How Soft Can the Medical Professional Liability Market Get?

Posted by on April 14, 2015 | Be the First to Comment

To the dismay of underwriters, there has not been a hard market in the medical professional liability (MPL) arena in more than a decade. Rates continue to decline across all healthcare subsectors and capacity has grown substantially as new players have entered the market. Underwriters are accepting what appears to be a permanent, competitive landscape. Within the healthcare industry, changes have fundamentally impacted the insurance cycle as carriers are now looking for new strategies in order to succeed.

The main reason for the continuing soft market: The ratio of supply to demand has never been greater. New carrier entrants to both the primary and excess marketplace, as well as the supply of ample reinsurance, offer buyers more options than ever. Overlay the tremendous consolidation among healthcare organizations and the trend toward the employment of physicians who had once been separately insured, and these forces have led to more carriers fighting over a shrinking customer base. As a result, pricing naturally declines in this macro-economic environment.

What have carriers been doing to succeed in the soft market? Insurers have differentiated themselves by tacking on additional coverages and sublimits to their standard professional and general liability policies. These coverages can include crisis response & public relations costs, evacuation expenses, and reimbursement for government regulatory actions.

These “freebies” are attractive to insureds and can tip the scale when clients make decisions on where to place their coverage. Also, many carriers are focusing on niche classes (e.g., home health, outpatient facilities, etc.) within the healthcare industry segment, hoping their deep analyses into these areas will support their new pricing models and product offerings.

Overall, the risk profile of the healthcare industry looks bright. The implementation of advanced technologies in clinical settings, innovative risk management initiatives, and creative claim mitigation strategies has dramatically improved results. Loss experience remains favorable with an industry combined ratio for MPL that has remained in the low 90s. In short, it’s a rosy forecast for buyers!

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The True Cost of Product Recall

Posted by and on April 2, 2015 | Be the First to Comment

Product Recall

Marketing product recall insurance has now moved from agreeing the concept of cover (‘Why should I buy this?’), to cost of coverage (‘What value do I get from this?’), to the final stages of clarity (‘Will the cover perform?’) and claims (‘Will all my financial losses be reimbursed?’).

Despite that, many buyers of product recall insurance – and brokers who have not handled a lot of product recall cases – concentrate on the trigger. They put a tremendous amount of effort into writing detailed definitions around what might cause products to be recalled and define the likely costs they will incur in the moment of crisis.

When a product is withdrawn, the immediate costs are usually very easy to anticipate:

  • Bringing together the crisis team
  • Removing the product from the market
  • Investigating the cause
  • Managing public relations

However, we estimate that 80 percent of the total financial losses are incurred long after the offending products have been discarded. As well as being long-term, these costs are also very difficult to define. For example, how can you prove why customers still don’t buy the product a year later?

A forensic accountant can relate the policy language to resultant loss of profit. This can yield significant extra value beyond the immediate increased costs of working.


The importance of claims handling

Clearly, claims handling is the true shop window of any sophisticated coverage and is how a specialist claims team creates ultimate value for clients.

Claims are complex and it takes time – often more than a year – to understand the full extent of losses. The trigger needs to be identified correctly as well as the complexity of losses that mount up after the event.

Three key items to help prepare you in advance include:

  1. Anticipate what a loss adjuster would want to know, take advice, and rehearse your reporting.
  2. Simulate a recall to gauge your company’s readiness to handle communication.
  3. Identify your key people – lawyers, public relations professionals, recall specialists – who would have a role to play if
    one of your products was recalled. Your insurer may pay for these advisors.

Familiar Scenarios
Here are examples of issues our team has worked on, which illustrate the most common losses:*

1. Raw product goes up in value
When a raw meat supplier had to recall its products, it sourced them from elsewhere so it wouldn’t breach obligations to the customer it was supplying. The spot price of those meat products was five times higher, and our client successfully claimed for the difference in those costs.

