The market for “signature risks” in the MCO sector—E&O, D&O, and cyber—continues to harden, rapidly for some payer types. Generally speaking, there is a widening gap when it comes to carrier appetite for large plans and small plans (with the latter being preferred).
While insurance rates for smaller and provider-driven plans are relatively stable, even decreasing in some rare cases, the rates for larger, higher profile payers remains increasingly stressed.
In fact, it’s safe to say that it’s a very hard market for Blue plans. More recently, it’s looking to be headed that way for Delta Dental Plans, too—the likes of which we have not seen since the early 2000s.
While there had been ample capacity in the market up to 2018, the past two years has seen constricting capacity across the MCO / health plan universe from pure lack of interest among the insurance community for MCO E&O and D&O.
This is due to:
- BCS Insurance Company exiting the MCO market. BCS stopped writing E&O and D&O insurance. Around 20 percent of the market’s capacity disappeared overnight as a result.
- OneBeacon Insurance Group’s exit from the MCO market. OneBeacon exits from D&O and E&O and sells renewal rights to TDC Specialty Underwriters. TDC re-underwrites the OneBeacon book and only renews approximately 60% to 70% of clients.
Both of these moves were triggered by increasing “frequency of severity” and broad recognition that the market has underpriced the true risks of this industry for many years.
A key driver is the mounting defense expenses and catastrophic nature of multidistrict antitrust class action litigation against Blue Cross / Blue Shield.
Rate Changes for E&O and D&O as of Q4 2019 for MCOs
| Year | E&O Rate Change | Commentary |
|---|---|---|
| 2017 | Flat | |
| 2018 | Blues: 20% to 40% All others: 5% to 10% | BCS pulls out of E&O. The severity of multidistrict litigation is becoming more evident. |
| 2019 | Blues: 25% to 75% All others: 10% to 40% | We see the continued impact of multidistrict litigation and BCS’s departure, in addition to OneBeacon’s exit. |
| Year | D&O Rate Change | Commentary |
|---|---|---|
| 2017 | Flat: 5% | |
| 2018 | Blues: 25% to 50% All others: 5% to 10% | BCS pulls out of D&O. The severity of multidistrict litigation is becoming more evident. |
| 2019 | Blues: 25% to 100% or more All others: 10% to 45% | We see the continued impact of multidistrict litigation and BCS’s departure, in addition to OneBeacon’s exit. |
Notable developments as you are interpreting the numbers above
- In 2018, BCS pulls out of E&O and D&O. The severity of multidistrict litigation is becoming more evident.
- In 2019, we see the continued impact of multidistrict litigation and BCS’s departure, in addition to OneBeacon’s exit.
For those of us looking for a “silver lining:” while the MCO industry is still the toughest segment for cyber insurance, capacity is still abundant and pricing is aggressive even for MCOs.
9 Key Risks for MCOs Today
Here are some of the key risks facing MCOs in 2020.
- Antitrust claims affect on both E&O and D&O insurance policies: This is when it is nice to have the same carrier for both. You won’t get into a situation where two carriers are arguing about whose fault it is. However, one carrier will only defend under one policy. By having the coverage with a single carrier, while you may get your claim paid quickly, you’ll usually only have one set of limits due to anti-stacking provisions.
- Ongoing “healthcare reform” issues: Provider and payer services continue to blend. Health plans are creating joint ventures with health systems to more closely manage care to produce better outcomes/control costs. Provider disputes and litigation are on the rise.“When the rules change for HC payers and providers, we get litigation.”
–MCO E&O Teammember, Travelers Insurance - Technology/privacy claims: The landmark Anthem breach illuminated the potential scale of these claims. Current estimates put the total expected losses from that to be in the $1B range. So across the industry there’s increased scrutiny on limit adequacy of the cyber program and also noting the knock on risks of potential carryover claims to E&O and or D&O. On that note, any remaining coverage grants for cyber as part of the E&O are being removed. Health plans’ total spend on Cyber is becoming or has already become the largest single portion of their insurance spend.
- Multidistrict litigation: What started with antitrust claims against Blue Cross / Blue Shield is now spilling over into the Delta Dental sector and any other area with similarly structured cross-geography agreements.
- Opioid litigation carrying over: Health plans can be sued by patients or patients’ families for being an accomplice to bad provider practices re: opioid prescriptions. Meanwhile providers can sue health plans for being kicked out of a network. These litigation trends are especially true for PBMs, but we’re now seeing spill over to HMOs.
- Provider payment litigation: We are seeing a sharp rise in provider litigation (especially in California). Providers are alleging underpayment, tortious interference, breach of contract, and claim statutory violations. These claims have been very costly to defend as expensive firms are often hired that quickly rack up defense expenses.
- EPL in the “Me Too” era: EPL lawsuits are on the rise due to claims arising under the Me Too movement. This is especially tough in California, with minimum retentions even for relatively small plans eclipsing $1 million, for some markets.
- Financial pressures on all payers: Contrary to what many in the public may believe, payers are operating on very tight, mandated margins. These financial pressures amplify all the other sources of risk and pressure for health plans.
- COVID-19: While it is far too early to tell how long this will last or how great the healthcare costs associated with this virus will be, we can say with absolute certainty that these costs will be borne largely by payers and they will be very significant. In many cases these costs / losses will pierce health plans’ reinsurance (if fortunate enough to have it) and will increase the pricing in what is an already stressed reinsurance market.
Notable Coverage Developments In 2019 & 2020 Market Cycle
The following are some of the trends we’re seeing in coverage as of Q1 2020.
- A reintroduction of higher retentions, sublimits, and co-insurance for antitrust, regulatory, and subpoena coverage: Some carriers are limiting anti-trust to $1 million regardless of overall limit.
- An overall reduction in limits capacity: Any program with single-layer limits in excess of $10 million is being reduced to $10 million max. Many carriers are reducing the max to $5 million. A $1 million maximum limit for California EPL is becoming the norm.
- An opioid exclusion is universal for PBMs: This is also a case-by-case decision for all other types of plans depending on the insurer and the insured, however it’s a sticking point with underwriters during each renewal discussion. Nobody is “giving it away.” The default position is an exclusion that you may or may not be able to negotiate off.
- Many carriers are refusing to write Blue plans altogether until multidistrict litigation is resolved: The most severe estimates expect total limits losses for each insured and insurer on every program.
The Bottom Line
Insurance underwriters for health plan E&O and D&O still feel that the pricing is not back to where it needs to be to fund this industry segment, given the severity of issues and the long, long tail of the exposure.
They argue that the claims are expensive to defend, and they take years to resolve, which adds a concerning level of uncertainty.
Furthermore, the business practices of MCOs are often somewhat homogeneous, thus the risk of catastrophic claims impacting an underwriters’ entire portfolio is real. They are already stating that the hard market needs to last for quite some time to properly fund for the ongoing litigation matters, “frequency of severity” or lottery verdict, and other emerging risk issues.
Clients should anticipate that this market is not going to soften in the near term and should plan accordingly and the emerging COVID-19 pandemic will likely only add to this stressed environment.
In addition to managing budgetary expectations, the MCO brokers at Woodruff are helping our clients explore captives, self-insurance, and other alternative risk vehicles as well as working with new carriers to create additional capacity and new markets.
This remains a very challenging market for MCOs with the opportunity for very bad outcomes for the unprepared. However with proper preparation and experienced advisory, far more palatable outcomes are still possible.