Medical professional liability (MPL) has been a profitable line of business for the insurance industry over the better part of the last two decades. Mounting obstacles, however, present challenges going forward.
Upward trend in loss ratios
Underwriting profits have become more difficult to achieve over the last few years, as losses and defense and containment expenses (DCCE) have risen markedly. Calendar year loss and DCCE ratios (the ratio of loss and DCCE incurred to premium earned) were around 60% from 2012 to 2014 but have since increased, averaging 78% for the 2019-2021 period.
Figure 1: Calendar year loss and DCCE ratios for the MPL industry (direct business)
Source: National Association of Insurance Commissioners (NAIC) Annual Statement data
Although overall claim frequency has been stable, claim severity has risen, with large losses occurring more frequently, contributing to the loss ratio deterioration noted above. In addition, premium rates for the industry were relatively flat from 2012 to 2018, failing to keep pace with rising claim severity, as carriers set prices competitively in a soft market.
Reductions in reserve releases also impact the upward trend in calendar year loss and DCCE ratios. While the industry has benefited from significant reserve releases over the last decade, the magnitude of releases has decreased since 2018. Industrywide net loss and DCCE reserve releases averaged $1 billion per year from 2012 to 2018 but have averaged roughly $240 million per year since. This could be a sign that the reserve releases previously enjoyed by the industry may be drying up. It is also possible that reserve releases have been delayed to some extent due to disruptions in the legal system during the COVID-19 pandemic. If the latter is the case, future calendar year loss and DCCE ratios could get some relief from reserve releases once the court system recovers from delays caused by the pandemic.
The current social/economic/legal environment has presented several risks that the industry will need to manage to curb the recent loss ratio deterioration. Some of these risks are:
The frequency of large claims has increased in recent years and social inflation is a major contributor to this phenomenon. Juries have been awarding higher damages, as jurors are more sympathetic to plaintiffs and more mindful of social justice.
After averaging 1.7% per year over the previous 10 years, economic inflation, as measured by the Consumer Price Index (CPI), rose to 7.0% in 2021 and 9.1% through June 2022. At this point, it is not known how this will impact MPL claim costs. The high level of economic inflation will likely drive up plaintiff demands, but the extent to which it will translate to larger plaintiff awards is not yet clear. Further, it is not known how long economic inflation will remain at an elevated level.
Impact of COVID-19
The COVID-19 pandemic has resulted in significant delays in the court system, which have slowed development patterns and lengthened the tail of the claims process. This raises the level of uncertainty surrounding the industry’s ultimate loss and loss adjustment expense (LAE) estimates (and unpaid claim liabilities), making profitability projections for recent exposure periods less reliable.
The pandemic also caused delays in medical treatment, as healthcare providers had to limit patient volume to reduce the risk of COVID-19 transmission and many patients deferred or forwent treatment due to concerns of potential COVID-19 exposure. Such delays in treatment and diagnosis increase the risk of adverse medical outcomes and could potentially lead to an influx of MPL claims in the future.
Many state governments enacted immunity legislation in the early stages of the pandemic to shield healthcare workers from civil lawsuits emanating from the treatment of COVID-19 patients (and, in some cases, non-COVID-19 patients), unless injury resulted from “gross negligence” of the healthcare provider. However, these protections are not permanent (many have expired) and there is uncertainty as to how effective the immunity legislation will ultimately be in protecting medical professionals against liability claims. Perhaps these laws will be quite effective in providing protection against COVID-19 claims associated with incidents that occurred within a certain period; however, the immunity legislation may be less effective in situations where adverse outcomes occurred for non-COVID-19 patients whose care was impacted by disruptions (e.g., delays in treatment) caused by the pandemic.
Potential legislative changes are a perennial risk to insurance carriers, as future law changes can significantly impact claim liabilities. For instance, earlier this year California revised the Medical Injury Compensation Reform Act (MICRA) to increase the state’s cap on non-economic damages, a change that is expected to increase claim costs. Other states such as New Jersey and New York have introduced bills that would expand damages awarded in wrongful death suits. If these bills are passed into law, medical professional liabilities in these states could increase dramatically.
The MPL market has been hardening in response to mounting risks. Data published by the Council of Insurance Agents & Brokers (CIAB) and MarketScout indicates that rates have increased by 13% to 20% from 2018 to 2021. Rates are expected to increase further in 2022, and some of the major carriers have already achieved rate increases in various states through the first half of the year. In addition to rate increases, the market has implemented more conservative underwriting practices, such as increasing self-insured retentions or reducing coverage limits.1
Figure 2: MPL rate indices and annual rate changes
The hardening admitted market creates opportunities for alternative markets (e.g., risk retention groups, captives, excess and surplus carriers), though alternative carriers will need to proceed with caution as the current litigious/inflationary environment poses challenges for growing MPL books profitably.
2022 and beyond
While emerging risks have driven up MPL loss ratios in recent years, the industry has taken steps to reverse this trend. Significant rate increases and more conservative underwriting practices have carriers poised to navigate through the social, economic, and legal challenges that lie ahead in 2022 and the years to follow.