Good news/bad news for seniors housing market

From the 2005 ASHA Seniors Housing Liability Insurance Report.
To request a full copy of the report, click here.

By John Atkinson, Partner
Thilman Filippini

While not exactly popping champagne corks, corporate risk managers and chief executives are celebrating the first signs of a return to fierce competition among business insurers.

Hurricanes and malpractice awards notwithstanding, profitability in the insurance industry generally is trending up. Statutory surpluses have increased. And quite a few industries will see a softer market for commercial property and primary liability.

Some say it's the best underwriting environment for policyholders since 1986 as underwriters seek to add premium and grow their organizations.

With some notable exceptions.

Again this year, the news is mixed for long-term care and seniors housing. Capacity is somewhat tight. Aggressively-managed risk is of paramount importance in gaining premium credits or even "as is" rates. While a number of individual companies are faring comparatively well, others struggle.

For those firms who have pursued a managed risk approach, and have taken on larger pieces of risk, the news is largely dependent on their own experience. We've seen our clients, as well as those responding to this year's survey, take on greater levels of risk, work diligently to manage that risk and ultimately gain a measure of control over this seemingly uncontrollable cost component.

Excess pricing and terms, particularly offshore options, have gained momentum. And alternate risk financing mechanisms – such as captives – have found greater acceptance among lenders and equity holders.

The stakes could not be higher in today's environment. The cost of risk impacts NOI and represents arguably the single greatest controllable expense within a community. The effect of this cost component on the value of a single location or large portfolio is dramatic, given current cap rates and the high levels of acquisitions in the industry. Controlling this expense could be the difference between winning the day on acquiring new assets or management opportunities or, on the flip-side, a negative impact on value (as a seller) if assets have loss, claim or survey problems.

Managing risk is no longer the luxury of the largest operators; it is an essential operational element for controlling costs and increasing equity value.

The main culprit, as we know, is resident litigation. But those in the lower acuity IL and AL segments of the marketplace also must continue to be vigilant in providing underwriters with clear evidence of differentiation from skilled nursing and higher acuity models.

National claim trends in seniors housing continue to far outpace those of other industries. Figures vary dramatically – some states even show a leveling in GL/PL-cost per bed – but overall the outlook is troubling.

One recent actuarial study (which is widely circulated and studied by industry underwriters) found that GL/PL cost-per-annual-skilled-nursing-bed jumped from $310 in 1992 to $2,290 in 2003. Florida had an average loss cost of $8,200 per bed. The study further identified an increase in the average claim cost from $62,000 per claim in 1992 to more than $150,000 in 2003.

The problem with this study, in terms of the Independent and Assisted Living segments, is that it relies heavily on national and publicly-traded skilled nursing chains, yet because the report includes Independent and Assisted Living units, underwriters use this data to develop rates for all segments of the long-term care industry.

Although no industry-wide data exists on a macro scale, those of us working in the IL/AL industry have long contended that Independent and Assisted Living operators are not experiencing the frequency or severity of losses suggested by other studies. In fact, the current and two prior ASHA Seniors Housing Liability Insurance Reports indicated significantly lower aggregate losses per unit than other surveys.

In addition, Thilman Filippini's business relationships, which represent close to 100,000 units nationwide, shows per-unit claims costs that are a fraction of costs reported in other studies.

On the pages that follow, we looked at several other data points which should be highlighted:

• A further examination of various risk financing mechanisms is included in Chapter 2. It points to even greater acceptance of large deductibles, retentions and captive insurance options.
• Our review of risk management practices shows additional investments in these areas, including a trend toward creating corporate risk management positions within organizations.
• Over half of respondents have implemented corporate risk management committees, developed policies related to private care givers, corporate incident tracking systems, and use arbitration clauses in residency agreements.
• The overall cost per unit is down over last year and continues a two year trend of stabilization or decreasing cost, driven partially by increased levels of risk retention of participants.

The "Managing Risk" concept may sound like a mantra, but it works. Virtually everywhere we've installed a Managed Risk program, it's helped reduce increases in costs by minimizing liability either at a single property or across an entire network. Even in today's difficult market, premium credits and favorable rates are available to those operators who demonstrate fewer underwriting "blips," a good (or improving) claim history and solid risk management foundations.

As we mentioned earlier, underwriters want new business. Managed Risk gives them a reason to believe.