are evaluating their quality/compliance policies and procedures much more closely, along with their infection control plans and formal clinical risk management programs.
There is a continued push to move coverage forms from occurrence to claims made. This change in form will result in further increase considerations YOY, as organizations will see step factor increases for three to five years from the retroactive date. Note: Step factors are the annual expected increases to reflect the increase in exposure as more time passes from the retroactive date.
Most carriers will no longer offer first-dollar programs and are starting with deductibles of $25,000 or $50,000 but, in many cases, they are only providing options with a minimum deductible/SIR of $100,000 or higher.

Lastly, we are seeing higher utilization of self-insured programs, risk retention groups, group captives market carriers. These solutions require a very strategic approach to risk management, and can be extremely effective in reducing volatility and combating the hard market.