Medical Liability Insurers Look Strong Now But Face Difficulties Ahead: Fitch

May 11, 2012

The medical professional liability insurance (MPLI) market continues to stand out as a relatively strong corner of the U.S. property/casualty business, with recent underwriting performance remaining favorable, according to Fitch Ratings. However, analysts at the ratings firm said they see more difficult market fundamentals ahead, as reflected in the MPLI industry segment results.

MPLI represents a relatively small and specialized segment of the broader property/casualty market, accounting for about two percent of written premiums. Still, MPLI has been a stand-out in terms of profitability, with considerably better combined ratios than other commercial lines segments. Over the period between 2007 and 2011, MPLI posted a solid average calendar year combined ratio of 85.3 percent.

Favorable loss reserve development from prior underwriting periods has been a key factor supporting better MPLI results. Over the last five years, favorable reserve development has averaged 23 percent of written premiums annually, according to Fitch.

Fitch said it believes this reflects the inherent conservatism of MPLI writers in their incurred loss reporting. MPLI segment loss reserves, in Fitch’s opinion, remain significantly redundant, while the overall industry reserve position has weakened recently, and MPLI insurers are likely to generate favorable reserve development in future years.

Despite these positive underwriting trends, market fundamentals are weak, according to Fitch. Annual written premium volume has shrunk by 16 percent since year-end 2006. This decline was driven by declining premium rates and the continued movement of physicians to hospitals and larger medical practice groups that are more likely to self-insure.

In contrast to other commercial lines segments, where insurers have recently gained pricing traction, MPLI premium rates are more likely to remain flat or even fall in future years. Fitch analysts expect this to lead to a deterioration of underwriting results.

MPLI specialty writers have reported solid capital growth over the last several years. This puts insurers in a strong position to withstand future operating volatility, but opportunities to deploy capital in the segment are more limited, the analysts said.

As a result, significant market consolidation has occurred, with several acquisitions closed over the last two years. Acquirers have included The Doctors Co. Group, ProAssurance Corp., and Berkshire Hathaway.

Discouraging revenue growth prospects may lead more MPLI writers to pursue mergers and acquisitions in future years, but Fitch said it believes there are limiting factors that may slow consolidation. Following the recent wave of acquisitions, there are fewer potential targets with sufficient scale to be acquired. Moreover, most smaller MPLI writers’ incentive to merge is lessened by their current strong capital position and mutual or risk retention group organizational structure, according to the analysts.

 

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