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Quarterly Analysis of the Medical Malpractice Insurance Industry - Second Quarter 2018

By Eric Wunder, Consulting Actuarial at Milliman Inc. to Medical Malpractice Insurance


Cunningham Group launched a new Healthcare Matters video series that takes a quarterly, deep-dive look at the financial health of the medical malpractice insurance industry. These videos give our customers and the greater healthcare community all the necessary information to understand the current financial results of the medical professional liability industry as well as actuarial predictions for the industry’s future.  This insider information can help predict the rising and falling costs of medical malpractice insurance as well as the future health and stability of the insurance companies you entrust with your liability coverage with. On Episode 1, Milliman Inc. actuarial consultant Eric Wunder and Medical Liability Monitor editor Michael Matray review the second-quarter financial results for a composite of medical professional liability insurance companies. The following topics were discussed:
  1. The state of Direct Written Premium through the first six months of 2018.
  2. Where reserve development currently stands in relation to the past quarters and recent years.
  3. What a first-half combined ratio of 112 percent portends for the year end, and how this combined ratio compares to the first half of recent years.
  4. How the hot investment market is driving profits in the face of underwriting losses.
  5. How current financial trends will this affect physician medical malpractice insurance costs in 2019 and beyond.
Eric Wunder is a consulting actuary at Milliman Inc., and coauthors a quarterly analysis of the medical professional liability industry’s financial health that is published by Medical Liability Monitor.

Michael Matray is the editor of Medical Liability Monitor, the only independent source of consistent, reliable coverage and fresh perspectives on the medical professional liability (medical malpractice) insurance industry.

Healthcare Matters is sponsored by Cunningham Group, the medical malpractice insurance specialists. Please subscribe to our Youtube Channel so you never miss a Healthcare Matters episode.


Michael Matray: What is the state of Direct Written Premium for the first 6 months of 2018?

Eric Wunder: The 12-year decline in directorate and premium finally reversed course in the first quarter of 2018, and the second-quarter premium levels have followed suit. As you can see, the composite brought in about $100 million, or 3.6%, more premium through the first six months of 2018 than through the first six months of 2017. This is the largest year-over-year increase in directorate and premium since December of 2005.

Michael Matray: Favorable reserve development has been a driver of the long run of profitability for MPL insurers. Where does reserve development currently stand in relation to the recent past?

Eric Wunder: Actually, the composite’s 2018 favorable reserve development through six months dropped when compared to each of the last 12 years, as shown here. Just $36 million worth of reserves were released during the first half of 2018, compared to an average of nearly $250 million during the past 12 years. While annual MPL reserve development is largely dependent on fourth-quarter reserve adjustments made in preparation for year-end financial statements, the graph does illustrate that the amount of reserves released through six months provides a glimpse as to how reserves will develop during the final six months of the year. If current relationships, recent relationships continue in 2018, MPL specialty writers will see the lowest annual favorable reserve development in 12 years, and by a wide margin.

Michael Matray: Combined ratios have been creeping up for the past few quarters. Where does the composite’s combined ratio currently stand?

Eric Wunder: Relating to parts of the reduced reserve releases I just mentioned, the composite combined ratio through the second quarter rose for the third straight year to 112%, its highest mark in 15 years. This graph compares the composite’s second-quarter combined ratios to its year-end combined ratio since 2002. In this graph, the impact of the composite’s favorable reserve development during the latter half of the year is quite apparent. From 2005 to 2017, second-quarter combined ratios dropped by an average of more than 10 points from mid-year to year-end. These reserve releases, until recently, helped turn what may have been unprofitable underwriting years into profitable years. The anticipated downturn in reserve releases could place upward pressure on the 2018 combined ratio. Recent drops in the amount of favorable reserve development in 2012 and 2015 led to 5- and 6-point increases in the composite’s annual combined ratios, respectively.

Michael Matray: With the investment market so hot right now, how is it affecting the health of MPL’s bottom line?

Eric Wunder: As you can see here, the composite’s investment gain through June of 2018 increased for the third straight year. This is an increase of 5.1% relative to 2017, and continued the upswing investment performance which began near the end of 2016. As the composite’s investment performance continues to improve and its underwriting performance continues to deteriorate, the composite’s profitability has turned into a struggle between these two conflicting forces. Thus far, the upward pressure on net income from the composite’s strong investment performance is exceeding the downward pressure from the composite’s underwriting performance. Shown here, the composite’s 2018 second-quarter net income is slightly lower but comparable to 2017. However, if relief from favorable reserve development never shows in 2018 or in future years, we will likely see a downward trend in the composite’s net income unless underwriting results improve or investment income continues to rise.

Michael Matray: What affect will this have on physician medical malpractice insurance costs?

Eric Wunder: : I think, from the outside, it appears as though we might be seeing a bottoming out in terms of premium decreases, which, all else equal, would lead me to believe that premium rates would…premium levels would likely increase in the future. Although, some of that has to do with the impact that captives or non-statutory companies have on these results. If physicians of hospitals continue to move towards other alternative vehicles for insurance, then we may not see those premium gains rise as much.

Michael Matray: Will MPL Insurers be profitable in 2018?

Eric Wunder: The most interesting development, in my opinion, in the 2018 MPL market thus far is the lack of reserve releases related to prior years. It’s possible that companies have delayed these releases in 2018 for various reasons, or possibly that the releases, which, from the MPL market…from which MPL market has benefited for better than a decade have run their course. If the concern for the latter is true, is the impact this would have on already under-performing underwriting results. Keeping this concern in check, however, are robust investment results, high levels of capital, and another quarter of increasing premium volume. In any regard, at the halfway point of 2018, MPL specialty writers appear on track for yet another year of profitability.