What Donegal Does Right
The town of Marietta, Pa., sits in Lancaster County, about 100 miles west of Philadelphia, right on the banks of the Susquehanna River. The town is less than a square mile in size and has a population of roughly 2,600. The borough’s website dubs the community “a quintessential small town.”
You’ll find no Starbucks on Market Street, and the nearest Dunkin’ Donuts is a 10-minute drive away in the town of Mt. Joy. The most impressive structure in town may be the Donegal Insurance Group’s corporate campus, a multi-wing building that in 1961 became home to one of the region’s leading providers of both commercial and personal lines of property and casualty insurance.
On May 13, 1889, the Governor of the Commonwealth of Pennsylvania, James A. Beaver, issued Letters of Patent to the Donegal and Conoy Mutual Fire Insurance Co. The fledgling insurer was formed by a small group of farmers in Lancaster County who joined forces to protect their property and crops. Its first policy was issued to a local farmer for dwelling coverage for $4,300, with an annual premium of $3.90.
Now in its 125th year, Donegal boasts $700 million in direct premium writings, with assets of more than $1 billion. It has 800 employees, nine offices in 22 states, and a ranking among Forbes’ 100 Most Trustworthy Cos. in America.
Slow and Steady
“A significant part of it has to do with a strong, long-term business strategy,” said President and CEO Don Nikolaus. A conservative approach, he said, is the name of the game.
The company just doesn’t take on risky classes of business that many larger companies write.
“We don’t write in jurisdictions that have high susceptibility to catastrophic losses,” said CFO Jeff Miller.
That includes “municipalities, large industrial risk, taxi cabs in New York, for example,” Nikolaus said. The company’s strategy has been to stick to safer classes where it has developed expertise.
“In a very price-sensitive cycle where there’s a lot of competitiveness, if you’re committed to a long-term business strategy focused on underwriting profitability, you invoke the discipline not to chase after business at inadequate premiums,” Nikolaus said.
The commitment to be unswayed by competitors’ strategies sometimes keeps the company from pursuing fast-growth opportunities that provide short-term reward. But keeping its mind on its own knitting has protected Donegal from devastating losses.
Choosing new geographic regions to move into follows the same logic. States prone to hurricanes and tornadoes are out; ditto coastal regions at risk for flooding. That worked to Donegal’s benefit especially after Superstorm Sandy, from which it emerged without heavy losses due to its decision to avoid New Jersey and coastal New York.
The legislative, judicial and regulatory environment in any state eyed for expansion also goes under a microscope. With strategic moves into the South and Midwest, Donegal has been able to grow without jeopardizing its stability.
Diversification and Expansion
Donegal and Conoy purchased its first office in downtown Marietta in 1919, expanding it in 1949, when the company changed its name to Donegal Mutual Insurance Co. In that year, premium writings had risen to more than $600,000.
Donegal has been able to grow by diversifying its offerings, adding automobile and homeowners insurance among other property/casualty lines, and by branching off onto the commercial side.
Numerous acquisitions of personal lines companies over the years have helped the company edge into new states.
Donegal capitalized on those expansions by introducing commercial products into those branches, using existing channels to distribute commercial policies for property, liability, inland marine, auto and workers’ compensation.
“Over the last three to four years, we’ve begun to concentrate on building up the commercial lines side to get closer to that 50/50 mix,” Miller said. “We’ve also been appointing some commercially focused agencies to try to bolster the production of our commercial business.”
While organic growth has continued steadily, acquisitions have been key in transforming Donegal into a leading regional provider. Since its first acquisition in 1976, Donegal has added 10 more companies into the fold, eventually merging some of those together. Three stand out as critical moves that helped Donegal get a foot in the door of new markets.
First was the incorporation of Atlantic States Insurance Co. as a wholly owned subsidiary in 1986. Originally formed to write workers’ compensation insurance, it eventually served as a launching pad for other commercial products.
