The Medical Professional Liability Market and the Impact of COVID-19
The COVID-19 pandemic hit on the heels of yet another brutal financial reporting season for the medical professional liability (MPL) insurance industry. Healthcare providers are risking their lives to help others; the last thing they should have to worry about is whether their liability insurer will be around to protect them. But the viability of some MPL insurers may be in question.
Early analysis suggests that COVID-19 related lawsuits are forthcoming. Commentators cite the anticipated influx of claims related to an insufficient response or having an insufficient infrastructure to properly respond. Plaintiff attorneys are already advertising to patients who have been harmed by the virus in hopes of blaming healthcare professionals.
Changes in jury sentiment, known as “social inflation,” can influence medical malpractice awards. When there is a widespread belief that physicians and their insurance companies are “deep pockets” that can compensate “victims,” juries tend to rule unfavorably on the healthcare community. However, it might be an uphill battle for a plaintiff attorney to convince a jury that the medical community is at fault for the COVID-19 epidemic.
To recognize the heroic efforts of healthcare providers, Federal and State governments are introducing legislation and signing executive orders to shield healthcare providers from liability arising from their efforts to save those infected with COVID-19. The Federal Government has granted immunity to physicians who respond on a voluntary basis. New York and New Jersey have gone even further by not requiring such providers to be volunteers.
Given the above, the system might not only see a reduction in awards, but also a reduction in the number of claims filed.
Moreover – though plaintiff attorneys may have “ecourt” filing capabilities (and will undoubtedly be granted extensions for statute of limitation issues) – newly filed cases will likely face a tremendous backlog. With courts shutting down, existing cases will take longer to resolve, and new cases will not generate substantial expenses until normalcy returns.
In the interim, poorly financed companies might get a much-needed reprieve; assuming they can collect premiums.
Physicians across the US are contemplating how to weather the COVID-19 storm. Elective procedures have been suspended in some states, while hospitals everywhere are asking physicians to conserve resources for patients most in need. Physicians are weighing the impact of closing their doors. If they put their practices on hold, they may put their liability insurance on hold as well.
Many MPL carriers have already granted short-term premium deferrals, which might be extended based on whether COVID-19 can be contained. Carriers in a precarious financial position may struggle to survive without adequate premium coming in, particularly those with a history of “cash-flow underwriting” (under-reserving, then using new money to pay for old claims).
A careful analysis of carrier financials can help physicians determine which carriers are most vulnerable.
Throughout competitive, or “soft,” insurance market cycles, little attention gets paid to company performance. Soft market cycles invariably begin when profits are healthy, and competitors try to seize opportunities by undercutting prices. Price wars usually last too long, so when hard market cycles return, they tend to be extreme.
The MPL hard market began before the pandemic. Now that it’s here, understanding key financial indicators is even more essential to prudent carrier selection.
A combined ratio is the sum of the loss ratio and expense ratio. Essentially, it refers to how much money is collected, against how much money is paid out. Since insurance companies are supposed to make investment income, a combined ratio of up to 100% is acceptable.
In 2018, several companies posted combined ratios in the high 110%’s, while a number were above 120%. Early 2019 reporting reveals that most companies saw their combined ratios further increase – in one case in excess of 170%.
An expense ratio speaks to the money spent on running an insurance company, including commissions, and less claim expenses. Fiscally irresponsible companies, by definition, will have high expense ratios.
With COVID-19 impacting MPL carriers’ ability to collect premiums (estimated to be down 25% or more for the coming quarter), expense ratios are set to rise. Companies will need sufficient surplus to withstand these times.
Year-to-Year Surplus Changes
Surplus is calculated simply by subtracting liabilities from assets. Each year, healthy companies should be building their surplus. One of the best ways to see how a company is performing is to compare current year surplus to previous years. Consistent surplus deterioration is a strong sign of serious trouble ahead.
Additional Warning Signs
Premium increases are the standard in a hard market. When markets are too soft, prices drop to unsustainable levels. Thus, structured increases are prudent to return to fiscal responsibility. Large increases, however, are an indication that companies need more money to survive.
Most increases across the market have been negligible thus far – 10% or less for most practices. Expect this to change as carriers feel more pressure to perform from their members, shareholders and/or rating agencies.
The easiest way to monitor the financial performance of an insurance company is to track its independent financial strength rating(s). Even when companies fall short of receiving a “downgrade,” their “outlook” might change. Companies with strong ratings can typically weather hard markets more successfully then those with weak ratings.
Somehow, a handful of carriers and risk retention groups (RRGs) are permitted to operate without a rating from any agency. These carriers often do not participate in such a process because they would receive unfavorable ratings.
Ironically, companies without financial strength ratings tend to highlight the financial strength of their reinsurers.
The Reinsurance Deflection
Carriers with poor balance sheets are quick to divert attention away from themselves by pointing out that their own insurers (“reinsurers”) are financially sound. This tactic gained popularity when risk retention groups (RRGs) flooded the MPL market. Not surprisingly, the highly touted reinsurers are still thriving; most of the RRGs themselves are long gone.
“Do What I Say, Not What I Do”
Prudent insurance carriers would not buy unrated reinsurance. There are several reasons why even the best reinsures do not protect physicians though.
The primary reason is because few if any reinsurance contracts include a “cut-through” endorsement, which would require the reinsurer to respond to claims on a first dollar basis if the underlying company becomes insolvent. In the absence of a cut-through, reinsurers provide little direct protection to physicians.
Healthcare providers on the front lines of the COVID-19 crisis have a lot to worry about. Juror sympathy towards, and legislation designed to protect, the brave providers sacrificing themselves every day to keep the population safe is a good start. But these measures alone might not be enough. Regulators have repeatedly failed to protect physicians from irresponsible MPL insurers. Amidst helping countless others, physicians must also help themselves.
Brian S. Kern, Esq., Partner, Acadia Professional.