Home Features Competition Heats Up Amongst Insurers Seeking to Cover Addiction Centers
Competition Heats Up Amongst Insurers Seeking to Cover Addiction Centers
July 2007

Van Wagner

Lower Premiums Loom, But Addiction Centers Need to Be Vigilant on Coverage Quality

In late May, CRC Health Corporation, the nation's largest addiction treatment provider, held a conference call for investors and analysts to discuss its first quarter operating results.When it came time to talk numbers, CEO Barry Karlin gave the floor over to Kevin Hogge, CRC's chief financial officer. Hogge said little about the quarter's sharply lower margins and soaring interest costs, but he did mention something interesting about the expense side.

During the call, which featured just one question from an analyst at Merrill Lynch, Hogge pointed out that CRC had been ePam Van Cottxperiencing a sharp reduction in its insurance costs, materially impacting the provider's bottom line. He said CRC realized big savings in workers comp and property casualty, pointing out that the insurance market had improved dramatically at renewal time this year. CRC isn't the only treatment provider that is likely to see lower premiums when renewing this year and next.

"We are entering a soft market for property casualty at this time in the addictions insurance market," says Pam Van Cott, EVP at the nation"s leading insurance brokerage serving addiction treatment centers, the Van Wagner Group, based on Long Island.

Insurance markets typically fluctuate between what carriers describe as "soft and "hard" markets, with soft markets characterized by lower prices (premiums) and hard markets characterized by rising prices. In soft markets, there is usually a flood of new carriers that target a particular risk or market, increasing the competition for business and lowering prices. This has been the case in the addictions insurance market as new players have sought to write policies, with insurers like Arch Insurance joining longtime players like AIG, Philadelphia and Safeco in the $150 million a year addictions property casualty market. "There is particular competition for top residential centers, and these centers can expect to save as much as 25 percent on their drasinsurance costs in this market," says Van Cott, who points out, though, that providers need to be vigilant that they are not being shortchanged on breadth and quality of coverage at the same time.

NSM Aggressive Competitor

NSM Insurance Group, a pioneer in the insurance program administration area, has partnered with Arch Insurance and has been highly aggressive in its efforts to win business, signing the prestigious Caron account and writing in excess of $10 million in premium since the program was launched last fall. Of course, soft markets are preceded by hard markets, and the last hard market, which lasted from 2001 thru 2006, saw massive price increases of sometimes as much as 300 percent for addictions industry risk. The strength of that hard market was matched only by the depth of the soft market that preceded it in the 1990s, where carriers, flush with investment portfolio proceeds from booming stock and bond markets, aggressively entered the business. In their efforts to write policies and win market share, carriers lowered prices for insurance dramatically, very sigficantly mispricing risk along the way.

When bubbles burst in the fincial markets at the turn of the century, the extent of the mispricing became starkly apparent. And not just in the tiny addictions niche, but also throughout the insurance world. As policies matured, claims started to roll in, and without the cushion from their now deflated investment portfolios to back them up, insurance companies began to fail in droves. In the addictions arena, players like Frontier and Legion closed their doors, leaving some centers holding the bag in the form of unpaid claims.

Van Cott says that there is no indication that the market is currently mispricing risk to this extent, but she says if you get a rate that very substantially beats others, it may just be a deal backed by a carrier taking excessive risks.

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