Authors: Steve Kahl Larry Hansard Trevor Weyland John Ergastolo
While healthcare institutions experience many of the same insurance renewal challenges as the broker marketplace, there are nuances that do require additional consideration, specifically within some of the management and professional liability coverages. In this report, we will discuss insurance market updates for various coverage lines for the healthcare industry.
Hospital professional liability insurance
The hospital professional liability market faces some headwinds as we enter 2024. Many insurers have set new minimum guidelines focused on profitability, even if it means they'll have existing clients look for alternative relationships. The underlying goal for many is sustainability. Therefore, many healthcare systems can expect pressure on deductible or self-insured retention levels. Those with large excess towers will see their excess carriers manage limit capacity and likely reduce their participation.
The insurers dedicated to this segment remain highly concerned about loss severity impacting their loss ratios, and that concern is justified. According to a recent market update by TransRe, this market segment experienced at least one verdict in excess of $10 million each week of 2022 and a verdict in excess of $25 million every other week during the calendar year. They also suggest that 2023 results will be more dire than 2022.*
This loss severity is driven not only by the increasing complexity of healthcare procedures and care but also by catastrophic outcomes resulting from medical errors, such as long-term disabilities or loss of life, that lead to such substantial financial settlements or judgments. Birth injuries and obstetrics-related losses still make up the largest individual claims, and allegations of sexual misconduct have increased at an alarming rate.
The growing trend of larger compensatory awards and the expanding scope of noneconomic damages further contribute to heightened loss severity. Insurers have to try to accurately assess and price for this severity risk, which is compounded by the impact of ever-evolving legal precedents and court decisions on settlements.
The challenges faced by several states and their long-standing damage caps are another contributing factor to stress on rates and retention levels. The most recent change occurred at the beginning of 2023 in California with the revisions to the Medical Injury Compensation Reform Act (MICRA) under Assembly Bill 35 (AB 35).
In short, AB 35 does away with the long-standing $250,000 noneconomic damages cap in California established in 1975 at the inception of MICRA. It also will increase attorney contingency fee limits and apply the cap amount applicable at time of judgment, arbitration award, or settlement. Most insurers continue to seek rate increases of 10%—15% for those categorized as good risk. Hospitals with loss development or adverse outcomes can expect increases at or above 20%. Continued exposure growth and inflation now factor into pressure on self-insured retention levels. More than half of our clients saw some level of increase in the attachment points within their program structures in 2023. While the insured can manage this increase, often effectively, many clients are still concerned about the first adjustments in many years to what they have retained.
Hospitals can expect insurers to continue to seek "premiums" for exposure growth and other market conditions such as loss development and venue. We remain optimistic that the market may become more stable over the next few years, but perhaps only if we see some stabilization with the current level of loss severity.
Digital health and telemedicine
Virtual health programs that include medical professional liability insurance, technology Errors and Omissions (E&O) insurance, and Cyber liability insurance have remained stable. The overall results in the digital health and telemedicine sector have been extremely favorable, due limited attention by plaintiffs' counsel thus far. Carriers are reporting an increase in claim volume. However, the Gallagher client base has exceptional claim history with the very few claims, but with a few occurring in the behavioral health space.
Rate pricing has continued to be relatively flat in terms of rate year over year, with some rate decreases on established accounts with some history. We've seen tremendous growth in many accounts with increasing revenues, and pricing is tied to revenue thus proportionate. It's common for some clients to see price increases over 300%, but this large increase is due to exposure (revenue) increases. Larger accounts with strong loss history and proper loss controls have actually seen rates decrease as much as 25%, which has helped partially offset exposure increases due to year-over-year revenue increases.
Historically, we've had two carriers focused on this unique niche. In summer 2023, four additional carriers launched products to compete in this industry sector with new virtual health programs. Gallagher was asked to consult with all four new carriers in the product development phase, due to our experience in the telemedicine space. These new entrants are beginning to impact pricing as they aggressively look to add premium in a finite market. We expect this trend to continue through 2024, which should lead to additional rate decreases.
Capacity is still limited to $5 million for virtual health programs, with some markets being extremely cautious about offering terms above $1 million per claim/$3 million annual aggregate for medical professional liability. However, new capacity in the market makes it relatively easy to build a limit tower to meet client demands.
