Favorable pricing trends in U.S. medical professional liability insurance (MPLI) have not yet translated to a reversal of weak segment underwriting performance, Fitch Ratings says. Continued rate increases will promote improvement in near-term results, but persistent litigation-related loss severity and competitive market fundamentals likely inhibit a return to underwriting profits.
The 2020 combined ratio of 113% marks the fifth consecutive year of MPLI segment underwriting losses as fading loss reserve strength and pandemic-related concerns affected results. Market pricing is responding to these losses. MPLI posted a 6.9% increase in renewal pricing during 1Q21, according to the Council of Insurance Agents & Brokers (CAIB) recent survey, a lower magnitude relative to increases reported for other loss affected lines like commercial auto or property. Net written premiums in MPLI increased by approximately 4% for the third consecutive year in 2020 despite several companies implementing premium return actions associated with pandemic-related underwriting exposure reductions.
Poorer underlying MPLI results were masked for several years by recognition of prior-period reserve strength. Favorable development of calendar-year reserves dropped in the last few years to essentially zero percent of earned premiums in 2020 from 14% in 2016. Reserve deficiencies emerged in the last two years in the claims-made MPLI segment, which represents approximately 75% of all MPLI premiums, that is typically coverage for physicians and other healthcare providers. The smaller occurrence (25%) segment, more represented by hospitals and facilities coverage, continues to report annual favorable development.
A continuing trend of higher loss severity and more frequent multi-million-dollar jury verdicts led to a sharp escalation in accident year loss ratios in the last decade. Loss cost volatility creates challenges in setting reserves as the 2017-2019 accident years have developed unfavorably in MPLI from initial estimates, a meaningful departure from prior years.
Social and economic disruption due to the coronavirus pandemic had significant effects on the MPLI market, and uncertainty remains regarding future related litigation in MPLI and several other property/casualty lines. However, reductions in healthcare patient encounters and medical procedures in 2020 lowered underwriting risk exposures and information compiled in statutory financial statements shows MPLI reported claims filings declined by 14% in accident year 2020 versus the prior year. While the broader threat of escalating incurred losses in MPLI from social inflation and rising litigation costs remains, actuaries may have underestimated benefits of lower frequency in 2020 that create a greater chance that incurred loss estimates will decline as experience emerges for this period.
A shift to future underwriting profits in MPLI is constrained by the market’s unique competitive structure. Over half of industry MPLI net premiums are written by narrowly focused specialty underwriters that largely maintain very strong capital positions but have limited opportunities or expertise to deploy capital into products outside of MPLI.
As the healthcare system continues evolving toward physician employment by hospitals and larger medical groups that are more likely garner coverage through captives or other self-insured products, a declining policyholder base and revenue pressure induces MPLI specialization to emphasize policyholder retention over premium rate adequacy. Underwriting capacity reductions among MPLI specialty writers via market exits or consolidation would likely foster better market conditions, though widespread acquisition activity is unlikely in the near term.