A.M. Best Cites Underwriting, Reserving Pressures for Maintaining Negative Medical Professional Liability Outlook

The U.S. medical professional liability (MPL) insurance segment continues to produce favorable results, with better-than-average profitability for more than a decade. However, according to a new A.M. Best Special Report, the MPL market remains pressurized, resulting in a longterm trend of declining premiums, rising underwriting ratios and diminishing reserve redundancies.

The Best’s Market Segment Report, titled, “MPL Industry Results Improved in 2018, but Challenges Remain,” notes that while many financial metrics look encouraging for the MPL segment, a host of issues are infringing on the market. These challenges include the evolution of healthcare delivery systems, growing concerns about cyber liability/security, the opioid crisis, mergers and acquisitions, diversification and tort reform. Additionally, a growing numbers of doctors have moved from working as solo practitioners or in small practices to being employed by hospitals or other large medical organizations. Given these headwinds, A.M. Best is maintaining a negative market segment outlook on the MPL segment, with the overarching theme being shrinking demand and prolonged soft-market conditions.

In correlation with the publication of “MPL Industry Results Improved in 2018, but Challenges Remain,” A.M. Best hosted a roundtable-style webinar on the state of the MPL market where industry leaders discussed the data underlying the Special Report. The following consists of data from the report and commentary from the correlated webinar.

“Looking at the national data we compiled from our rated entities, another year of operating profitability has been generated by the overall composite,” said David Blades, A.M. Best associate director, during the rating agency’s webinar, State of the Medical Professional Liability Market in 2019. “That’s a continuation of what we’ve seen for at least the last 10 years in terms of operating profits, although in this year, the composite did generate an underwriting loss. What was interesting is that for the first time in a number of years, on a year-to-year basis, direct premiums written actually increased for the overall composite.”

According to the Report, direct premiums written (DPW) for the A.M. Best MPL composite was up 3.2 percent in 2018, to $7.4 billion. Overall earnings were boosted by higher investment gains and lower taxes.

The composite posted another underwriting loss in 2018 that was slightly worse than that experienced in the previous year, and the combined ratio, after policyholder dividends, deteriorated to 102.3 from 101.1 in 2017.

“The MPL sector has generated an underwriting loss in each of the last three years,” Blades said. “The underwriting loss hasn’t been huge. And it’s slightly larger in 2018 than in 2017; that’s reflective of net earned premiums increasing but losses and loss adjustment expenses incurred actually going up a little more than that of premium. So, what we saw is a one-point increase in the overall loss and loss adjustment expense ratio. Other underwriting expenses in policyholder dividends generally stayed the same. So we saw that the combined ratio really, which was also up by one point, was, again, really tied to the loss and loss adjustment expense ratio.”

Despite another year of net underwriting losses, the composite’s net income increased in 2018 by 55 percent to $1.8 billion due to increases in net investment income and realized capital gains.

“For 2018, we saw growth in investment income and realized capital gains, but their impact on total return on invested assets was muted by unrealized losses for the year,” said Sharon Marks, A.M. Best senior financial analyst. “In total, return on invested assets actually declined down to 1.2 percent for the year, compared to 6 percent in 2017. If you take a closer look at the numbers, you can see the net investment income grew 20 percent. That really reflects improvement in yields as the invested asset base did decline.

“You see the growth in realized capital gains as well, up about 40 percent for the year. What we don’t see, though, is the impact of those unrealized losses, which totaled $1.2 billion for the sector in 2018, compared to an unrealized capital gain of $953 million in 2017. That was the result of the significant downturn in the equity markets in the fourth quarter. A lot of that has been reversed in the first quarter of 2019. The impact of those unrealized losses, though, I think highlights one of the changes we’ve seen in this segment’s investment portfolios in recent years, and that’s been a move to take on more investment risk in exchange for higher yields.”

Since 2010, the MPL segment’s one-year reserve development has been running off redundant. However, the release of prior-year reserves has been decreasing, and the amount released as a percentage of the prior-year’s original calendar-year reserves booked also has been decreasing.

Despite favorable reserve development year-over-year, indications are that there is clear erosion in the level of redundancy for the segment. A.M. Best believes that current reserve redundancies will allow insurers to continue to report favorable reserve development in the near term, but at a lower level than reported in calendar-year 2018.

“When we look at the prior-year loss of development, something that we’ve reported in each of our last several annual reports on the MPL market segment, we see what was once a very robust reserve cushion — from a prior-year loss reserve development standpoint — continue a path of dissipation on a year-to-year basis,” Blades said. “If that continues dissipating, that’s a negative headwind that’s really impactful, from the A.M. Best standpoint, in terms of what annual calendar-year results will look like. Favorable development still [occurred] in 2018. The favorable impact on prior-year losses of development was about 15-and-a-half points in 2018, lower than the prior year of 17.8 points, on the combined ratio. So again, we’re seeing a lesser positive impact from prior-year losses of development.”