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Healthcare Professional Liability Insurance

London Calling (For US Healthcare Risks)

Charles Kolodkin | February 1, 2005

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Street view of Lloyd's of London.

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. 1

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 coffeehouse 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 AM Best and "A" (Strong) by S&P. It is this distinctive composition that gives Lloyd's its special character and enabled it to maintain an unparalleled record for paying out claims.

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 Physician Insurers Association of America (PIAA) companies and were 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 an 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 US 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 and 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, and not surprisingly, they come in all shapes and sizes, with 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 US-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 their professional contacts and understanding of the markets' appetite for risk to secure the best coverage proposal for their clients.

As with any medical malpractice marketplace, London is asked to consider a variety of risks, from hospital professional liability through nursing homes to the reinsurance of physician risk retention groups (RRGs), 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 US healthcare risks placed in the London market include the following.

  • Multihospital 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 on 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 RRGs 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 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 are willing providers of reinsurance coverage to the healthcare industry.


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 US domestic market.

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1 Thank you to John Sutton for coauthoring this article. Mr. Sutton is a founding member of Humphrey Haggas Sutton, a Lloyd's-accredited broker specializing in the placement of insurance and reinsurance for a broad range of coverages.