2. Rejected stock used for another purpose, selling for less
A fresh produce supplier turned its product into animal feed (which sold at a much lower price) after a small amount was found to be contaminated with salmonella. The insurers covered the full difference in value.

3. Despite a small problem, a big amount has to be discarded
Weevils were found in large sacks of rice, so the entire lot was thrown away to maintain the brand’s reputation. Even though only a small amount of the stock had been infected with the weevils, the insurers paid for the full loss of stock to maintain the brand’s reputation.

4. Supplier forced to reimburse customer’s total losses, including abandoned marketing campaign
A large fast-food restaurant chain had created a marketing campaign around a special ingredient. When that ingredient suddenly had to be recalled (and the campaign abandoned), the company demanded full reimbursement of the campaign costs. We argued successfully to the insurer that their short-term loss would be in the client’s long-term interest: This was a sensible strategy to keep in place its contract with an important customer.

5. Loss caused by physical damage to property
Rain fell through a hole in a warehouse roof and spoiled a consignment of cheese. The property insurer quickly paid for the roof to be repaired, but we led lengthy negotiations between all the insurers over consequential losses (such as the loss of the cheese). We reached a satisfactory compromise.

6. Produce mislabeled and has to be repackaged
A product contained peanuts, but this was not mentioned on the original labeling. The insurer covered the cost of re-labeling the full consignment.

7. Loss caused by damaged packaging, usually supplied by a different company.
Faulty lamination meant chip packets were not sealed properly, allowing air into the product, which would have made the chips go stale. The chip company successfully argued that the packaging supplier should cover the costs of the full recall and replacement of the damaged products.

8. Small component causes large losses in a complex supply chain.
A relatively small component ($2 each) in a car’s catalytic converter was faulty. The car company successfully argued for compensation to cover the full cost of recalling all new cars and replacing the full exhaust system on each one ($100 each).

 

Your contacts at Lockton:

Ian Harrison leads Lockton’s team of product recall specialists, based in London. Together, they place around US$20 million into global markets each year. They also work with our claims specialists, to negotiate payments to clients that have suffered loss through product recall. These matters are normally very complex, and require careful liaison with insurers. Adrian Parker specialises in claims. In the last 12 months, Lockton’s specialist claims team has secured product recall claims valued more than US$60 million.

Ian Harrison, Partner | Tel: +44 20 7933 2297 | ian.harrison@uk.lockton.com

Adrian Parker, Assistant Vice President | Tel: +44 20 7933 2202 | adrian.parker@uk.lockton.com

 

*To protect client confidentiality, we have removed the names of the companies.

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Venezuelan Sanctions Could Provide Challenges for Clients

Posted by and on March 11, 2015 | Be the First to Comment

Venezuela Caracas Downtown

This week, effective March 9, (the “March 2015 Order”), the US government implemented sanctions against named individuals in Venezuela, which appear to focus on government officials. However, as we saw in Russia, many of these officials may be tied to semi-government contracts, landlord/property contracts, or energy and construction projects.

The wording of the March 2015 Order is broad enough that companies with ongoing Venezuelan operations should conduct a review to determine where these sanctions may apply, as they could present challenges for their business.

Of primary importance to these companies, is any direct or indirect relationship with the Corporacion Venezolana de Guayana (CVG). The March 2015 Order lists a sanction against Justo José Noguera Pietri, CVG’s President, with CVG’s subsidiaries including the aluminum producers Alcasa, Venalum and gold mining Minerven.

US persons are prohibited from doing business with such sanctioned individuals. Specifically, the March 2015 Order outlines prohibitions that include, but are not limited to:

  • The making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any person whose property and interests in property are blocked pursuant to the Order
  • The receipt of any contribution or provision of funds, goods, or services from any such person

There could be legal and financial consequences to engaging with sanctioned entities and persons. Specific to insurance, most policies issued out of the US and the UK include OFAC Sanctions restrictions which explicitly exclude insurance payment for claims resulting from operations, sales, etc. that are in violation of US OFAC Sanctions. We recommend reviewing compliance with these new sanctions with internal or outside counsel.

