Reserve Strength Declining for US Medical Professional Liability

Fitch Ratings findings show that the US medical professional liability insurance (MPLI) sector experienced underwriting losses again this past year, placing more scrutiny around shrinking reserves.

For the second consecutive year, the MPLI market reported a statutory underwriting loss, with a 102 percent combined ratio in both 2016 and 2017. Calendar-year results in MPLI continue to benefit from substantial favorable loss reserve development that averaged 20 percent of annual earned premiums for the last 10 years. That said, the level of reserve strength is declining, according to Fitch Managing Director James Auden. "Favorable development levels from the most recent accident years that represent the largest proportion of all reserves have fallen noticeably," added Mr. Auden. 

Mergers and acquisitions and consolidation activity could also pose more problems for the MPLI market over time. "Consolidation of hospitals and healthcare practices is shifting physician employment toward larger groups that are more likely to self-insure and use captive insurance or alternative risk programs, which will reduce demand for primary MPLI coverage," said Mr. Auden.

The MPLI line is a smaller product segment in the US property-casualty (P&C) industry. MPLI pricing and market performance tend to follow a different cycle than other commercial lines as large portions of market share are held by monoline writers. Historical periods of profit volatility relate to the heavy litigation and legal settlement cost component of MPLI claims. 

A large portion of MPLI market share is held by specialty underwriters. These organizations have limited expertise and underwriting opportunities to deploy this capital outside of MPLI markets. "Excess capital and underwriting capacity in MPLI is a significant hindrance to any improvement in pricing going forward despite recent deterioration in underwriting results," said Gerry Glombicki, director at Fitch. 

Motivation for larger MPLI specialists to grow via mergers with smaller peers remains strong. However, few recent transactions have affected the MPLI space despite an increase in P&C market acquisition activity in the last 2 years. Still, the prevailing capital strength of many MPLI specialists provides an ability to withstand considerable future adversity and limits incentives to seek a merger partner.