Donegal merged other acquired companies into Atlantic States in 2001 and in 2006, including Delaware Atlantic States Insurance and Pioneer Mutual in Ohio and New York. Rolling these companies into one corporate structure increased regional market competitiveness and gave Donegal the platform it needed to deliver commercial products on a wider level.
A second critical move was made in 2002, with the acquisition of the LeMars Insurance Co. in Iowa, which provided an entrée into four additional Midwestern states: Iowa, South Dakota, Nebraska and Oklahoma.
The LeMars deal paved the way for future acquisitions in Wisconsin and Michigan, and kicked off the westward phase of Donegal’s expansion strategy. With a mix of 48.1 percent personal and 51.9 percent commercial business, it also moved them closer to achieving that 50/50 mix. By 2005, the company was seeing written premiums of $423 million, with combined assets of $872 million.
Donegal then made a big push into the South in 2009, entering into an affiliation agreement with Southern Mutual Insurance Co. This agreement added business in Georgia and South Carolina, building on previous acquisitions in Virginia and Maryland in the 1990s.
The company’s latest acquisitions could prove to be the next major step forward.
“The most recent acquisition is the largest we’ve done, which is Michigan Insurance Co., a $100 million company,” Nikolaus said.
Nikolaus said the company’s agency distribution system was attractive and the acquisition strengthens Donegal’s Midwestern presence.
Moving into the Midwest has helped reinvigorate the product that got Donegal started in the first place: farm owners’ insurance. While most of that business has been focused in Pennsylvania, where farms are typically 100 acres or less, Midwestern farms five times that size offer an opportunity to write coverage for larger and more complex operations.
Building Agency Relationships
According to Dave Krenkel, vice president, marketing and advertising, a key to Donegal’s success has been making it easy for their agents to do business with them, which means maintaining open lines of communication.
Donegal hosts agencies in their headquarters in “spring meetings” where Donegal’s officers and agents get a chance to discuss progress made and problems encountered.
“We distribute only through the independent agency system,” Nikolaus said. Agents are expected to be “first line underwriters” with keen knowledge of the risks they are working with. The meetings therefore provide a venue for agents to make recommendations based on the risk environments they’re seeing.
Agents might also be drawn to Donegal because of the resources invested in talent and technology development. A training facility was built on Donegal’s campus in 1998 to prep new employees and provide continuing education courses for veterans.
“Agents really take advantage of that to come see our campus, meet our people and interact with the underwriters they’re dealing with,” Miller said.
Always with an eye on the future, the company takes in college graduates with an interest in the insurance industry and starts them as trainees, working with underwriting management in both commercial and personal lines on a daily basis.
Individual trainees that stand out for leadership qualities are fast-tracked in a leaders’ program, which provides them with extra training, conferences, and more hands-on participation opportunities.
“It’s been very helpful to identify and help provide additional resources to people so they can develop and take the next step in their careers,” Nikolaus said. All that investment
has paid off; Donegal’s employee turnover rate has held steady at under 3 percent.
“We provide an environment where employees can grow in their profession. If you want to be successful in the long term, employees have to feel that they work in an environment that has interest and concern for them and their families, and how they might succeed over time,” Nikolaus said.
Ahead of the Game
Keeping up on technology, while an ongoing process, has helped Donegal position itself as a carrier that agents and policyholders want to work with. A technology wing built in 2004 houses massive database servers that are crucial to the success of the company’s mobile apps, WritePro and WriteBiz.
For personal and commercial underwriters, respectively, the apps draw from the database to prefill information and underwrite a risk in real time, producing quotes in as little as five minutes.
While the latest editions of each app were released in 2006, they are under constant review.
“Your technology is never a completed project,” Nikolaus said. “If you’re not continually looking for ways to enhance it, you’ll fall behind.”
If Donegal’s long history proves anything, it’s that continually looking ahead, with patience and diligence, pays off in a big way.
