MGU meets challenges of insuring long-term care facilities

Sapphire Blue has been shaped by a decade of internal and marketplace changes

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Managing general underwriter (MGU) Sapphire Blue opened for business on October 1, 2001. Its mission was to find the very best long-term care facilities and provide them with good liability protection at a competitive price, not an easy undertaking when capacity was limited by a hard market.

But where some see a problem, those with the entrepreneurial spirit like Kieran Dempsey, Sapphire Blue's founder and chief executive officer, and Nancy McMahon, its co-founder and chief underwriting officer, see a compelling opening.

Today, Sapphire Blue is part of Ryan Specialty Group (RSG), and its product line has expanded beyond long-term care facilities to other health care liability. But its focus remains consistent—identifying the best risks in a very tough class, says Dempsey.

The beginning

Dempsey and McMahon both were seasoned professionals when they met in 1999. Dempsey was working for Bermuda-based Mutual Risk Management (MRM) as it acquired Avreco, a wholesale insurance brokerage focused on medical malpractice, and moved him to Chicago to oversee it. McMahon had been a broker at Avreco and was underwriting health care risks for another company when she was recruited to rejoin Avreco to head underwriting. Together, they were charged with changing Avreco from a brokerage to an underwriter by creating an in-house underwriting facility for long-term care business. They hired an additional underwriter, developed a policy form tailored for their targeted insureds, established a rate plan and adopted a marketing approach, learning a lot and developing relationships along the way, says McMahon.

“It was exciting to build something from nothing,” she says. It was also difficult.

This is not an easy class to write, and with a lot of disruption in the marketplace, most insurers were reluctant to devote effort and capital to it. “As a wholesaler, we opened up the business to all agents, but that was problematic,” she says. With two underwriters and so much pent-up demand, the paper submissions quickly overwhelmed the staff. The pair had access to virtually every account, reviewing 500 to 600 submissions, including many with high frequency of loss. They identified and wrote only about 15 risks that met their tight underwriting criteria. “It was a tremendous amount of work but an amazing learning experience,” McMahon says.

The entrepreneurial spirit continued to grow, and two years later, with encouragement from a London market that was concerned about the health of the MGU's parent company, they set out on their own as an independent underwriting organization for Lloyd's markets. By now, they had also figured out how to limit submissions so they would see more of the outperforming risks they could underwrite at competitive rates, rather than the broader market.

“We were fairly successful right away because long-term care facilities were having a difficult time getting insurance,” says Dempsey. “We would find those that outperform and place them with various underwriters in Lloyd's,” he explains. They started to write business the first month and within a year were writing in excess of $12 million.

The name

Questions about the origin of their company's name invariably produce a chuckle from both Dempsey and McMahon. It was summer 2001, and they were sitting in a London pub with several Lloyd's brokers designing the product when one of Lloyd's people remarked that most patrons were drinking Bombay Sapphire Gin and tonic and suggested they name the new business “Bombay Company” or “Sapphire Company.” They decided to go with “Sapphire,” but when they tried to register the name in Illinois, the registration clerk rejected it as too generic. She suggested they add “Blue” because of the color's association with trust and health care, and “Sapphire Blue” was adopted. The name, the underwriting approach, the markets and even some clients have remained steady through several changes of ownership.

In 2007, Sapphire Blue sold itself to Beazley, one of the supporting syndicates.

“From an analytical business perspective, the market was softening, pricing was coming down and more competition was coming into the market,” says Dempsey. “We had a fairly sizeable book of insureds, and we thought we needed more resources, more capacity and more intensive claim-handling services than what we could get though a TPA (third-party administrator).”

At that time, Beazley was just growing its U.S. platform to broaden the quality of general and professional liability business it writes and was looking for cross-sell opportunities for its management liability unit in London. Acquiring its longtime underwriting partner Sapphire Blue as its Chicago underwriting team just made sense.

But more change was coming. In 2011, Ryan Specialty Group approached Dempsey and McMahon to consider jumping ship to start a health care practice at RSG. It sounded like a good opportunity with a rapidly expanding operation, and they really liked the RSG management team, Dempsey says.

