London Calling (for U.S. Healthcare Risks)
February 2005
Lloyd's of London enjoys a venerable place
in the insurance industry, supporting numerous classes of business throughout
its long history. Healthcare providers have been insured in London for decades
and it continues to be a willing market for hospitals, physicians, and nursing
centers.
by Charles
Kolodkin and John Sutton
The Cleveland
Clinic
The key to understanding the modern day London insurance market and Lloyd's
of London is to appreciate that it is a marketplace in the truest sense of the
word where buyers and sellers come together to negotiate business deals. The
London insurance marketplace traces itself to a certain coffee shop run by Edward
Lloyd. Beginning in the 17th century, people who needed partners and insurance
for their ships and cargo would approach wealthy individuals (the precursors
of the underwriters of today), often by way of intermediaries (today's brokers)
who were friends with or at least knew which individuals might be interested
in such a proposition. The wealthy and fashionable at this time would often
be found in establishments offering the new and expensive delights of coffee.
The Lloyd's coffee house became a particularly popular meeting place for such
negotiations and over centuries has evolved into the modern edifice of Lloyd's
of London.
One of the hallmarks of Lloyd's is its adaptability to changing times. A
key to its longevity and survival is an appreciation for and ability to be flexible.
A look at Lloyd's syndicate profile and capital structure demonstrates the adaptability
of the London insurance market. For most of its history, capacity in the Lloyd's
market came exclusively from wealthy individuals known as "names" who literally
risked everything.
In the 1980s, a series of adverse losses seriously stretched the capital
structure of many syndicates (risk bearers), inhibiting their ability to continue
to write business. In response, Lloyd's has transitioned to a structure where
the majority of the capital comes from corporate members rather than individuals.
Moreover the "typical" syndicate profile has moved from hundreds of small syndicates,
where underwriters were more likely to be generalists, to today's situation
characterized by fewer but much larger syndicates (around 70) led by teams of
specialist underwriters. Indeed, underwriting expertise and knowledge are among
the London market's greatest selling strengths.
Sources of Capacity
Capacity in the London market has grown by over 50 percent in the past 5
years and is now at record levels, over $25 billion in 2003. Although the syndicates
are still broadly independent and in competition with one another, the insured
benefits from the unique economic and operating structure of Lloyd's and can
expect a financially more secure market than in the past. Each syndicate must
establish a "Premium Trust Fund" by paying a portion of the premium that they
receive into a trust. In the event this source of funds is drained, several
levels of capital exist to protect insureds. These include not only the assets
of the syndicate at risk, but also the funds at Lloyd's reserve, to which all
market participants make contributions. Lastly, Lloyd's "Central Assets," are
available if necessary.
As all Lloyd's policies are ultimately backed by this security, a single
rating can be applied. Hence, policies issued by Lloyd's syndicates are rated
"A" (Excellent) by A. M. Best Company and "A" (Strong) by Standard & Poor's.
It is this distinctive composition that gives Lloyd's its special character
and enabled it to maintain an unparalleled record for paying out claims.
Sources
of Capital
London's Role in Medical Malpractice Insurance
Lloyd's experience insuring American healthcare providers demonstrates its
skillfulness and ability to respond to change. Lloyd's underwriters and the
London insurance community in, general, are quick to recognize opportunity,
for example when worldwide capacity may be withdrawing, and pursue profitable
risks. During the 1970s, the American physician malpractice insurance marketplace
was in turmoil. A majority of commercial insurers abandoned this coverage line
following a spate of large awards and a pronounced increase in frequency. This
in turn led to a critical situation for physicians and their communities throughout
the United States.
As a result of this crisis, a number of physician-owned insurance companies
were established essentially on a state-by-state basis. They became known as
PIAA (Physician Insurers Association of America) companies and sometimes derisively
referred to as "bedpan mutuals." These companies, similar in structure but independent
of one another, were formed out of desperation, yet also out of a desire to
control their own destiny and to prevent their insureds from being placed in
such unacceptable circumstances by the traditional insurance industry ever again.
The PIAA companies needed reinsurance protection if they were to have any
future and stability, but the domestic reinsurance market was unwilling to support
them. It was here that the London companies stepped in and demonstrated their
creativity by devising a reinsurance product commonly known as the "Swing Plan."
This mechanism, which is essentially a retrospectively rated plan, allowed the
infant insurance companies to pay a minimum premium based on better-than-forecasted
loss results, at the contract inception. Yet it also protected the reinsurer
against adverse claims experience by increasing the reinsurance premium based
on actual incurred reinsurance losses, on a sliding scale up to a predetermined
maximum amount. The "Swing Plan" was the key to enabling these unproven companies
to grow their capital and surplus and, ultimately, their risk retention capabilities.
At the same time these new, specialty companies were given the opportunity
to prove that their in-depth knowledge of the profession and their ability to
handle claims more efficiently than the conventional insurers, as well as their
risk management capabilities, would make them successful. The PIAA companies'
reinsurance partners in London were rewarded with favorable, better-than-expected
reinsurance results and the foundation for a longstanding business relationship.
While London had always written medical malpractice insurance on a direct and
reinsurance basis, it was the PIAA situation that cemented it firmly in the
industry.