Accountability in the ACO Structure
Health care reform is reaching for some lofty goals: making sure every U.S. citizen who wants coverage gets it, increasing standards of care to produce better outcomes, and perhaps most importantly, reining in costs.
One way the Affordable Care Act (ACA) plans to meet its goals is by promoting the formation of accountable care organizations (ACOs). These systems — consisting of integrated hospitals, physician practices and outpatient medical facilities — aim to provide better quality patient care, increase efficiency and save money through care coordination and shared savings programs. An estimated 500 ACOs currently operate in the United States, serving as many as 30 million patients.
But the new structure changes the game for the health care industry when it comes to medical professional liability issues. Many factors come into play, including the hospital employment of physicians, new reimbursement models, higher standards of care and increased use of electronic health records.
As physician employers, ACOs “will need professional liability coverage for the errors of its professional care providers,” said Derek Jones, a principal and consulting actuary at Milliman.
In fact, said I. Glenn Cohen, co-director of Harvard Law School’s Petrie-Flom Center for Health Law Policy, Biotechnology and Bioethics, ACOs will see “an increase of malpractice liability at the institutional level.”
While liability will continue to fall just as heavily on physicians’ shoulders, plaintiffs will now be able to go after their employers as well for a bigger payout. Under the ACO structure, though, a physician employee might be forced to settle a lawsuit — whereas before she may have wanted to litigate the claim to protect her reputation — because the ACO’s top priority may be to limit losses.
Unlike managed care organizations (MCOs) that became ubiquitous in the 1970s and 1980s, ACOs are not afforded protection under the Employee Retirement Income Security Act (ERISA). Patients enrolled in MCOs were barred from filing claims of negligent corporate acts against the organization; they could not allege that a corporate policy was responsible for a physician’s malpractice.
In effect, ERISA shielded MCOs from liability stemming from their physicians’ errors and omissions as they pursued cost-cutting strategies.
Now, however, the Centers for Medicare and Medicaid Services website defines “corporate acts of negligence” as those corporate policies that may have influenced a doctor’s treatment decision, like a directive to meet certain cost-savings goals.
Meeting Higher Standards
At the same time, errors are likely to increase as physicians adjust to new demands, trying to both limit expenses and deliver higher quality care.
“If you’re going to incentivize physicians to achieve savings in the cost of health care, that could tempt them to provide less care, which could lead to higher claims,” said Mike Hollenbach, executive vice president of BMS Intermediaries. “But if you incentivize them with greater reimbursement based on positive outcomes, it could drive them to provide better care.”
The definition of “better” care matters. Traditionally, better care equaled more care — more tests and more treatments. While that may be a more comprehensive way to attack an illness or injury — as well as a defensive way to limit litigation risk — it results in a higher bill.
According to the CMS, health care spending, at $2.8 trillion or $8,915 per person, constituted 17.2 percent of the U.S. GDP in 2012. That’s about twice as much as other developed nations.
ACOs look to undo that trend, improving care quality by streamlining and coordinating services from all providers into one, patient-focused plan, and reducing unnecessary and redundant treatment. While limiting costs and delivering higher quality care should theoretically reduce malpractice claims, higher standards of care will likely introduce new exposures in the initial phases of health care reform. Until ACOs and doctors adapt to new demands and are actually able to deliver quality care at a lower cost, patients will have more ammo to bring against them in a malpractice suit, perhaps claiming “sub-standard” care.
Meeting higher standards will be complicated by a focus on “patient-centeredness,” another focal point of the Affordable Care Act. The ACA goes so far as to tie patient satisfaction to reimbursement. For example, Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) surveys, which poll discharged patients about their overall experience with hospital staff, are used as a quality measure to calculate value-based incentive payments, according to the CMS. Thus, patient satisfaction surveys have the potential to sway how “valuable” treatment was, which affects reimbursement.
