Last month, Medical Liability Monitor published its 2016 Annual Rate Survey, which provides a year-to-year, continuing overview of changing premium rates for medical professional liability insurance. The Annual Rate Survey reports the manual rates for specific mature, claims-made specialties with $1 million coverage per claim and a $3 million annual aggregate – by far the most common limits. The special issue details three specialties – Internal Medicine, General Surgery and Obstetrics/Gynecology – to reflect the wide range of rates charged.
This year’s Annual Rate Survey depicts the cost of medical malpractice coverage against the backdrop of a medical professional liability insurance industry continuing an unprecedented run of consecutive profitable years. Much of the industry’s financial success is being driven by calendar-year underwriting profitability. This is significant because, during the approximately 40 years medical professional liability has been reported as a separate line of business, there have been only 13 years reflecting a calendar-year combined ratio under 100 percent. Ten of those 13 have been the last 10 years.
The consistent profitability and level of the calendar-year combined ratio is due, in no small part, to the favorable reserve development that began in 2005 after a five-year period of unfavorable development, occurring on the heels of significant broad-based increases in medical malpractice insurance rates and high-profile debates about the connection between access to healthcare, increases in medical professional liability loss costs/rates and tort reforms – with many states, consequently, implementing tort reforms beginning primarily in the 2003 to 2005 time period. These tort reforms – in concert with escalating costs associated with bringing a malpractice lawsuit and a shift in attitude by jury pools toward physician sympathy – have had a chilling effect on claim frequency.
As a result, the medical professional liability insurance industry has enjoyed a decade-long soft market where malpractice insurance rates have declined or remained flat from year to year. Results from the 2016 Annual Rate Survey indicate that the cost of medical malpractice insurance remains largely unchanged (flat) when compared to 2015 results. While the average rate decreased by 0.1 percent between 2015 and 2016, the vast majority (75 percent) of medical professional liability insurers participating in the 2016 Annual Rate Survey reported no rate change between 2015 and 2016 – slightly higher than the percentage with no manual change shown in 2015 (71 percent).
Of note is the distortion created by states with a Patient Compensation Fund (PCF). In 2016, and to some degree in 2015, the PCF surcharges have been impacted by unusual events. For example, the Mcare fund in Pennsylvania reflected decreased surcharges by about 50 percent in last year’s survey, but an approximate 40 percent increase in this year’s survey (related to adjustments called for in a settlement of litigation). Besides Pennsylvania, this year’s survey reports changes for the PCF surcharges in Indiana (increase), Louisiana (decrease) and Nebraska (increase). Eliminating the distortion created by the PCF surcharge changes causes the 75-percent no-change percentage mentioned above to increase to 82 percent, reduces the percentages reflecting increases (15 percent becomes 10 percent) and slightly reduces the percentage of decreases (9.4 percent becomes 8.6 percent).
In the 2015 Annual Rate Survey, medical malpractice insurers reported more rate increases than decreases for the fist time since 2006. This trend continues in the 2016 Survey – with 15 percent reporting increases and 9 percent reporting decreases. Double-digit rate increases are nonexistent this year, and only three states reported decreases of more than 5 percent: Arizona, Colorado and Louisiana.
For the twelfth-straight year, most increases were less than 10 percent. Roughly 1 percent of rate increases exceeded 10 percent, compared to a more than 5 percent of rate increases in excess of 10 percent a year ago. Similarly, 4 percent of last year’s rate increases exceeded 15 percent, whereas this year only one-half-of-1-percent of rate changes fell in this range.
Indications that the medical malpractice insurance industry’s fortune could be due to wane include a declining reserve development. During the last 10 years, favorable reserve development has benefited otherwise indicated industry calendar-year loss ratios by more than 27 points in some years. However, that benefit has declined to nearly 20 points in 2015, begging the question as to whether the medical professional liability insurance industry will continue the unprecedented, decade-long string of calendar-year underwriting profitability.
Another indication is the industry’s inflating “defense and cost-containment expense,” often referred to as allocate loss adjustment expense, or ALAE. In layman’s terms, the cost of attorneys, their staff, expert witnesses and other court-related services is getting more expensive. This increasing pressure has not prompted rate action yet because of all the other favorable claim trends, which are having a significant effect, but the increased ALAE costs should not be ignored.
The Medical Liability Monitor 2016 Annual Rate Survey indicates that the medical malpractice marketplace will remain stable in the near term, but over the long term, the industry’s slowly declining underwriting results and increasing ALAE pressures could potentially start pushing rates upward.
Michael Matray is the Editor of the Medical Liability Monitor, he can be reached here.