The past 10 years have marked one of the longest periods of soft market conditions the insurance industry has ever seen. A confluence of factors have contributed to this:
1. Lower claims frequency and severity
2. Abundance of capital
3. Tort reform
4. Better and proactive risk management
With a focus primarily on medical malpractice, which account for the largest share of the insurance cost to healthcare providers, this article will discuss strategies to take advantage of the soft market and outline best practices that can shield providers from the next hard market.
Let’s start with a closer look at four micro-economic factors impacting the market.
All studies seem to suggest claims frequency and severity are lagging indicators of insurance market health, which explains why many carriers tend to increase reserves from time to time. Capital is mobile and always seeking favorable returns. Capital can help to stabilize the market, as is currently the case, but can precipitate a hard market when deployed elsewhere. Tort reform on the other hand, can have a more lasting effect at the state level, but tends to fall to political pressure as political climates change. The on-going effort to repeal the ACA is a current reminder of how fleeting change can be.
This leaves one consistent factor, risk management, which is, coincidentally, the only tool providers have control over and possibly the single most effective way of managing your total cost of risk. Years of analysis have shown that adherence to national best practices and proactive risk management deliver significant reductions in the total cost of risk. Furthermore, these reductions are sustained over a longer period of time and are less likely to be susceptible to wild swings when the market hardens.
Conversely, providers with limited resources, inadequate patient safety protocols and an ad hoc approach to risk management were very susceptible to wide premium cost swings as the market hardens. While they do receive good rates during soft market conditions, mostly by occasionally switching carriers, they typically pay it back many times over when the market hardens.
With these facts in mind, here are three key steps that providers, especially smaller institutions, can take to position for the next insurance market cycle.
1. Seek optimal cost efficiency and a client centric contract now. If you have not already done so, use your next renewal to seek further premium relief, lower your self-insured retention, remove unnecessary exclusions and improve key provisions such as batch language. This provision allows you to combine all related claims into a single claim, thereby limiting your retention obligation to one payment.
2. Partner with carriers for the long term. A long term partner should meet the following criteria:
a. A. M. Best rating of A or better
b. A dedicated health care platform with experience underwriters and long track record in the health care industry
c. Additional risk management and loss control services
3. Partner with a broker that:
a. Has broad expertise with your industry, not just a transactional broker riding the coattail of a soft market
b. Can bring additional risk management techniques to bear when needed
c. Has established relationships in the market place and can advocate for your interests at the highest level
d. Can map out the right balance between risk transfer, risk mitigation and risk management.
Having limited resources to fund a sophisticated risk management program does not mean that you cannot reach out for help. According to Christina Stabile of Risk Strategies, “The truth is, for every large Integrated Delivery Network, there are dozens of community and rural hospitals that are struggling to take care of the poor.” Many carriers have resources and willingness to subsidize key patient safety initiatives as part of their efforts to protect their capital. Good risk management can be part of any operation.
