How Medical Liability Insurers’ $30 Billion ‘Cushion’ Is Also Barrier to Profit

For all the changes in healthcare over the past 10 years, the principal challenges facing medical professional liability (MPL) insurance remain much the same as they have been since its crisis in the mid-2000s: a high level of capital with poor investment returns and shrinking premium.

The roughly $30 billion in capital held by the MPL industry serves as a “cushion” against systemic losses, but also as a “barrier” against a hardening of the market needed to sustain underwriting discipline, said Jerry Theodorou, vice president of Conning, the insurance research and asset management firm.

Theodorou’s comments came in a presentation at the 2017 Medical Professional Liability Symposium last week in Chicago. The conference was conducted by the Professional Liability Underwriting Society (PLUS).

Reporting on the state of the industry, 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.

For years, MPL carriers have not been able to rely on investment returns to make up for underwriting losses. In terms of combined ratios, “95 is the new 105,” he said, indicating that underwriting profits are now imperative.

Given that, Theodorou said that Conning’s analysis of 2016 rate filings still noted some substantial rate decreases, a function of the continuing soft market, but even more rate increases, although the increases tended to be smaller than the decreases.

‘Rate Erosion’

That may not reveal the whole story of MPL pricing, however. According to Theodorou there is still “rate erosion” when MPL carriers expand coverage without changing their rates.

For example, he said, “some companies are adding coverages and not fully recognizing the exposures in their pricing. When you throw in additional terms and conditions [for adding coverage], there is rate erosion.”

Rate erosion is compounded by the continued rapid consolidation of the health care sector, as doctors, hospitals, and clinics combine into large health care networks.

“If a hospital or facility doubles in size, you’re not going to be able to double your premium,” said Carolyn Toomey, senior vice president with OneBeacon, in a panel discussion following Theodorou’s presentation.

“A risk may not have the self-insured retentions and aggregate limits to reflect its size,” Toomey said, adding later that “some of our worst accounts [from a loss perspective] expand most quickly.”

Panelists agreed that there can often be too much focus on negotiating a merger and not enough on implementing it.

Toomey shared the anecdote that, following one merger, employees of an acquired facility could not get into work because their name badges no longer allowed them access.

More fundamentally, Toomey said, patients expect that all the facilities in a network have knowledge of or access to their medical history, and may not think it necessary to inform practitioners of their past treatment, medications, and other matters relevant to their care.

‘Apparent Agency’

According to Theodorou, confusion over connections between practitioners and facilities is contributing to a growth in claims citing what is called “apparent agency.”

That concept, promoted by some plaintiffs’ attorneys, holds that a practitioner who works at a facility as an independent contractor, and not for the facility as an employee, can nonetheless be regarded as an agent for the facility. The facility would therefore share in liability for the acts of the practitioner.

At a time when surveys indicate low morale among physicians, managing health care professionals to protect patient safety is a critical job, said Margaret Marchak, senior vice president and chief legal officer for Hartford HealthCare Corp., a health care network.

Networks have the unpleasant task, on occasion, of putting a physician “in an area where he or she can practice safely,” she said, adding, “If messaged in an engaging, sympathetic way, you can bring people around to it.”

Topics Carriers Profit Loss Medical Professional Liability