S&P: Loss Severity Hinders U.S. Medical Malpractice

June 9, 2003

The U.S. medical malpractice industry in 2003 is likely to face a continued rise in loss severity, stemming from litigation, as it waits for meaningful tort reform, Standard & Poor’s notes in a report published last week.

The credit implications for rated companies have reportedly become somewhat less negative because of the companies’ ability to raise premium prices, and pricing adequacy alone offers no long-term positive implications.

“There is so much volatility in the industry that the current financial
strength of the industry will not hold,” said Standard & Poor’s credit analyst Shellie Stoddard, a specialist in the medical malpractice segment. “However, the ratings may stabilize this year due to pricing, because there are not many new entrants creating price competition.”

To cope with rising severity, underwriters of medical malpractice are reportedly reducing policy limits and are becoming more selective about whom they insure. Tougher underwriting standards and reduced policy limits will improve the risk pool, lower severity trends, and create more predictability in reserve estimation, as well as pricing, according to the report. Risks that are seen as substandard
are being written by excess and surplus writers for four and five times the standard rate.

As a result, loss ratios are improving. The total medical malpractice
industry’s loss ratio, defined as incurred loss and loss adjustment expenses divided by earned premium, has consistently improved since 1998. With the passage of effective tort reform, industry structure may improve and the typical medical malpractice company may actually earn an ROE commensurate with its risk level, according to Standard & Poor’s credit rating analysts. Insurers may be tempted to compete on price and policy design, similar to the 1990s market behavior.

The full report, “Waiting for Tort Reform, U.S. Medical Malpractice Industry Battles Loss Severity,” is available on RatingsDirect, Standard & Poor’s Web-based credit analysis system, at www.ratingsdirect.com.

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