“It seemed like a return, not fully to our roots of being independent, but to more of the entrepreneurial spirit that we were looking for,” so negotiations began for an arrangement that would work to everyone's benefit, Dempsey says. The end result, says Dempsey, was that, “Beazley sold RSG the renewal rights to the business.” Sapphire Blue works for Ryan but agrees to place all its long-term care business with Beazley. It is also free to add other products through other Lloyd's markets.

Sapphire Blue is now working with retail brokers and RSG's wholesale distribution group, R-T Specialty, to develop niche products in certain areas like correctional medicine and nurse staffing, says Dempsey. All of these products are supported by underwriters at Lloyd's in London and, like all of Sapphire Blue's products, are backed by Lloyd's security. “I think the syndicates tend to welcome Sapphire Blue's smaller, better-performing business as a change from the usual large and stressed accounts that find their way to London. That's one advantage of being in the U.S.,” he says.

Shifting sands

Long-term care has undergone major changes over the past 10 to 15 years, with the creation of standards helping to decrease volatility in loss results for insurers, Dempsey explains. When no one knew what an appropriate standard of care would be for treating wounds or mitigating nursing home falls, new risks were constantly emerging. Now, with increasing regulations that provide a blueprint for tracking issues and mitigating injuries, standards create both a legal defense when providers show they're followed, and an increased liability when there are lapses.

Initially, the regulations created a spike in claims, but now the industry has changed dramatically and many nursing homes are providing a much higher level of care to meet the standards. Periodic state and federal nursing home reviews are published regularly, further encouraging adherence to standards. This is wonderful for residents, of course, but risk is also more predictable from the insurer's perspective, Dempsey says.

Sapphire Blue determines which are the better performing nursing homes by reviewing surveys, staffing information, loss history and venue. Some wonderful homes are located in areas with litigious environments and high jury verdicts like areas of California; Cook County, Illinois; and Philadelphia, making them tougher risks. Also challenging are great nursing homes that “have had a bad outcome and come onto a plaintiff attorney's radar,” McMahon says.

The Hospital Readmission Reductions Program and other sections of the Affordable Care Act are driving an important trend by making the health care provider financially responsible for a patient who goes into the health system. When a patient falls and breaks a hip and goes to the hospital, the hospital will now become responsible for getting the patient all the necessary services to integrate him or her back into the community, rather than simply treating and releasing the patient. Federal data shows that nearly one in five Medicare patients discharged from the hospital is readmitted to the hospital within 30 days of the original admission, and the shift in financial incentives is aimed at improving outcomes and limiting readmission.

As a result, health systems have started partnering with long-term care facilities to provide expanded services. A Sapphire Blue client that functioned simply as a skilled nursing home, for example, is now setting up home-health care operations and rehabilitation facilities to provide all the services to take patients from the hospital through reintegration into the community, says Dempsey.

Challenges

Sapphire Blue has its own challenges. The market is soft and there are at least a dozen very competitive surplus lines markets ready to write formerly hard-to-place risks like a skilled nursing home, an assisted-living facility or even an independent-living community. “Coverage is often the same, so we differentiate ourselves through relationship and service,” says Dempsey.

That often requires fast work and flexibility. The MGA may be called the day before an acquisition to extend coverage to a new entity or to price for different scenarios. Its close relationship with Beazley's policy attorneys and its familiarity with policy wording allow it to quickly and smoothly craft new policy language in response to client needs, says McMahon. They also work with cash-strapped organizations to structure coverage they can afford.

Despite several rapid structural changes, new addresses and new phone numbers, Sapphire Blue has been very successful at retaining clients and markets.

“Our brokers and insureds have been incredibly loyal over the years. They were getting a Lloyd's policy and they were getting a Sapphire Blue product and underwriter, and the consistency was always there,” Dempsey says. That's what counts.

The author

Susan R.A. Honeyman is a New Haven, Connecticut-based freelance writer and vice president of Word Hive Communications LLC.