Frequency Down but Severity Still a Problem for Medical Liability Insurers

Like just about any company anywhere on earth, medical liability insurers lost money on their equity investments in 2008 due to the meltdown in the U.S. and worldwide economies in the latter half of the year. However, for the first time in the experience of one long time insurance professional in the field, underwriting profits in 2008 “carried the day for overall profitability” for medical liability insurance companies.

“Typically these companies underwrite to an underwriting loss and make profit through their investment gain,” said Ray Pate, executive vice president with reinsurance intermediary BMS. Pate, who has worked in the medical liability insurance industry since 1985, specializes in the company’s North American marketplace.

Pate explained that after the extremely hard market years of 2001 – 2003, the “character of losses within the market changed dramatically around 2004, 2005. It changed depending on where you were in the country, but nationwide for whatever reason, the number, or as we refer to it the frequency of claims, reported to companies stabilized and subsequently reduced dramatically.”

The market has more or less remained stable, Pate said, so insurers have had the opportunity to build up their balance sheets and strengthen their reserves. As a result, premium costs have trended down nationally over the past few years.

The decline in claims frequency in recent years has been attributed at least in part to tort reform efforts in many states that capped the so-called “pain and suffering” component of monetary awards in medical malpractice lawsuits. Many believe the caps have led to a more selective approach by plaintiffs’ attorneys when considering taking on cases. Indeed, a study released last fall by reinsurance intermediary John B. Collins Associates Inc., which was acquired in April 2009 by global risk and reinsurance specialist Guy Carpenter & Company LLC, showed that around 57 percent of medical liability insurance executives responding to Collins’ survey believed increased selectivity by the plaintiffs bar and tort reform were the main reasons for “the overall decline among the frequency of medical liability claims in recent years.”

No Decline in Severity

Although the medical liability insurance sector has enjoyed a decrease in claims frequency, the severity of high dollar claims, those that make “the front page headlines,” according to Pate, has not diminished. “The frequency of those very large claims continues, and the overall value of those big claims is very high,” Pate said. Companies cede the large loss claims “to the reinsurance market through reinsurance. That has been an effective strategy for the companies.”

If premium costs begin to go up, and they will eventually, Pate said, it likely will be because reinsurers also have lost money on investments and will be looking to stabilize their balance sheets after paying out to insurance companies for the high dollar claims.

The “losses these companies cede to their reinsurers are still there and the value of the severe losses are high,” he said. “Those losses have to be paid for so prices have to reflect losses that are being ceded to the reinsurance program. Prices for reinsurance are not going down. They are not cheaper this year than they were last year. They had seen some decrease but I think at best we’d see it going sideways in the short term and an uptick long term.”

Still, Pate said, reinsurance is available. “It’s very available for med mal companies, more so than any other line of business, because of the profitability. There’s just a higher level of focus across the board in the reinsurance business in underwriting for profitability. Particularly in this investment climate, where even if you had the all fixed income investment portfolio, you’re talking about a return on investment of 2 to 4 percent. And if you expect a 15 percent return on equity you’ve got to make it up in your underwriting performance.”

Emerging Risks?

Pate said insurers are attempting to gauge to what extent the aging baby boomer population and the recent economic melee might affect the medical liability line going forward.

As the population ages, the health care system will become more heavily utilized. In addition providers have more tools at their disposal to respond to the growing needs of that aging population. Health care practitioners are “challenged to prescribe the right procedure or medicine or whatever the cure or hopeful cure would be,” Pate said. “With all of those options, when an adverse event occurs and you choose options A, B and C, but in 20/20 hindsight you should have diagnosed and gone for D, E and F, then the claim is much more difficult to litigate on behalf of the doctor.”

At the same time, government reimbursements through Medicaid and Medicare are not increasing, so the physicians may be forced to see more patients but be unable to provide the most up-to-date and extensive care available because of time and monetary limitations.

On the other end of that spectrum, physicians who are at or nearing retirement age may feel the need to keep on working due to significant losses to their retirement portfolios. Pate said underwriters might ask, “Is their [the physicians’] collective skill set as modern as modern medicine is today? Do they have to go back and relearn things they may have chosen not to learn because they were on their way out? And does that create a higher risk profile for the underwriting companies?”

He emphasized there is no data yet to back up such theories, but they could become “pressure points to delivering good medicine.” And because insurers are in the business of second guessing what might be in order to cover themselves against possible future claims they’re looking for “defensible medicine, medicine that can be successfully defended in the courtroom.”

Tort Reform Debate Rolls On

Recent medical liability reform efforts in various states have paid off, Pate said. Texas, which Pate dubbed the “poster child” for tort reform, has seen the benefits of such legislation passed in 2003. “If you were to look at the number of companies that were writing in Texas and the rate level in Texas before tort reform versus the number writing now and the rate level now, you see a dramatic improvement in that marketplace,” Pate said.

As an example, one medical professional liability insurer operating in Texas, Medical Protective, recently lowered its rates for physicians for the sixth time since 2003, and every time the company has announced a rate change it has cited the effect of the 2003 legislation. Medical Protective, which has about 9,000 policyholders in Texas, reduced rates by a 6.2 percent statewide average effective Jan. 1, 2009. Overall, since 2003, the company has lowered malpractice premiums in Texas by an average of more than 37 percent.

Despite the Texas experience, however, some consumer advocates insist that even though tort reform laws may lower costs for insurance companies, those cost reductions don’t necessarily get passed on to consumers. The American Medical Association believes otherwise and is pushing Congress to enact medical liability reform on a national level that would include a $250,000 cap on non-economic damages in medical liability cases.

And with health care reform a key initiative for the Obama administration the debate over medical liability reform is likely to heat up at the national level. The plaintiff’s bar plans to lobby Congress against placing limits on medical liability lawsuits, according to Politico magazine, and the American Tort Reform Association reports that personal injury lawyers have begun targeting individual states in an effort to advance “their own legislative agenda to change tort law in their favor, and [are] doing so in an orchestrated and coordinated fashion through their national organization.”

Topics Carriers Texas Profit Loss Claims Underwriting Reinsurance Market