U.S. Medical Professional Liability Insurance (MPLI) was one of the most profitable lines of business for the past five years posting an average calendar year combined ratio of 87% from 2008-2012, according to a new report by Fitch Ratings. However, profitability has peaked and future expectations are for results to deteriorate albeit at a measured pace to levels commensurate with the commercial lines aggregate.
MPLI calendar year results have benefited from highly favorable loss reserve development averaging 23% of annual earned premium. Adjusting for this prior period reserve development, MPLI is generating current accident year underwriting losses that are similar to several other long-tail market segments.
Property/casualty industry overall reserve strength continues to weaken. However, MPLI segment loss reserves are still estimated to be significantly redundant. As such, a key challenge in assessing profitability of current period MPLI underwriting performance lies in estimating the magnitude of future loss reserve development.
Industry aggregate annual net written premium volume in MPLI has declined steadily for the past several years. At year-end 2012, the MPLI industry wrote $8.6 billion in premium which is down 17% from the peak which was in 2006.
Most commercial lines segments are currently experiencing significant premium rate increases in response to poorer underwriting experience. MPLI rates are more likely to remain flat to down and underwriting results will likely deteriorate further in the near term as the market underwriting capacity dedicated to MPLI is unlikely to meaningfully change.
A large percentage of MPLI market share is held by specialty writers that are solely focused on MPLI and have a concentrated geographic focus. MPLI specialists have generated strong capital growth over the last several years, but have limited opportunities to deploy this capital given market fundamentals and limited expertise in other underwriting segments.
The noted capital strength and low operating leverage of MPLI specialists represent a key source of credit rating stability that will allow MPLI writers to withstand any material future operating volatility.