The US medical professional liability (MPL) marketplace is in a tough spot. According to a recent AM Best report, MPL insurers suffered a sixth consecutive year of underwriting losses in 2020, with a combined ratio of 112.5%.
The global rating agency attributed the market deterioration to the past decade of soft market conditions with inadequate rating to deal with medical loss cost inflation, the impacts of social inflation, declining reserve redundancies, and the sustained low interest rate environment.
As a result, the MPL marketplace has hardened. Many carriers are protecting their balance sheets by introducing double-digit rate increases, reducing limit capacity, and tightening up coverage terms and conditions. Some are even exiting the more challenged sectors in the market, such as hospitals and nursing homes, causing further capacity constraints and rate increases.
With rates on the rise, many insureds are no longer willing or able to pay the increased price for their MPL insurance, so they’re turning to alternative risk transfer mechanisms like self-insurance or risk retention groups (RRG). While RRGs can be an effective risk transfer vehicle, it’s important for insureds and their retail agents to “make an informed decision about using an RRG, and not a reactionary one based on pricing,” according to Phil Chester (pictured), EVP and healthcare practice co-leader with Amwins Brokerage in Farmington, CT.
“Moving into an RRG should be a long-term, informed decision,” said Chester. “The agent should investigate and research the proposed RRG because there are some common pitfalls, and they should also ensure that the RRG aligns with their client’s interests or goals. An RRG is a long-term commitment; insureds can’t just get in and get out. So, it needs to be a very informed decision, where the client is going in eyes wide open.”
There are several things that agents and insureds should consider before moving their MPL risk into an RRG, according to Chester. First and foremost, they should analyze the RRG’s financial track record to ensure it is well capitalized and poised for long-term stability.
“Agents should also ensure the RRG is aligned with the client’s long-term goals,” he added. “For instance, if an RRG can only write in two or three states, and their client is expanding, they’re going to have limitations there. Another thing agents should investigate is whether there are any significant capital contribution requirements for being part of the RRG in addition to the premium. And they should also look into whether their insurance agent’s errors and omissions (E&O) insurance will cover them in the event that they place their client’s coverage through a risk retention group.
“They should also consider their client’s contractual liability, in terms of whether joining an RRG could violate a contractual requirement to be covered by an AM Best rated carrier. Many RRGs have a Demotech rating and they’re not AM Best rated. Some are owned by commercial carriers and have a cut-through endorsement, but for the ones that aren’t, it’s important to look for potential contractual violations.”
Another limitation to consider is that most commercial carriers refuse to write excess liability coverage over an RRG. Furthermore, they tend not to accept prior acts coverage from RRGs, making it extremely difficult for insureds to move back into the commercial marketplace once they’ve been part of an RRG. Insureds that do try to switch back to the commercial marketplace often find it difficult to secure coverage.
Beyond RRGs, there are other ways that agents can help their clients mitigate MPL rate increases and coverage restrictions. Chester explained: “Agents should be helping clients improve their quality, and, from a risk management standpoint, helping them to become a better risk. MPL underwriters are looking at quality, they’re looking at claims, and they’re looking at how proactive insureds are being to minimize the potential for future claims.
“Agents should also look at alternative options, take advantage of the marketplace, and look at some of the new capacity coming in. They should also consider partnering with a wholesale broker like Amwins, because a strategic partnership between a wholesaler and a retailer can be a very effective one. It’s about utilizing all of the resources available to them and forming strategic partnerships to explore new markets and create more dialogue.”
For some clients, an RRG is the best possible option. There are many long-standing and very effective RRGs with proven track records and commercial carrier support.
“The insureds in those RRGs have made an informed decision to go into the RRG and they understand that it’s a long-term commitment,” Chester told Insurance Business. “An RRG is a great vehicle for certain clients, but retail agents and their insureds must do their research and make an informed decision. It’s not a move an insured should make in reaction to price increases in the commercial marketplace. There are lots of variables to consider.”