Fitch: Medical Malpractice Insurance Companies Should Expect Underwriting Performance to Decline

On May 8, 2012, Fitch Ratings released a report that proclaimed medical malpractice insurance companies should expect their underwriting performance to decline. According to Fitch, a deeper look into the nation’s medical malpractice insurance companies indicated a less positive performance than has generally been recognized and that future operating challenges will challenge the industry moving forward.

Medical malpractice insurance companies have for years had enviable combined ratios. A company’s combined ration indicates how profitable an insurance company is performing. A ratio below 100 percent indicates that company is making a profit; a combined ration above 100 percent indicates the company is paying out more money in claims than it is receiving in premiums.  Medical malpractice insurance companies posted an average calendar year combined ratio of 85.3 percent for 2007 to 2011. Enviable indeed.

These awesome combined ratios can be attributed in large part to medical malpractice insurance companies strong dedication to risk management, recently successful tort reform legislation at the state level as well as a precipitously falling rate of claims frequency. All of these factors together have masked a material underwriting loss in 2010 and 2011.

While other property and casualty companies have started to increase premiums and hope to have left the soft market, Fitch expects the medical professional liability insurance industry to remain in a soft market for years to come. This will undoubtedly continue to have a negative effect on underwriting profitability.

Medical malpractice insurance companies can expect a difficult future. According to Fitch, these companies’ net written premium shrank 16 percent since year-end 2006. This shrink in premium dollars can be attributed to the soft market the industry has been stuck in for at least five years as well as a trend toward physicians choosing employment at hospitals or in larger groups rather than small, solo practices. When employed by a hospital, the hospital generally folds its employed-physician’s liability insurance into its own self-insured captive. This is a trend that is encouraged by the Patient Protection & Affordable Care Act and is likely to accelerate in coming years.

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