The downside of those surveys is that they raise patient expectations for their next hospital visit. The survey doesn’t just ask patients about the adequacy of care received; it questions communications with nurses and doctors as well as the “cleanliness and quietness of the hospital environment,” according to the CMS. A surveyed patient may seek a more collaborative relationship with doctors and nurses and more pleasant overall experience, and could be more inclined to blame a problem on the lack of such an experience.
The influx of newly insured patients — estimated to reach as high as 30 million — will also make it more difficult to deliver that personalized attention. This could lead to a spike in claims.
Costs of Cost-Cutting
Corporate cost-containment goals and incentive-based payments present the biggest liability exposures, experts said. An ACA provision calling for value-based compensation that pays doctors based on positive outcomes rather than patient volume for Medicare and Medicaid patients is set to go into full effect in 2015.
“If certain diagnostic tests are reduced or eliminated, there is potential for failures to diagnose medical issues that would otherwise have been observed,” Jones of Milliman said. Patients who feel that cost-cutting attempts resulted in inadequate care can sue their physician as well as the organization that employs them, alleging negligence.
According to an article in The Journal of the American Medical Association, “medical liability claims would be judged by state standards, which do not consider federal cost containment goals when determining whether a medical decision was appropriate.” So adherence to cost savings guideliness may increase the the exposure of physicians or ACOs.
“I think this is the biggest concern at the institutional level in terms of liability,” Harvard Law School’s Cohen said. “I think they will want to make larger investments in managed care E&O insurance, to try to protect from that liability. They’ll also want to be cautious when implementing incentive-based compensation that is tied not to quality but to cost savings, because that will be fodder for plaintiffs that want to sue the ACO and claim that the ACO policy was responsible for their injury.”
Coordination of care also means increased reliance on electronic health records (EHRs). These records, containing not only medical history but also demographic and billing information, help doctors develop more personalized treatment plans and work together within their health network.
But they also create a document that could potentially provide more information that could be used against a health care provider in court.
“When you have a longer paper trail, there’s much more to find as part of document discovery,” Cohen said. If a physician deviates markedly from care that’s already been given, the EHR provides what Hollenbach of BMS Intermediaries, called a “roadmap to liability.”
“On the other hand, if they’re documenting very well, in conformity with practice guidelines and evidence-based care, that could be helpful in fighting litigation,” Cohen said.
Documentation that reveals no smoking guns would pressure plaintiffs to settle.
Discovery of negligence, however, is not the only liability threat that EHRs pose.
As more patient information becomes digitized, and more care providers gain access, physicians and health networks take on a huge cyber exposure. HIPAA violations will be all that much easier to commit, and any lost or stolen data could lead to massive claims. ACOs that require their physicians to use EHRs would be liable for securing and protecting that data.
The implications of health care consolidation for medical professional liability insurance could take years to be realized. If all goes according to plan, delivering care through an ACO should mean fewer claims but implementing change leaves room for error.
As physicians adapt to that change and learn how to meet higher standards of care, MPL claims could temporarily spike. Over the long run, though, “I think ACOs will see a net benefit in comparison to a similar group of physicians, hospitals, etc., that are not coordinated via the ACO structure,” Jones said.
Insurers will also have to adjust their products to fit new demands. As private practices get drawn into larger organizations, insurers that typically write policies for independent physicians will have to rethink their strategy, either by broadening coverage to include hospital-based risks or by carving out a niche among a small (and shrinking) customer base of independent practitioners.
For now, some insurers are anticipating that ACOs will need higher levels of coverage and are offering “package” policies that include MPL, D&O and general liability coverage.
Underwriters can also shift focus to mid-level care providers like nurse practitioners and physicians assistants, who will likely take on heavier workloads as more patients enter the system as new patients.
“We’re paying close attention to claim frequency. It’s the first leading indicator for whether future loss levels will change,” said Jones. “Given the lag from when errors occur to when suits are filed to when claims are settled, it will take a long time before we can really measure the impact of health care reform on MPL.”