Management liability insurance
The management liability insurance market for health systems and large physician groups is quite stable heading into 2024. While some carriers have reduced their exposure to some types of healthcare risks such as very large organizations and private equity-backed for-profit healthcare, the market still has ample capacity to fill out even the largest Directors and Officers (D&O)/employment practices liability (EPL) towers. On average, premium rate levels have continued to be very steady with some minor premium increases on very large organizations and some modest premium relief for smaller organizations.
Private equity-backed for-profit organizations continue to be a major concern for some of the primary healthcare D&O/EPL carriers. Insurers will continue to put upward pressure on retention levels due to an anticipated increase in both D&O and EPL claim frequency in the next year, in part due to the increase in defense costs for these claims. The fast pace of mergers and acquisitions (M&A) in system and physician groups continued in 2023, and there doesn't appear to be any end in sight to the M&A activity within the healthcare sector. We expect M&A activity to continue to be high in 2024.
Regulatory activity is very high and qui tam claims continue to be a problem within the healthcare sector, particularly for health systems. Antitrust claims, typically brought after the announcement of M&As, continue to be the most severe D&O claims for insurers. The federal regulatory agencies are paying particular attention to larger healthcare mergers in hopes of prohibiting mergers they believe to not be in the interest of healthcare services buyers. Employment practice claims are also on the rise, specifically high-wage-earner and medical-practitioner claims, although not at an alarming rate.
The 2024 management liability insurance market for healthcare organizations will be somewhat stable, but carriers will try to limit coverage for certain exposures such as antitrust and regulatory matters. Insurers will attempt to increase retentions for medical practitioner, high-wage-earner and class-action claims on a case-by-case basis. Some primary carriers will attempt to better manage limits by cutting them in some cases, which isn't a cause for concern because the excess market has ample capacity and can be quite competitive. Any upward pressure on premiums can likely be offset with a move to higher retentions.
As always, start early and engage with your underwriters well in advance of your renewal.
Cyber insurance
The Cyber insurance market for hospitals, health systems, and medical groups has remained much more competitive through 2023 than it was when rates peaked in Q4 2022.
Many cyber insurers entered 2023 with large new business goals on the back of a mostly profitable 2022, resulting in greater competition, particularly for smaller insureds. A drop in the rate of ransomware incidents, plus an increasing number of insureds having acceptable controls in place, further fueled this more competitive environment.
Ransomware has remained at the forefront of headlines and losses, with several health systems suffering substantial costs and business interruption because of such attacks. By many accounts, ransomware activity is picking up again, although at the same time improved controls and backups are enabling more insureds to refuse to pay the extortion demand, and instead rely on their own resources to restore their systems.
Insurers have continuing concerns about aggregation of risk (i.e., single incidents affecting multiple insureds), whether due to nation-state cyber war, infrastructure failure, incidents at vendors, or vulnerabilities in operating systems. Insurers would rather not underwrite these (possibly) aggregating risks that don't have a clear loss record, aren't easily measured and continue to evolve.
Further, insurers generally assert that they're not collecting sufficient premium to cover them. Many insurers have introduced specific exclusions or restrictions in coverage, perhaps most forcibly by Lloyd's of London, which now requires its market to apply specific exclusions for war and state-backed cyber-attacks.
Many hospitals have been the target of litigation alleging improper use of pixels and other tracking technology in their marketing websites, as well as in patient portals that enable the unauthorized transmission and disclosure of patients' personally identifiable information and protected health information to third parties. Some large settlements have been made, and defense costs before getting to trial can be in the millions of dollars.
Looking forward, it remains fundamental that healthcare organizations continue to implement and maintain at least the minimum controls cyber insurers require. Insureds should continue to improve their defenses, and make sure that insurers understand the steps and investments the insureds are making. This information will support the negotiation of the best possible renewal terms with insurers. Insureds without good controls or with claims/losses will face continuing difficulties in the market, and need to explain the steps they've taken to prevent repeat incidents.
About our data
Gallagher Drive® is our proprietary data and analytics platform that combines market condition, claim history, and industry benchmark information to give our clients and carriers the real-time data they need to optimize risk management programs. Utilizing this tool, our brokerage team can provide specific rate guidance for your line of coverage, industry, and geography.
When used as part of CORE360®, our unique comprehensive approach to evaluating our clients' risk management programs, Gallagher Drive creates meaningful insights to help clients make more informed risk management decisions, find efficient use of capital, and identify the top markets with the best solutions for their risks.
Because of the highly nuanced nature of this market, it is imperative that you are working with an insurance broker who specializes in the healthcare industry. Gallagher has a vast network of specialists that understand your industry and business, along with the best solutions in the marketplace for your specific challenges.
