Deterioration in operating profitability, weakened capitalization, inadequate loss reserves and greater retention levels continue to wreak havoc on the medical malpractice market, making it more challenging for those insurers willing to write new business, panelists told the recent PLUS Medical PL Symposium.
Victor Adamo, president, ProAssurance Corporation, noted that premium increases and stricter underwriting decisions have added more pressure and more staff demands. “For the survivors in the business, there is the burden of constantly conveying bad news,” he said. “Investments no longer provide a major advantage in long-tail lines. For reinsurers, it means more business and less relationship.”
According to Adamo, rate adequacy is critical to companies avoiding price-driven markets and there are also regulatory barriers. “Unreasonable regulators are causing time-consuming approval and review processes.”
Adamo explained that there is over $1 billion of displaced premium in the market and that it is unclear whether small start-ups may be able to grow surplus enough to make a meaningful contribution to capacity. “A financial crunch restricts capital growth.”
Excess Insurers’ Perspective
Looking at hospital medical professional liability from the excess insurers’ perspective, Judy Hart, executive vice president, Endurance Specialty Insurance, Ltd., said that volatility never seems to go away, but is increasing further. “Next to earthquake insurance, medical malpractice is the most dangerous line of insurance.”
According to Hart, for 2003, there are further rating downgrades, additional retrenchment and withdrawal from the market and continued pricing and retention increases. “There is also new capacity and greater consideration of alternative options by clients with predictable loss exposure. Increased risk financing expenditures will cause greater clinical risk management and proactive claims defense.”
Hart noted that the tort system is out of control.
“Tort costs in the U.S. consumed two percent of GDP annually on average since 1990 and is expected to rise 2.4 percent of GDP by 2005,” she said. “The tort system is extremely inefficient. Only 20 percent of the tort dollar compensates victims for economic losses and at least 58 percent of every tort dollar never reaches the victim.”
Hart, who sees med-mal as a market “correction” rather than a “crisis,” said that the sophistication of the plaintiff’s bar, a trial bar flush with cash and an erosion of tort reform to accept junk science have been factors driving severity. “There are some deep judicial ‘pits’ and a jury desensitization to ‘deep pockets syndrome.’ There are also some corporations that just do really dumb things.”
Meeting the Challenges
In order to meet the challenges, Hart said first-rate underwriting and claims management knowledge are needed. “This is a great opportunity to learn from our mistakes. World class selling and negotiation skills are critical and health care specialists with technical expertise who can rise to the top will make a difference.”
Matthew Fay, senior vice president, Converium, predicted that the medical malpractice market was going to get worse before it got better. “Loss ratios will continue to deteriorate,” he said. “Reserve deficiency will wreak havoc on income statements and hurt companies. That’s why it’s so important to stay up to date.”
Fay said that with the hardening of the market more reserve strengthening is on the way. “Increases on the primary side weren’t enough and will continue to drive rates up higher,” he said. “Without tort reform, there will be a more severe second round of rate increases. The industry has done a tremendous amount of work to get us back in place, but we have to pay more attention to rates.”
Looking at the provider/captive market perspective, Anthony Mercurio, managing director, Marsh Healthcare Practice, said that there are differences in the hard market today than in the past that compound the problems. “In the past, most insurance buyers were imbedded in a cost-plus system. Today, it’s not true. We’re not going to be as elastic as we were in the past.”
Mercurio said that there are alternatives in the market such as self-funding, group captives, PRUE captives and others. “While we’re not immune from increased severity and lower investment returns on funded assets, ROI expectations are lower. In addition, many have engaged in a focused effort to reduce losses, most have lean budgets and have a camaraderie among their members that is very impressive.”
Mercurio added that tort reform needs to be implemented at the grass roots level. “It has to start with doctors.”
The panel was moderated by James Hurley, principal, Tillinghast-Towers Perrin.
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