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Insurance and risk financing always have been an important part of risk management, but up to now, many risk managers have been able to dabble in it from afar, leaving it to your broker to set you up with the proper insurance products for your needs. There is nothing wrong with that for the moment, but that approach might not work in the future, says R. Stephen Trosty, JD, MA, director of risk management at American Physicians Assurance Corp. in East Lansing, MI.
The insurance market for the health care industry is hardening in a dramatic way, Trosty says. Capacity is going down and pricing is going up. That means risk managers will find it much more difficult to acquire coverage for even the most common, mundane liability risks, not to mention the more exotic ones that may emerge in the future.
Jeannie Sedwick, ARM, risk manager with The Medical Protective Co. in Cary, NC, says the hardening insurance market is going to make the risk manager’s job even more important. The risk manager will be responsible for showing the carrier that the provider is a good risk. "If you’re going to continue to place your insurance with a reputable carrier, the carrier will want to know what kind of programs you have in place and who is managing it," she says. "That’s where the risk manager comes in. You’ll need to make a good case for showing that your programs are up to date, that you’ve assessed all the old and new types of exposures and taken the right steps to lower your risk."
Trosty says the insurance industry is becoming more of a seller’s market, which means that you may have to work harder to acquire coverage. "The hardening of the market is going to make the risk-financing part of risk management more important," he explains. "Risk managers will have to look at other methods of financing risk besides the traditional insurance market. The traditional market isn’t going to be so interested in providing that coverage any more. We’ll see a move away from the traditional method of buying insurance and toward alternative risk financing."
The alternatives could be captives, rent-a-captives, self-insureds, retentions, trusts, and other options. Many risk managers currently don’t have a sufficient understanding to develop and work with those alternatives, so Trosty says it would be wise to acquire that background now.
"Your knowledge of these alternatives needs to be such that you can play an active part," he says. "Brokers will be there to help you, but I don’t think most risk managers have the knowledge or background. You’re going to have to acquire it through educational programs and seminars. If you learned it in a course years ago and never had to apply it, you may have to go back and brush up on it."
Sedwick agrees, saying risk managers will do well to consider what the insurance broker is looking for. When the market was soft, that wasn’t so important because the broker was willing to do whatever it took to get your business. But now, she says, you have to play to their concerns. "They’re going to look at what they need in place to be able to underwrite this account and what kind of things can help discount the pricing," she says. "You’re better off if you go in with an understanding of that so you can show them and meet their needs."
Risk managers don’t have to become as adept as brokers when it comes to insurance alternatives, but Trosty says you do have to be familiar enough with the options to fully discuss them and determine what suits your needs. The difference is that, now and increasingly in the future, insurers are not so eager to seek out your business. It’s more of a seller’s market, and you will have to go after the coverage instead of waiting for it to come to you.
And when you are working with insurers in the future, don’t be surprised when they demand more of you. With the hardening market, insurers are going to be more picky in every way, Trosty says. That means they will expect to see evidence that you have your risks under control.
"Insurers and reinsurers are looking for new approaches that will have an effect," he says. "If all you say is you’ll do more of the same, you won’t get the insurance. Insurers will look to the entity to take some action, and the assumption is the risk manager will come up with some solutions or partner with someone who has a new and creative approach."