Since the late 1990s, a cycle generally familiar to the insurance industry has been playing out in the medical professional liability (MPL) market. During the late 1990s and early 2000s, insurers’ costs increased rapidly. By 2001, after a bit of a lag, insurers started increasing their pricing. Then, between approximately 2003 and 2007, claim frequency dropped significantly for a number of reasons—patient safety initiatives, tort reform, public sentiment, and others. Meanwhile, net earned premiums continued to rise, peaking in 2006.
While this was occurring, insurers continued to increase rates, in an effort to correct prior rate inadequacies. As a result, reserves built up, allowing insurers to ease up on premium prices. This set in motion a wave of declining prices, in a fiercely competitive market that continues to this day. The results, in terms of policy writing and profits, have been phenomenal on a calendar-year basis.
However, the price war has escalated to the point where reserve releases have become the primary undergirding of profits. Today’s stellar financials are possible only because insurers are still reaping the benefits of the earlier high prices, at the cost of reserves, which have been steadily declining in the most recent years. There is reason to believe that current pricing, geared to the competitive market but likely inadequate to sustain ongoing profits, will not work much longer.