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New Trends in Crime Coverage and Global Exposures

Posted by on March 4, 2015 | Be the First to Comment

White-Paper-Hero_Crime-Coverage-and-Global-Exposures

New trends in criminal activity, together with corporations expanding into new territories where they might be unfamiliar with business practices, culture, and customs, have challenged the traditional view of what is adequate balance sheet protection. Most multinational corporations will have either a global crime insurance cover or fidelity bond in place, thinking that will secure them against losses caused by fraud for gain.

However, wording in these policy forms for this area of coverage is from the 1980s and has not kept pace with developing loss trends and global exposures. Examples are provided below, along with what Lockton recommends so clients can not only be covered, but equally important, keep up to date in the current global market:

Michael Lea Blog Table

Increasingly, we are seeing requests for companies and their subsidiaries to be able to evidence valid crime insurance as a mandatory cover where they are engaged tenders. Being able to evidence crime insurance protection is becoming a requirement, particularly for financial service companies and contractors.

Read more in my latest white paper, which offers further details on the risks that companies should navigate – including scams – and what they can do to ensure they have the proper crime coverage no matter where they operate in the world.

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Product Recall: Understand Your Policy, or Else

Posted by on February 23, 2015 | Be the First to Comment

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As with many developing niche insurance markets, the product recall market currently faces a potential crisis of confidence.

Losses are building, new regulations and political issues are impacting insureds, and pricing competition and wording creep are making the sector less attractive to insurers. There is a spate of client litigation cases linked to nonpayment of claims due to misinterpretation of policy wording, and other incidents linked to lack of clarity over claims triggers are seeing clients and prospects question the value of cover. Many brokers are concerned that client dissatisfaction with wording is making the sector more risky, and they are less keen to invest in expertise and grow their product recall teams.

So how do we learn from the mistakes of the past and avoid a potential market dislocation in the future?

Learning from Collective Mistakes
Nearly all emerging insurance classes go through growth and loss cycles. Markets usually learn from their collective mistakes, reset policy language and pricing, and emerge stronger, larger, and more relevant to clients. The product recall market is no different.

In the late ’90s, AIG dominated in what was then a highly profitable, burgeoning market. CIGNA (ACE) then attacked AIG’s market dominance by offering higher limits, wider wordings, and attractive premium discounts. The inevitable result was that CIGNA got burned and exited the market. This exit, combined with resulting higher reinsurer costs, lowering of limits, and tightening of wording, saw a significant reduction in the size of the market in terms of numbers of policies written and premium income.

Since early 2000, the market has grown steadily, and today there are 15 markets, primarily based in London, with new capacity via Barbican and Apollo, recent Lloyd’s syndicates entering the market. Gross premium levels are probably in excess of $300 million, policy limits can be purchased above $200 million, and policy language is very broad.

In terms of policy development, once cutting-edge aspects of coverage have become standard and valued parts of recall policies. For example, rehabilitation of product covers the increased marketing costs incurred to help bring sales back to previous levels after a recall, and therefore can help to mitigate loss of profit claims for insurers. Despite initial concerns, insureds have not abused this clause through over-generous sales promotions funded by insurers, and it has benefited all parties.

Customer’s loss of profit (CLOP) is another example, which has become vital cover for private label manufacturers for large retailers. If these manufacturers damage a retailer’s image through contaminated or defective products, the retailer will expect loss of profit reimbursement, threaten, or delist the supplier. Offering CLOP has reduced far more significant losses to insurers and maintained retail trust in their supply chain.

Learn more from my post about the product recall market, including topics such as:

  • Growing Losses
  • Understanding the Cover
  • Growth via Segmentation
  • Protecting your Business
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