The market for “signature risks” in the MCO sector—E&O, D&O, and cyber—remains hard and continues to deteriorate, with two additional carriers exits from what was already a very limited underwriting pool. The gap in carrier appetite for large plans (particularly Blue plans) versus small plans remains with the latter still being preferred, but with the new development that all plans are facing double-digit rate increases.
In fact, it’s safe to say that it remains a very hard market for Blue plans, Delta plans, and for large public plans even by historical standards. That is saying something considering that the last hard market conditions in the early 2000s were catastrophic. This is particularly distressing for these risks as the past two renewals have also seen very steep increases. Today’s increases are stacking on top of an already high starting point versus two-three years ago. If your incumbent carrier decides to non-renew or exits the industry in totality (circumstances facing an increasing number of plans), securing adequate coverage at any price can be difficult.
While there had been ample capacity in the market up to 2018, the past two years have seen constricting capacity across the MCO / health plan universe because of pure lack of interest by the insurance community for MCO E&O and D&O.
This is due to the following developments over the past few years:
- 2018: BCS Insurance Company exiting the MCO market. BCS stopped writing E&O and D&O insurance. Around 20% of the market’s capacity disappeared overnight as a result.
- 2019: 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.
- Allied World (AWAC) is taking a far more limited approach and is not entertaining any new business at all in certain tough venues and classes
- AIG pulling out of the MC E&O line, cutting D&O limits and coverage while increasing retentions/premiums.
- Chubb currently has a moratorium on all new business due to Covid uncertainties
- Limited interest for new business across the market, as unknown liability impact of COVID.
With few case by case exceptions this leaves the following list of alternative options for new business:
- Chatham (Berkley/Travelers partner for the MC E&O)
- Berkshire: Usually excess only
- QBE: Usually excess only
These adverse developments were initially triggered by increasing “frequency of severity” and broad recognition that the industry’s market has underpriced the true risks 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. Most recently, COVID-19 uncertainties further impact this sector. Any appetite for new business or competition is completely absent.
YOY Rate Changes for E&O and D&O as of Q4 2020
Managed Care Errors & Omissions
Blues: 20% to 40%
|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%
|Continued clarity on the severe impact of multidistrict litigation and BCS’s departure, in addition to OneBeacon’s exit|
|2020||All others: 25% to 60%||COVID has chilled any competition with a few carriers declining to write anything new given unknown liability. AIG has closed down MC E&O line going into 2021.|
Directors & Officers Liability
|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.|
|2020||All others: 10% to 60%||Carriers cutting limits and increasing retentions with few alternative options upon marketing. In tough venues, EPL exposures further exacerbated increases and limits carrier appetites.|
Principal Risks for MCOs Today
Here are some of the key risks facing MCOs in 2021.
- Antitrust claims effect 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 $1 billion 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 #MeToo 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.
Ongoing Coverage Developments in the 2021 Market Cycle
The following are some of the trends we’re seeing in coverage as of Q1 2021.
- A reintroduction of higher retentions, sublimits, and co-insurance for antitrust, regulatory, and subpoena coverage: Carriers have begun to remove antitrust coverage regardless of exposure.
- 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, going down as far as $2.5 million for D&O exposures. A $1 million maximum limit for California EPL is becoming the norm.
- An overall increase in retention: Depending on the state, exposure, and COVID response, carriers increasing retentions across every coverage line. A separate mass/class action retention is common.
- Limiting D&O coverage for the entity: Carriers have begun to limiting the entity indemnification clause to respond in securities claims only, especially in cases of bankruptcy risk.
- 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
Carriers expect to see a rise in government attention with the rise in M&A and policy changes. Small pool of carriers willing to write primary E&O and D&O for healthcare entities. The larger COVID environment has dried up any interest for new business as the liability impact has yet to be fully seen.
Underwriter scrutiny and pricing is expected to increase as healthcare entities have seen serious financial impact over the past year with some companies filing for bankruptcy particularly on the provider side.
Clients should anticipate that this market is not going to soften in the near term and should plan accordingly.
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 potential for very bad outcomes for the unprepared. However, with proper preparation and experienced advisory, far more palatable outcomes are still possible.