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2013: Medical Professional Liability - Looming Threats to Solid Performance

Over the past several years, medical professional liability insurers have prospered. Although insurers are still writing profitable business, the future does not look quite so bright. Conning forecasts profits in this line to deteriorate in the next three years, due primarily to four emerging threats. This study reviews concerns related to market cycle, regulatory and judicial reform, movement of doctors from private practice into hospitals and large institutions, and lower investment returns. Major segments of the industry are reviewed in this context—specialists, multi-line insurers, and risk retention groups.

1.  Introduction

2.  Executive Summary

3.  The Medical Professional Liability Insurance Market: Declining Profitability and Renewed Stress

  • Overview
  • Conning Forecast—Declining Profitability
  • Structural Segments of the Insurance Industry: Specialists, Multilines, and Risk Retention Groups
  • Characteristics of the Segments
  • Growth of Leading Writers
  • Capital and Balance Sheet Leverage by Segment
  • Examples of Leading Writers in Each Segment
  • Underwriting Results by Company Type
  • The Four Emerging Threats
  • Summary

4.  The Threat of the Market Cycle: Are Insurers Once Again Heading Down a Dangerous Road?

  • History of Market Cycles—Why Are They So Severe?
  • Overview of the Current Cycle 1998-2015(?)
  • Are We Heading into Another Period of Peak Losses?
  • Summary

5.  The Threat of the Legal Environment: Proceed with Caution

  • Drivers of Improved Claims Experience Since 2001
  • Tort Trends Are Looking Less Favorable
  • The Affordable Care Act: The Unknown Threats
  • Summary

6.  The Shifting Health Care Provider Base

  • Consolidation of Medical Groups
  • Insurance Companies Respond to Shrinking Market
  • Summary

7.  Declining Investment Income Adds to Profit Pressures

  • Declining Interest Rates
  • Impact on Medical Professional Liability Insurers
  • Investment Strategies in a Low Interest Rate Environment
  • How Have Investment Portfolios Changed Over Time?
  • Investment Yields by Peer Group
  • Interest Rate Risks
  • An Efficient Frontier of Strategic Asset Allocation for Medical Professional Liability
  • Summary

8.  Two Possible Roads Ahead

  • The Base Conning Forecast—Recap
  • Alternative Forecast: Leading to Peak Losses
  • How Bad Can Results Get?
  • Summary

Appendix

A. List of Medical Professional Liability Insurers

B. Leading Writers in Each Segment

C. Reported Loss Development for Medical Professional Liability

D. Premium Distribution of Top Insurers

Introduction

Over the past several years, medical professional liability insurers have prospered. Underwriting profits have been at historically strong levels, with combined ratios well below 100%. Tort reforms, improvements in risk management, and successful defense of claims have brought down losses.

Although insurers are still writing profitable business, the future does not look quite so bright. Conning forecasts profits in this line to deteriorate in the next three years, due primarily to four emerging threats.

One threat is the cyclical nature of the market, which alternates between rapid increases and decreases in pricing and premiums. Some of this is driven by competitive forces, and some by volatility and slow recognition of changes in losses. Another threat is the regulatory and judicial environment, most notably the evolving nature of tort reform and, more recently, the Affordable Care Act. These changes could drive up loss frequency and severity for insurers. A third threat is the movement of doctors from private practice into hospitals and other large institutions, many of which self-insure their liability exposures. Insurers that are concentrated in single states could be especially vulnerable to losing business. Finally, medical professional liability insurers face lower investment returns, bringing down profits.

The first part of this study takes an in-depth look at the major segments of the medical professional liability insurance market in the context of the coming changes. The major segments include specialists, multiline insurers, and risk retention groups. Each of these segments has different strategies, obtains and uses capital in different ways, and has found various responses to changes in the market.

The next several chapters in the study explore the four emerging threats in detail, including the forces that drive them and their expected impact on medical professional liability insurers. How long will insurers be able to write profitable business, especially if rates continue their downward trend? How severely will changes in legislation, including the Affordable Care Act, affect loss costs; will companies need to contend with larger or more frequent judicial awards? How are insurers adapting to the increasing trend of physicians being employed by hospitals? And to what extent will companies be able to rely on investment income in the near future as a supplement to or replacement for declining underwriting performance?

The final chapter explores ways in which the four emerging threats will affect these different segments. How will insurers respond if profit margins decline as Conning has forecast? If market conditions deteriorate to the point where peak losses occur, which segments will see companies withdraw from the market, and which segments will see companies sustain and perhaps ultimately raise rates and lead the industry into a hard market?

 

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