AM Best: U.S. Medical Malpractice Insurers Make Underwriting, Net Income Gains Despite Difficult Environment

In spite of posting better underwriting outcomes and another year of favorable net income, AM Best has decided to retain its negative outlook for the medical professional liability (MPL or Medical Malpractice Insurance) sector this year. The ratings agency justified this outlook based on the segment’s unfavorable returns and an overall reduction in policyholder surplus, primarily attributable to unrealized losses resulting from instability in the capital markets.

Best has maintained a negative outlook for its composite of MPL insurers since 2018, initially citing changes in healthcare delivery methods and the migration of private practice physicians to large physician networks and hospital employment. Three years ago, the ratings agency began expressing concern about underwriting adequacy, rising loss costs, loss-severity trends and shrinking reserve redundancies, noting the sector was at its “weakest point in almost two decades” and faces “dim prospects for … profitability.”

In correlation with the publication of this year’s MPL Market Segment Report, Difficult Environment for U.S. Medical Professional Liability Insurers, Best hosted a roundtable-style webinar on the state of the MPL market, in which Best analysts and industry leaders discussed the data underlying the report. The following consists of data from the special report and commentary from its corresponding webinar.

Profitability Despite Underwriting Losses

The MPL segment incurred an underwriting loss of $261 million last year. Though it was an improvement over recent years, it marked the eighth-consecutive year of underwriting loss.

While the MPL industry’s year-over-year premium growth flattened, AM Best’s MPL composite — consisting of insurers predominantly focused on medical or hospital professional liability insurance — witnessed a direct premium growth of 5.5% in 2022, reaching $8.8 billion. This followed a 7.6% increase in direct premiums in 2021 and a 3.1% increase in 2020. Best expects the segment to achieve top-line growth in 2023, owing to modest rate/pricing increases spurred by rising reinsurance costs and underwriting losses.

“In our discussions with companies, we continue to hear about them taking rate, reducing credits, tightening terms and conditions where appropriate,” said Sharon Marks, AM Best director, during the May 10 webinar. “But from what we hear, these actions still aren’t across the board. There are still some markets and specialties that are highly competitive. And some companies facing competitive pressures and ample capacity — particularly in the physician segment where you have a lot of mutual and mutual-like carriers that have substantial capital bases — may have slowed some of the momentum [behind] rate increases we saw [in 2021].”

In spite of a positive net income of $786 million for the MPL composite last year, it marked a decline of 15.1% from 2021, attributable mostly to a significant decline in realized capital gains, though partially offset by a reduction in underwriting losses and growth in net investment income. Continued “other income” from ancillary fee-based services also helped offset the underwriting loss.

As a result, pre-tax operating income grew significantly in 2022, after being relatively flat for three years, as declines in net investment income had largely counterbalanced modest moderation in underwriting losses from 2019 through 2021. The substantial unrealized losses and the decline in realized capital gains were also the primary driver behind an 8.2% decline in policyholder surplus to $19.9 billion last year. Even with the decline in surplus and the 6.5% growth in net premiums written, the ratio of net writings to surplus remains at 0.3 at year-end 2022, indicating the MPL composite’s solid capital position.

Best believes the overall MPL industry’s 2022 calendar year-end booked net loss and loss adjustment expense reserves will ultimately prove to be redundant $3.4 billion, a slightly stronger position than 2021 calendar year-end reserves, which are estimated to be $2.8 billion redundant. The gradual erosion of the reserve redundancy that began more than a decade ago appears to have ended with 2020 calendar year-end reserves, which benefitted from a large reduction in reported claims due to the decline in activity because of COVID-19 restrictions.

Headwinds Persist

According to the Best report, the MPL segment’s core client base continues to be impacted by healthcare consolidation and the employment of physicians by hospitals, which often have their own captives or self-insurance mechanisms, resulting in depressed demand for professional liability insurance in the commercial market. Accordingly, premiums for physicians have declined steadily, while premiums for hospitals saw significant growth, as well as some of the highest loss ratios during the 2018-2022 period.

The MPL industry’s long-term decline in medical liability claims frequency has been at least partly counterbalanced by worsening claims severity. This rise in severity can be attributed to jury verdicts favoring plaintiffs and higher settlement amounts, particularly in certain jurisdictions. Additionally, recent years have seen an increase in high-severity losses and a weakening of state tort reform, which have further impacted loss costs. Even in states that have implemented caps on noneconomic damages, economic damages continue to rise. Social inflation, life care plans, jury anchoring and litigation financing are contributing to the rise in excess verdicts.

“Different jury composition, a desire to compensate, loss of performance, more liberal interpretation of liability, all those things are contributing to [higher jury verdicts], and I guess we can say they sort of roll up into something called social inflation,” said Jim Hurley, WTW consulting actuary, during the webinar. “The pressure which originated with hospitals seems to be making its way into physician business, such that the entire spectrum of professional liability is seemingly having an impact on those severities.”

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