Author: John Ergastolo
Heading into 2020, we knew that management liability insurance carriers that wrote the vast majority of primary Directors & Officers (D&O) liability insurance were challenged, and they intended to take action to make their books of business profitable. Many of the legacy primary D&O liability carriers came into 2020 intending to:
- Reduce their limits of liability on any one insured.
- Raise retentions on all the coverage lines they provided.
- Restrict terms for antitrust coverage and regulatory coverage.
- Raise premiums in excess of 10% for virtually all risks, and raise premiums much more significantly for larger risks in difficult jurisdictions.
Once the COVID-19 pandemic broke out in March 2020, the guidance we were providing to our clients was completely revised to reflect the massive strain on health systems and healthcare-related organizations across the country. Further belt-tightening on the part of insurance underwriters resulted in very large increases in premiums and retentions for those organizations that were deemed to be at risk — either directly from the financial strains of the COVID-19 pandemic or from the potential operational strain that was placed on them due to the economic ripple effects from the pandemic.
Some healthcare industry key trends include:
- Health systems that continued to operate during the COVID-19 pandemic saw margin compression from large reductions in elective surgeries.
- Physician offices, clinics, rehabilitation businesses and other healthcare facilities that were forced to temporarily close due to the pandemic may have experienced massive economic hardship. This resulted in a spike in reductions in force, furloughs and, in some cases, bankruptcy, which continued into late 2020.
- Surprisingly to some, the rate of mergers and acquisitions activity within the sector has not subsided in 2020. In fact, there were at least 10 large health system mergers in 2020.
- The private equity sector continues to look for healthcare merger and acquisitions (M&A) opportunities. This type of activity is considered by D&O liability underwriters a heightened exposure and generates a higher probability of a claim.
- Pressure on the boards of healthcare organizations has never been greater, largely due to event-driven litigation. The allegations being made are that the board (and executives) did not properly prepare for and adequately assess or respond to an "event." That event can be something completely outside the control of the board, but stakeholders and regulators are scrutinizing how the leaders of the organization could have prevented the event or managed the event more effectively and efficiently.
From a claims perspective, we saw a continued heightened frequency and severity of employment practices liability (EPL) claims. Industry consolidation, through mergers and acquisitions, frequently leads to redundancy of positions and reductions in staff to control expenses in order to maximize profitability. These staff reductions often lead to EPL litigation and, when those reductions in force include highly paid physicians, costs of EPL claims accelerate quickly. The need to control expenses due to margin compression generated by the pandemic has led to reductions in force, which in turn has led to an increased frequency of claims.
The healthcare management liability sector will be much more challenging in 2021. Primary insurance carriers are targeting at least double-digit premium increases on their D&O and EPL private/non-profit renewals. Carriers will attempt to significantly increase EPL retentions. Excess capacity is still plentiful, but several carriers have recently started to demand higher premiums. Please note, a client's risk profile is the primary variable dictating renewal outcomes. Loss experience, industry, location and individual account nuances will also have a significant impact on these renewals.
Coverage terms negotiations will be contentious in 2021. Some insurance carriers are attempting to pare back coverage for antitrust and other coverage terms we negotiated during the soft market. Now more than ever, it's critically important to start renewals as soon as possible, and work with your Gallagher team to deliver a comprehensive and professional submission to insurance underwriters.