Finding a reliable insurance company to cover your assets at a lower cost than what you are currently paying became much more difficult in the past year as many insurers either went out of business or stopped serving the HME market.

While insurance industry insiders say it is a natural outgrowth of the economic environment, this is small comfort to HME providers struggling to find good, affordable insurance, and to insurers fighting to stay profitable.

“The insurance industry as a whole is pretty much in a state of collapse,” says Dennis Santoli, JD, CRM, chief executive officer of The Campaigna Group, a Vienna, Va-based full-service provider of specialty insurance for the subacute sector of the health care industry and one of the few remaining companies still writing liability policies for HME enterprises. “Last year, 31 insurance companies offering policies for the HME field went out of business, and most of the survivors have elected to withdraw from serving this market,” he says.

In light of this, Santoli asserts that the average HME-industry premium of about $4,000 annually for $500,000 in protection against injury claims still represents a good value. “Compared to a lot of the other fields that insurers cover, the HME industry is by and large fairly well run and is a relatively low risk,” Santoli says. “We see about 26 claims for every $1 million in premium collected from HME businesses. At today’s average premium, that works out to about one claim for every 10 HME dealers insured. That is not a particularly high frequency of claims compared to other medical fields.”

Companies that insure HME providers also benefit because average damage claims in this industry are less expensive than those in other health care industries, Santoli says. “The average HME exposure, including the cost to defend the policyholder, is between $25,000 and $30,000 per claim,” he says. “For every $1 million in premium collected from HME clients, we are paying out no more than about $810,000 in claims. From an underwriting standpoint, that is not going to break the bank, not even when you add in the overhead—the commissions paid to agents, the fees paid to underwriters and actuaries, and the premium taxes paid to the government.”

Hard Market Blues
The real reason so many insurance providers failed or simply left the market is that the insurance industry is going through a hard-market cycle, says Bill Thompson, CIC, senior vice president and partner in Smith Bell & Thompson, a company in Burlington, Vt, that manages a national insurance program writing coverage for home health care companies.

“The insurance industry runs in cycles and has exhibited this behavior since the 1920s,” he says. “The good times for buyers are known as ‘soft market’ cycles. Currently, the industry is coming out of the longest soft market in its history, which started in the early to mid 1990s.”

The hard cycles begin when insurance companies start realizing the effect of years of underpricing business. With mounting losses, they must make rapid adjustments to pricing and to the types of risks they insure to maintain their surplus and operating ratios.

John Spragle, president of VGM Insurance in Waterloo, Iowa, says that the current hard market is one of the worst seen in years. In part, that is because the last soft market enjoyed a cycle that lasted twice as long as normal.

“During our most recent soft market, insurance companies had an extended time to flourish—eventually, unusually strong competitive pressures emerged to push the price of policies below the level that would allow those insurance companies to break even,” Spragle says. “The companies that dropped their prices under that floor did so with the expectation that they would make up the difference either in the investment market or with high-volume sales or by eliminating the competition and thus ending up in a position to dramatically raise prices without serious consequences.”

It did not actually work out that way, though. One player that alone wrote 15% of the health care industry’s liability coverage took a fresh look at its books last year following a major shakeup in management and determined it was losing money hand-over-fist, Santoli says. “They decided they had to get out of the health care sector,” he says. “With the stroke of a pen, about one sixth of the liability capacity for the health care field nationwide disappeared.”

12 to 18 Months to Go
The September 11 terrorist attacks on New York City and Washington, DC, had no direct impact on the problems besetting HME insurers. “Most of the companies involved with the exposure caused by those assaults did not play in the health care liability market,” Santoli says.

However, the terrorist attacks did exacerbate the economy’s problems, Thompson says. “Investment yields for these insurance companies have dropped precipitously,” he says. “Insurance companies do not make money writing policies and collecting premiums alone. They also make it by investing.”

When investment yields fall below 5%, as is the case at present, insurance companies traditionally try to compensate by writing more policies. However, that was impossible this time around, Santoli says. “States have regulatory agencies that limit the amount of insurance a company can write,” he explains. “So, if a company cannot write enough policies to make up for its investment income shortfalls, then it has only two other choices: charge sharply higher premiums, or exit certain parts of the markets it is in.”

Spragle predicts the hard market will last at least another 12 months, possibly 18. At that juncture, cyclical forces will usher in the next soft market. Policy prices should recede, and the availability of coverage will likely increase, he says.

In other words, hang in there.

Rich Smith is a contributing writer for Dealer/Provider.