The London underwriters, using the knowledge they gained of the American
healthcare liability insurance market provided by reinsuring PIAA companies,
were able to establish a significant foothold by targeting hospitals to expand
their writings. Throughout the 1980s and into the 1990s, the Lloyd's syndicates
were reliable and fairly consistent sources of insurance and reinsurance coverage
for large healthcare providers, managed care entities, and integrated delivery
systems. The London market became a legitimate competitor to the traditional
domestic insurers and a viable alternative when many of the U.S. companies either
exited from difficult venues or limited the amount of coverage offered to insureds.
As a result, London acquired a reputation for not only being creative, but also
steady, that is a dependable place to turn even in a time of "crisis." This
reliability has enabled London underwriters to forge close, longstanding business
relationships with their insureds, many of whom have remained loyal throughout
the ups and downs of market cycles.
The London Market
To access syndicates at Lloyd's and the London market requires the services
of a London broker. The London market is almost exclusively a broker market
with accredited brokers placing risks on behalf of clients. The accreditation
process for London brokers takes several years in which brokers' reputations
and financial standing must be affirmed. There are well over 100 brokerage firms
in London, not surprisingly they come in all shapes and sizes, many of them
specializing in a particular risk category.
A number of the London brokers are actually owned by American brokerage companies
such as Marsh, Aon, or Gallagher. In placing a risk, the London broker is typically
approached by a U.S.-based broker or producer who provides a description of
the risk and the needs of the insured. The London broker then presents the account
to a variety of Lloyd's syndicates and other London based companies. The London
broker relies on his professional contacts and understanding of the markets'
appetite for risk to secure the best coverage proposal for his clients.
As with any medical malpractice market place, London is asked to consider
a variety of risks, from hospital professional liability through nursing homes
to the reinsurance of physician risk retention groups, and much more besides.
However, historically, London has not been a market for the individual physician
due to the difficulty of ensuring adequate risk management and claims handling
from afar. The London market is comfortable where the group is of a size to
retain an adequate retention and to have a responsible risk management system
in place. Typical U.S. healthcare risks placed in the London market included
the following.
-
Multi-hospital systems
-
Acute care hospitals with 200 beds or more
-
Large scale nursing risks and assisted living facilities
-
Surgery centers and dialysis clinics
As a general rule, Lloyd's does not offer first dollar policies to its healthcare
risks; instead there is insistence upon a reasonable retention (or deductible)
ranging from $25,000 for small organizations to around $250,000 to $500,000
for most risks. Larger healthcare organizations can anticipate retentions ranging
from $1 million to as high as $5 million depending on the risk profile, venue,
loss history, and other key risk characteristics. Oftentimes, London will initially
serve as an excess market for an insured, allowing both the insured and insurer
to gain mutual comfort with one another. Over time, London may then insure the
primary portion of the risk, i.e., the first layer of insurance.
Lloyd's will consider large physician groups, though generally Lloyd's has
been more successful writing these risks in the form of reinsurance of a physician-owned
captive rather than on a direct basis. London is an active source of reinsurance,
both for the newer healthcare specific vehicles that have formed in the past
few years such as specialty captives and risk retention groups, in addition
to traditional commercial insurance companies. Indeed London is a vigorous supporter
of various alternative risk funding entities.
Healthcare professional liability is certainly a specialty coverage that
calls for an advanced level of expertise in order to be properly underwritten.
Although numerous syndicates may ultimately participate on a particular risk,
there are certain key syndicates with healthcare expertise who take the lead
in underwriting and pricing. These "lead" markets set the terms and conditions
of the placement. Once this occurs, the broker will find other syndicates who
are likely to participate on the account and, depending on their appetite, follow
the lead syndicates and commit to the placement. Within the Lloyd's community
there are several syndicates who characteristically serve as lead underwriters
on healthcare accounts, namely Beazley, Catlin, Amlin, and Chaucer. In addition
to the aforementioned lead syndicates, Aspen, Faraday, and Managing Agency Partners
(MAP) are willing providers of reinsurance coverage to the healthcare industry.
Conclusion
A common perception among much of the American community has been that London
is only a market for the more unusual or even distressed risks. While there
is some truth to this, especially in the past, the market now participates on
a tremendous amount of conventional healthcare accounts as well as reinsurance
placements that are considered mainstream. London has always had the ability
to be creative when confronted by a difficult situation, but it has evolved
to become a market providing terms and capacity that make it a more reliable
outlet.
Further, the knowledge base possessed by the Lloyd's underwriting community
and its commitment to long-term relationships is borne from a long history,
during which time it never abandoned the healthcare industry. London has weathered
several "crises," such as the hard markets of the 1970s, during the mid-1980s,
and in 2001, along with the transition from an occurrence-based product to claims-made
triggered, and remains well positioned to provide a solid "A" rated alternative
to the U.S. domestic market.
John Sutton is both a founder member and a Director of Humphrey Haggas Sutton, a Lloyd's
accredited broker specializing in the placement of insurance and reinsurance
for a broad range of coverages. Mr. Sutton has over 20 years' experience in
the placement of reinsurance, facilities business, and medical malpractice insurance.
He is responsible for the reinsurance broking activities of Humphreys Haggas
Sutton & Co Ltd. in London. He can be reached at .
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.