“The insurers that will be the most successful,” said Hollenbach, “are those that can stay nimble and keep on top of these changes and react to them quickly and accurately.
Four Takeaways on the Reinsurance Market
Leaders of the reinsurance industry gathered at the CPCU Society Reinsurance Symposium earlier this year to discuss the current state of the market and where it’s headed. Here are some key takeaways from the conference’s opening panel discussion:
1. A Soft Market is the New Norm
Swiss Re Managing Director Keith Wolfe called the market not just soft, but “dismal,” with reinsurance pricing currently more competitive than the primary market.
The reinsurance market is saturated with “too much competition, too much capital, and too few CATs,” according to Peter Hearn, chairman of Willis Re. It is a trend that may be the norm until excess capital dissipates into new, emerging risks.
Cost control efforts, however, could hinder new ventures.
Specialty and regional carriers are sticking to what they do well,” said Hearn, and only global insurers are pursuing expansion.
According to Mick Ware, president and CEO of United Heritage P&C, reinsurers are recovering slowly from the economic recession but remain very cost-conscious.
One opportunity for growth may exist in workers’ compensation which, according to Wolfe, is “starting to pick up more than people realize” and is leading the way in rate increases.
2. Seeking New CATs
Reinsurers are increasingly looking to spread capacity to new CAT markets. The reinsurers identified five categories with promise:
The market for cyber insurance and reinsurance is soft because so many players are trying to get involved, and much uncertainty exists due to cyber risk’s evolving nature. Still, it is a demand that will not be going away anytime soon and will offer growth opportunity as cyber products become more developed.
If the government does not reauthorize the Terrorism Risk Insurance Act, private reinsurers will have a big void to fill.
“TRIA is a big concern,” Wolfe said. “There is an appetite for terror exposure to come into the industry.”
• Climate change
Losses from severe weather are likely to increase as major storms become more common. “Wildfire is also a big concern from a CAT standpoint,” Ware said.
• Driverless cars
The rise of automated driving is “not an ‘if’, but ‘when’ situation,” Wolfe said. While liability surrounding driverless cars is uncertain, insurers will have more risk to cover, whether it belongs to drivers, car manufacturers or suppliers.
Given the increasing scope of nanotechnology, Hearn surmised that it could be “the next asbestos” in terms of the potential for mass tort litigation.
“It’s big in the health and fitness and the food and beverage industry. The impact could be huge,” Hearn said.
Nano particles can be used to manipulate food’s texture, aroma and flavor, and alter its health profile. Pollutants created by the manufacturing process could potentially sicken workers and consumers. The growing potential uses and risks of nanotechnology have been largely flown under the radar, Hearn said, but they represent a new CAT market to keep an eye on.
The lack of loss history, however, is a common drawback to all of these opportunities. Reinsurers are taking a “wait and see” approach to these emerging markets.
3. Alternative Capital
Hearn dubbed this a “transformative time” for reinsurance as it becomes a “blended, collateralized, hedge-fund driven market.”
Insurance-linked securities and other alternative forms of capital have grown, contributing to market softening. Yet, “there is a ceiling to the percentage of the alternatives that will be purchased,” said Nick Tzaneteas, executive vice president of Transatlantic Re.
According to Hearn, insurance-linked securities represent 5 percent of P/C premium at Willis Re.
However, due to lower cost of capital, insurers are increasingly turning to alternative forms of risk transfer as a complement to traditional reinsurance, which will push reinsurers to adopt new models.
Said Wolfe, “the reinsurance market is not traditionally innovative, but that needs to change.”
4. Demographics and Expansion
The aging U.S. population means fewer younger people are buying cars and homes, and starting families, and thus are buying less insurance. Decreased economic activity incentivizes larger reinsurers to look abroad.
“From a demand standpoint, we have to look at emerging nations,” Hearn said.
The rise of the middle class in China, India and Africa means there is a larger population that has assets to protect. “We will see a rise in life and property/casualty demand,” he said.