Medical Professional Insurer Market Prepped for Consolidation: Fitch

September 29, 2015

The medical professional liability insurance market continued its years-long decline in 2014 in terms of net written premium volume, hammered by forces including worsening accident-year results and a rapidly evolving healthcare market, Fitch Ratings found.

Despite its challenges, the MPLI market still managed to report a profit in 2014 and could be a target for consolidation, Fitch said.

Fitch said that net written premium volume dropped 2.5 percent in 2014, the eighth straight year that it has decline. Fitch also said that the changing healthcare market and “ample underwriting capacity” for medical professional liability insurance (MPLI) suggests the sector will continue to have weakening market fundamentals and more “gradual” declines in premium rates.

A number of factors are continuing this trend, according to Fitch, including:

  • An evolving healthcare market. The ratings entity noted that healthcare providers are moving from independent (and smaller) group practices toward working for hospitals and large medical groups. In doing so, this is causing a major change in purchase and coverage preferences for medical professional liability insurance. The difference: large groups tend to self-insure and use captive or alternative risk programs. This ends up reducing demand for primary medical professional liability insurance coverage.
  • Challenges for specialty MPLI writers. Market share for the sector is widely dispersed, Fitch said, with a large chunk of premiums written by monoline specialists, many of which are concentrated geographically. They have strong capital positions, generally, and low operating leverage. But Fitch said they enjoy limited business expansion opportunities because they lack underwriting expertise in other markets.
  • Accident-year results are deteriorating. Fitch said MPLI loss ratios on an accident-year basis have gotten higher, because of the rate of price deterioration surpassing adverse claims trends. One sign of trouble in this areas: the industry accident-year loss ratio for MBLI-claims made business in 2014 landed at 76.7. That’s 19 percent higher than the latest estimate for 2009. (Fitch does expect the difference to narrow a bit as 2014 loss experience matures.)
  • A large but diminishing reserve redundancy. It is true that calendar-year results for MPLI are still benefiting from substantial favorable loss reserve development (an average 22 percent of annual earned premiums over the previous 8 years). But Fitch said this level of favorable reserve development will shrink. Why? It turns out that development from recent accident years (accounting for the biggest proportion of all MPLI reserves) are producing “a materially lower level of development relative to past years.”

On the bright side, Fitch pointed out that the MPLI market continues to produce significant profits per calendar-year, and that the industry combined ratio was 94 in 2014. That represents only a slight deterioration over the last five years.

Still, with all of the negatives, Fitch thinks the market is ripe for consolidation. There have been few mergers and acquisitions involving MPLI specialists in the last few years, but M&A activity has picked up in the broader P/C market through the first half of 2015. With that in mind, conditions seem ripe for some MPLI merger deals, according to Fitch.

“Heightened expense pressure from a declining revenue base, coupled with profit erosion from weaker underwriting results and depleted reserve redundancies could spur an expansion in MPLI transactions going forward,” Fitch said.

Even so, the very nature of the MPLI sector’s way of operation could also be an obstacle to more merger deals.

“The mutual/reciprocal organization structure of many MPLI specialists reduces incentives for management to find a merger partner,” Fitch noted.

Source: Fitch Ratings

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