Ratings Agencies Warn of Profitability Challenges for Medical Professional Liability Insurance Companies

Last month, the global rating organizations A.M. Best and Fitch Ratings released independent reports that indicate while in recent years the medical professional liability insurance market has outperformed all other segments of the property/casualty insurance industry in underwriting and operating results, turbulence looms on the horizon for these insurers.

Representing approximately two percent of the property/casualty insurance industry’s written premiums, medical professional liability insurance posted significantly better underwriting results than other long-tail commercial lines segments with an average calendar-year combined ratio of 85.3 percent from 2007 to 2011. According to the Fitch report, Medical Professional Liability Update, this outperformance has been a function of more attractive competitive fundamentals in medical professional liability insurance, as well as stable loss trends in recent years driven by declining claims frequency and the impact of various tort reforms at the state level.

Significantly more favorable reported prior-period reserve development in medical professional liability insurance relative to other property/casualty lines was a major factor contributing to this difference in performance. Fitch believes that medical professional liability insurance segment loss reserves remain “significantly redundant” at year-end 2011, in contrast to an overall deteriorating industry loss reserve position.

Looking at results on an accident-year basis, the claims-made medical professional liability insurance segment, which represents approximately 75 percent of the medical professional liability insurance industry’s total  premium, entered the soft phase of the underwriting cycle later than other market segments. However, this segment has shifted to a material underwriting loss in the 2010 and 2011 accident years.

In its report, Medical Professional Liability Outperforms, But Is This Sustainable?, A.M. Best shares that its medical professional liability insurance composite indicates a 2011 calendar-year combined ratio of 89.1, which is starkly contrasted by a 2011 accident-year combined ratio of 113.4, the highest reported accident-year combined ratio in eight years. The ratings agency shares that it “is becoming increasingly concerned that at some point future calendar-year results will mirror accident-year results, leaving some medical professional liability insurance companies and their policyholders in a very contentious position.”

The Challenges Ahead
Medical professional liability insurance specialty writers have reported very strong earnings and capital growth during the last five years, but face considerable profitability challenges going forward. The medical professional liability insurance market’s net written premium volume has shrunk by 16 percent since year-end 2006, attributable to declining premium rates and the impact on insured exposures from movement of individual physicians to employment within hospitals or larger medical practice groups that are more likely to self-insure.

While other commercial lines segments are currently experiencing significant premium rate increases in response to poorer underwriting experience, Fitch expects future medical professional liability insurance rates to remain flat to down modestly, leading to further deterioration in near term underwriting performance.

Medical professional liability insurance specialty writers have reported solid capital growth during the last several years. According to Fitch, this puts insurers in a strong position to withstand future operating volatility, but opportunities to deploy capital in the segment are more limited. As a result, significant market consolidation has occurred, with several acquisitions closed during the last two years. Acquirers have included The Doctors Co. Group, ProAssurance Corp. and Berkshire Hathaway.

According to Fitch, discouraging revenue growth prospects may lead more medical professional liability  insurers to pursue mergers and acquisitions in future years, but there are limiting factors that may slow consolidation. Following the recent wave of acquisitions, there are fewer potential targets with sufficient scale to be acquired. Moreover, most smaller medical professional liability insurers’ incentive to merge is lessened by their current strong capital position and mutual or risk retention group organizational structure.

A.M. Best acknowledges that the medical professional liability insurance line has shown to be highly cyclical, but going forward, it is unknown how low the cycle’s soft phase must descend before the hard market manifests itself, and how quickly and severely the cycle will turn. In addition, uncertainties in other areas, such as tort reform, cyber liabilities and the Patient Protection & Affordable Care Act persist as the healthcare environment rapidly evolves.

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