AM Best Maintains Negative Outlook for MPL Segment, Cites Depressed Demand, Rate inadequacy, Diminished Reserves, Pandemic Uncertainty

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Despite a slight net-income improvement in 2020, a composite of U.S. medical professional liability (MPL) insurers saw their sixth consecutive year of underwriting losses, according to a new AM Best Special Report, Continued Uncertainty Clouds the Horizon for MPL Insurers.

The financial rating agency maintains a negative market segment outlook for the MPL sector, citing the ongoing pressures of a depressed demand, rate adequacy concerns, diminished reserve redundancies due to rising loss costs and social inflation, and the unknown potential for future COVID-19 pandemic-related claims.

In correlation with the publication of the special report, AM Best hosted a roundtable-style webinar on the state of the MPL market, where industry leaders discussed the data underlying the report. The following consists of data from the special report and commentary from its corresponding webinar.

A Depressed Demand

According to AM Best, the MPL segment’s core client base has been negatively impacted in recent years by physician group and hospital consolidation trends as well as by the employment of physicians by hospitals, which often employ their own self-insurance mechanisms.

Direct premium written for AM Best’s MPL composite was up 1.1% in 2020, to $7.9 billion, after increasing 4.3% in 2019 and 2.6% in 2018. This growth followed a prolonged period of soft market conditions and changing industry dynamics that dampened product demand. Hospital and other healthcare facility businesses provided the growth, while overall premiums for physicians declined steadily during the prior five-year period.

According to the special report, the trend away from private practice, which has been diverting market share from MPL insurers for more than a decade, slowed during the first three quarters of 2020, likely due to the pandemic. But the pace reportedly picked up again during the fourth quarter.

“On the healthcare provider side, I think the pace of acquisitions is going to continue robustly — whether it’s hospital mergers or physicians joining together,” said Timothy Kenesey, MedPro Group president and chief executive officer, during the May 13 webinar, State of the Medical Professional Liability Market. “The desire to consolidate among physician groups by joining hospitals, larger physician groups or hospitals acquiring other hospitals will continue rapidly.”

AM Best also noted that the ongoing consolidation of the healthcare industry and its providers is likely to spur further consolidation among MPL insurers.

Rate Adequacy Concerns

After more than a decade of soft market conditions, loss-cost inflation, declining reserve redundancies and a prolonged low-interest-rate environment, many MPL insurers increased their pricing during the past year. According to AM Best, capacity constraints in the most challenged sectors, including hospitals and nursing homes, have driven substantial rate increases. However, sectors of the physician MPL market remain competitive. AM Best expects rate hardening to gain further momentum in 2021 as unfavorable profitability trends persist.

Despite a 1.7% reduction in underwriting losses attributed to the pandemic’s effect on claim frequency, 2020 was the MPL composite’s sixth-consecutive year of underwriting loss. The segment’s average combined ratios during the last five years are approximately 6.7 points worse than those of the overall P&C industry.

“No matter how you look at it, what we’ve seen in recent years is rate inadequacy impacting underwriting results,” said David Blades, AM Best associate director. “We’ve seen a precipitous rise in the combined ratio, showing the unfavorability of underwriting results during the last couple of years. In 2019 and 2020, the combined ratios have been in the 112% to 113% range.”

“We are starting to produce pricing that is more reasonable than it’s been in the past, but we’ve got a fairly long way to go,” added  William McDonough, Constellation president and chief executive officer. “When I look at this market, I see a 2% or so increase in prices during the last year or two. That probably needs to be 10% to 15%, ultimately.”

Diminished Reserve Redundancies

According to AM Best data, the slow erosion of the MPL industry’s reserve redundancy during the last decade appears to have ended with the 2020 calendar year-end reserves. The rating agency believes the segment’s 2020 calendar year-end booked net loss and LAE reserves will ultimately prove to be $2.1 billion redundant, representing a slightly stronger reserve position than at calendar year-end 2019, which was estimated to be $1.9 billion redundant.

The rating agency is concerned last year’s reserve improvement may be temporary, as the 2020 accident year benefited from a significant reduction in claims due to diminished physician-patient engagement during the pandemic. As restrictions are lifted in 2021 — and patient visits, procedures and surgeries return to more normal levels — the reserve position of future calendar year-ends could weaken again.

“The degree of industry [reserve] redundancy is far less than it was years ago,” Kenesey said. “Because redundancy is minimal at this point, I would predict that while there will be reserves released by the industry in the next few years, it will not be enough to overcome accident-year losses from inadequate pricing.

“What the industry should make sure it does is set initial accident-year reserves conservatively. When markets change, there’s sometimes a reluctance to do that. The question is, are the industry reserves going to be built up or are they going to deteriorate? I’m afraid I would predict they [will] deteriorate.”

AM Best partly attributes the reserve erosion to a decade-long rise in claim severity that has — at least partially — offset the MPL industry’s historically low claim frequency. Increasing severity has been driving initial accident-year loss and LAE ratios upward, a trend that continues to worsen.

“Before the pandemic, there was little doubt in our minds that severity was increasing,” Kenesey said. “Social inflation, runaway verdicts and settlement values were concerning for us.”

The Impact of the COVID-19 Pandemic

AM Best noted that pandemic-related court closures slowed legal processes last year, likely blunting the full impact of social inflation and the escalating claim severity in 2020 results. Should those claim trends return post-pandemic, claim frequency and ultimate claim costs could trend upward again.

The ratings agency still considers the pandemic’s future impact on MPL loss costs uncertain, but areas of concern include the potential for an influx of COVID-related claims attributed to a failure to positively diagnose affected patients due to delays in care, failure to protect patients from exposure to the virus and/or the denial of care due to overloaded healthcare facilities. AM Best also sees a potential surge in delayed diagnosis claims related to the postponement of non-essential care last year.

Uncertainties surrounding the sudden and substantial increase in telemedicine engagement have rightly alarmed MPL insurers. They have historically carried a low risk profile, and the uptick in engagement could very likely result in a spike in telemedicine-related medical liability claims.

“Our database shows that claims over the last five years [related to] telemedicine have had a paid-to-close ratio of about 37%, which is about 10% higher than you usually see,” said Brian Atchinson, Medical Professional Liability Association president and chief executive officer, who also pointed to ambiguity surrounding telemedicine standards of care in some specialties and the heightened potential for miscommunication and poor documentation that come with telemedicine as MPL industry concerns. “Telemedicine is an area rife with inconsistencies and uncertainty. No one thinks that genie’s going back in the bottle, but we still have great concerns.

“From the regulatory and legislative side, we remain concerned that we’re going to be dealing with piecemeal oversight and regulation regarding cybersecurity and data privacy.”

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