The U.S. medical professional liability (MPL) insurance sector is stable, with strong capitalization and profitable, albeit declining, operating performance, plus the prospect of positive earnings in the medium term, according to A.M. Best.
Stable claims frequency and reserve redundancies should continue to offset soft market pricing, modest increases in claims severity and weak investment markets, according to the report, “Medical Professional Liability Sector: Solid Results Despite Growing Headwinds and Deteriorating Profitability.”
Although many financial aspects point to a favorable near-term outlook, MPL carriers face numerous challenges. According to the report, many MPL insurers have capital that they are finding difficult to deploy, as new market opportunities in their core client base continue to migrate from private practice to hospital employment.
The state of the MPL market and the roughly $30 billion in capital held by the MPL industry were discussed by Jerry Theodorou, vice president of Conning, the insurance research and asset management firm, at this year’s Medical Professional Liability Symposium. Theodorou said capital serves as a “cushion” against systemic losses, but also as a “barrier” against a hardening of the market needed to sustain underwriting discipline.
Theodorou said that MPL’s fixed expenses, premium decreases and a recent uptick in accident-year loss ratios are “eroding MPL’s distinction as a low-expense, low-combined ratio line of business.” Compounding the problem, he added, is that “MPL book [investment] yields have been down, down, down” in the low interest rate environment.
The A.M. Best report states the MPL segment reported an underwriting loss in 2016 of $164 million after 10 years of reported underwriting profitability, and an $82 million underwriting gain in 2015, reflecting the ongoing margin compression. The increase in loss and loss adjustment expenses incurred, and a decrease in net earned premiums, along with a slight increase in non-acquisition- related underwriting expenses, resulted in the combined ratio deteriorating to 102.9 from 99.2 in 2015.
Despite the decline in profitability, A.M. Best says capitalization in the MPL sector remains solid, as its prospects for positive earnings over the medium term favor the stable outlook. Modest increases in claims severity should continue to be offset by decreasing claims frequency trends and lower levels of reserve redundancies, the analysts predict.
However, there are challenges abound. Changes in healthcare delivery, tort reform, the emergence of new medicines and surgical procedures, the migration of solo practicing physicians to group and hospital employment, cyber security, the influx of insureds into the healthcare system, a highly competitive market, and low interest rates all contribute to the importance of having strong enterprise risk management.