Skyrocketing insurance premiums, a dearth of companies writing medical malpractice insurance and doctors suspending their practices in protest are precipitating increased regulatory involvement and tort reform in the medical malpractice industry. According to the American Medical Association, which released a study on the sector in June 2002, medical liability has reached crisis proportions in 12 states with 30 others showing problem signs. Though legislatures have been slow to address these concerns, insurance regulators around the country are assessing the crisis and seeking solutions through such means as state-run pools and tort reforms.
The road less traveled
The medical malpractice industry has begun to reevaluate its late 1990s expansion when insurance companies diversified away from a regional focus to a national presence. This strategy has proved to be a perilous one. Many insurers have now scaled back their writings to concentrate on core geographic regions. This past summer The MIIX Group’s management put its insurance subsidiaries into solvent run-off and created a new physician-capitalized insurer, MIIX Advantage, focused solely on its historically profitable New Jersey physician business. Unfortunately, such reassessment comes too late for some insurers to offset years of under-reserving.
For example, Pennsylvania and New York regulators took over PHICO and Frontier Insurance Group, respectively, in Aug. 2001. Similarly, Virginia regulators recently took over Reciprocal of America. Instead of just focusing on key states, some writers have elected to completely exit the product line. The St. Paul, the second largest medical malpractice writer in the U.S. in 2001 according to A.M. Best, announced in Dec. 2001 that it would no longer write this line of business.
In the early 1990s the medical malpractice industry was a very profitable niche business with insurers benefiting from a hard pricing cycle and liability caps enacted in the late 1980s. Believing that there was a lucrative opportunity available, a number of insurers began to write outside of their historical footprint. In order to gain market share in new states, these insurers often resorted to underpricing their policies. As the competition increased in the late 1990s, profitability began to fall precipitously.
This declining profitability can be attributed to a number of key trends in the industry, including increasing claims severity, decreasing investment returns and higher reinsurance costs. These factors will likely continue to impact the sector detrimentally over the next few years. As a consequence, insurers have significantly increased premium rates. According to A.M. Best, total industry premiums rose 15.6 percent in 2001 and continued to increase in 2002. So far in 2003, premium rates have increased by 20 percent to 50 percent on average and over 200 percent in the “crisis” states, with obstetrics/gynecology experiencing the brunt of the rate increases.
Jury lottery and increasing claims severity
The spike in the severity of verdicts is the single biggest problem facing medical malpractice insurers today. According to AMA chairman, Dr. J. Edward Hill, “the current liability system has failed patients. The United States has created a litigation lottery, where select patients receive astronomical rewards, and others pay higher costs for healthcare and suffer access problems because of it.” (BestWire, Aug. 2002). Jury Verdict Research Co., a legal research firm based in Horsham, Pa., reported that jury awards for medical malpractice cases have increased 175 percent since 1994, to a median of $1 million in 2000 (BestWire, May 2002).
Outlook: silver lining on the horizon
Even with the government’s recent attempt to limit damages, the capital markets remain skeptical of the publicly-traded medical malpractice carriers. Publicly-traded medical malpractice carriers as a group have underperformed the property and casualty sector. We believe that significant levels of capital will not be injected into the medical malpractice insurance sector until increased measures of tort reform are enacted. It is too early to determine when national tort reform will be enacted but developments on Capital Hill are encouraging.
As investors seek higher returns in less volatile P&C sectors, we expect that medical malpractice providers will continue to use captives, risk retention groups and state pools in increasing numbers. Given effective tort reforms on the state and national levels, formation of state pools and captives, and the hardening market, the tide will turn for medical malpractice insurers to deliver products and services without jeopardizing their financial stability.
Grace Vandecruze is a senior vice president at Fox-Pitt, Kelton Inc., a leading investment bank specializing in the financial services industry. She is responsible for the firm’s regulatory advisory practice. Vandecruze specializes in capital raising issues for medical malpractice insurance companies and most notably was the financial advisor for The MIIX Group.
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