Best’s Market Segment Report: Underwriting and Reserving Pressures Build on U.S. Medical Professional Liability Industry

The U.S. medical professional liability (MPL) segment continues to produce favorable results, with better-than-average profitability for more than a decade; however, according to a new AM Best special report, the MPL market remains pressurized, resulting in a long-term trend of declining premiums, rising underwriting ratios and diminishing reserve redundancies.

The Bests Market Segment Report, titled, MPL Industry Results Improved in 2018, But Challenges Remain, states that while many financial metrics look encouraging for the MPL segment, a host of issues are infringing on the market. These challenges include the evolution of health care delivery systems; growing concerns about cyber liability/security; the opioid crisis; mergers and acquisitions; diversification; and tort reform. Additionally, a growing numbers of doctors have moved from working as solo practitioners or in small practices to being employed by hospitals or other large medical organizations. Given these headwinds, AM Best is maintaining a negative market segment outlook on the MPL segment, with the overarching theme being shrinking demand and prolonged soft-market conditions.

The property/casualty industrys top 20 MPL writers, based on statutory direct premiums written (DPW), accounted for 69.9% of direct premium volume in 2018. DPW for AM Bests MPL composite was up 3.2% in 2018, to $7.4 billion. Overall earnings were boosted by higher investment gains and lower taxes. The composites underwriting loss in 2018 was slightly worse than that experienced in the previous year, and the combined ratio, after policyholder dividends, deteriorated to 102.3 from 101.1 in 2017. However, despite another year of net underwriting losses, net income increased in 2018, by 55% to $1.8 billion due to increases in net investment income and realized capital gains. The positive impact of prior-year loss reserve development on MPL business has been diminishing in recent years, but the composites calendar year underwriting results still benefited operating profitability for the segment.

Since 2010, the MPL segments one-year reserve development has been running off redundant. However, the release of prior-year reserves has been decreasing, and the amount released as a percentage of the prior years original calendar-year reserves booked also has been decreasing. Despite favorable reserve development year over year, indications are that there is a clear erosion in the level of redundancy for the segment. AM Best believes that current reserve redundancies will allow insurers to continue to report favorable reserve development in the near term, but at a lower level than reported in calendar-year 2018.

AM Best notes the impact innovative technological advancements have had on the medical field, and as an extension, the MPL market. AM Best believes that innovation is critical to insurers future success and that they must use it to attract and retain customers, as well as improving efficiencies and gain a competitive advantage. While technological developments tend to be the innovations that garner the most recognition, innovation is not all about technology. Many insurers have found nimble ways to adapt to the dynamically changing market environment without having to become sophisticated technology players.

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David Blades, CPCU
Associate Director, Industry Research
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Sharon Marks
Senior Financial Analyst
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Christopher Sharkey
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Jim Peavy
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