Part 2: US Medical Malpractice Insurance: A Brief History
Since peaking around 2007, physician medical professional liability (MPL) insurance rates had been largely declining. Over the past few years though, most MPL companies have been writing business at a “combined ratio” of more than 100% – meaning that they spend more money than they take in. Some such companies have elected to file for well-justified rate increases. Sensing an opportunity, competitors seek to attract the providers receiving these increases – betting that gaining market share trumps short-term profit. The big question remains: Is the next medical malpractice (“med mal”) crisis looming?
The Last Med Mal Crisis:
There is a range of theories about what caused the last med mal crisis, which came to a head in 2002. Trial attorneys cited an unacceptable rate of medical “errors,” which were reported and made popular in a book entitled “To Err is Human.” Physicians pointed to a tort system heavily stacked against them. Either way, high limits of insurance were relatively inexpensive, as was the cost of bringing a medical malpractice lawsuit. Thus, the risk of suing a physician was low, while the potential return was high. Regardless of the reason(s) for the collapse of the MPL market, one fact prevailed: Insurance companies did not charge enough money for the coverage they provided. That mistake was corrected.
The Hard Market
For a few years following the collapse, prices were increased to what many physicians felt was a breaking point. Lobbying efforts increased exponentially and rallies – even strikes – were organized. Coverage was sharply reduced, and the asset protection industry blossomed. Many states passed variations of “tort reform.” Meanwhile, technological advancements and enhanced legal and risk management strategies took hold. These factors all contributed to a new fact: Insurance companies were charging far more money than they needed to be profitable.
The Soft Market
Despite the public sentiment of “lesson learned” from the previous crisis, it was not long before new price wars ensued. Start-up companies without financial strength ratings were able to grow without the oversight of rating agencies. And the combination of tort reform and risk management led to a decline in claim frequency. *
Though MPL prices kept dropping, surplus grew – causing prices to drop even further.
Casualties of Price War
Astute readers know what follows. As with any war, the price war produced casualties. Note:
Oceanus http://www.oceanusinsurance.com/liquidation-documents/
Doctors and Surgeons National RRG http://www.dsnrrg.com/
Fairway Physicians RRG http://www.fairwayphysicians.com/
Louis and Clark, RRG http://www.cbs.state.or.us/ins/admin_actions/actions_2013/insurer_2013/financial_2013/13-01-002.pdf
Galen Insurance http://www.njguaranty.org/Docs/Public%20Notices/Galen%20Insurance%20Company%20Public%20Notice.pdf
JM Woodworth, RRG
Winners & Losers
Indications show more financial trouble ahead. A “direct writer” in Florida recently had its financial strength rating lowered from an A- to a B+, with a negative outlook assigned. Another company based in Texas was just placed into rehabilitation.
To be sure, some companies have the surplus and a strong enough balance sheet to continue to compete for market share for quite some time. Others simply do not, but that might not stop them from playing in the high-stake game. Indeed, the alternative often comes with a bruised ego.
A quick way to gage your company’s financial strength is to inquire about its financial strength rating. (Do not confuse a company’s rating – or lack thereof – with that of its reinsurer’s, which is a common point of misdirection). Many (though not all) of the above company casualties were those without financial strength ratings. Those with no rating, or ones that have experienced downgrades, are the obvious ones to watch.
Timing
As with any market, trying to time an MPL market swing is a fool’s errand. But there are many steps providers can take to protect themselves from the next med mal crisis – if it comes. Hiring an independent broker with broad market access is perhaps the best one.
*According to a recent report released by CRICO, claim frequency dropped 27%, while claim severity rose 3%, over the past ten years.
Brian S. Kern, Esq., Partner, Acadia Professional.