A.M. Best Maintains Negative Outlook on Medical Malpractice Insurance Segment for 2020, COVID-19 Outbreak Exacerbating Challenges for Insurers

The U.S. medical professional liability (MPL) insurance segment experienced a notable deterioration in underwriting results in 2019. The already dim prospects for the segment’s profitability have been clouded by COVID-19, with uncertainties regarding impacts to loss costs as well as premium refunds and the ability to put planned rate increases into effect, according to a new A.M. Best report.

In its Best’s Market Segment Report, titled U.S. Medical Profes-sional Liability Insurance Market Remains in Flux, A.M. Best states that it is maintaining a negative outlook on the MPL segment, owing to the COVID-19 outbreak. It also expresses concerns over rate adequacy amid rising loss costs and the impact of social inflation on litigation-driven loss-severity trends in the wake of diminishing reserve redundancies.

In correlation with the publication of the report, A.M. Best hosted a roundtable-style webinar on the state of the MPL market where industry leaders discussed the data underlying the report. The following consists of data from the report and commentary from the corresponding webinar.

The Unknowns Surrounding COVID-19

Like almost all conversations these days, the Best’s Market Segment Report and its associated webinar discussion began with talk of the COVID-19 pandemic.

The report notes the strain being placed on the healthcare system as COVID-19 spreads could lead to medical errors and other unforeseen situations, creating a surge of litigation. Current sentiment toward healthcare providers, the difficulties of determining the standard of care in the current environment and immunity legislation could provide some protection from COVID-19-related litigation. However, these immunities have not been tested in the courts, and claims will likely come in years ahead.

“Like virtually all aspects of life for people in the U.S. and around the world, the MPL sector has been affected by the COVID-19 pandemic,” said David Blades, A.M. Best associate director, during the rating agency’s webinar, State of the Medical Professional Liability Market. “Specific to COVID-19 are challenges such as inadequate diagnostic tests and medical supplies, a higher patient-to-medical-personnel ratio, a lack of needed personal protective equipment, an inadequate number of respirators, and on and on. Those are [some of] the number of things that could portend a variety of additional liability risks healthcare professionals and the insurance companies that provide coverage for them will have to face.

“And we’ve all seen how some of the more densely populated states and cities are more acutely impacted by the COVID-19 virus. What we’ve seen [is] that these highly affected areas are some of the least desirable litigation venues from a liability standpoint, which is also troubling for the overall MPL segment. That’s something that we’re considering as well in our overall look at the segment.”

Pre-Existing Fundamental Concerns

The A.M. Best composite of MPL insurance companies saw its pre-tax and net operating income decline year over year by 71% and 63%, respectively, owing to a significant increase in underwriting losses. The decline in underwriting results was due primarily to a slight rise in underwriting expenses and loss and loss-adjustment expenses, an 11% drop in net premiums earned, diminishing benefit from prior-year loss-reserve redundancies and ongoing margin compression. The segment’s combined ratio deteriorated to 113.3% in 2019 from 102.3% in 2018.

According to Blades, “the pandemic may have actually hit the MPL segment at its weakest point in the last two decades,” due to these already existing fundamental concerns.

“In terms of underwriting profitability, the MPL composite experienced a sizeable increase in the magnitude of its underwriting loss, specifically premiums earned compared to losses paid out, losses incurred and underwriting expenses,” he said. “That was largely due to an overall drop in net earned premiums while losses and underwriting expenses increased.

“In exhibit five of our report, you can see the U.S. MPL composite and the financial ratios that we put together in aggregate. You can see that, over time, and specifically, in the last year, from 2018 to 2019, we’ve seen a big jump in the loss and loss-adjustment expense ratio, a jump also in the underwriting expense ratio. That led to the combined ratio going up from 102.3% in 2018 all the way up to 113.3% in 2019. Again, that’s in concert with the negative outlook that we’ve got on the market. That shows some of the struggles that the sector is fighting against.”

How MPL Insurers Are Reacting

Even before the COVID-19 pandemic, the MPL insurance segment was in a state of flux. With climbing combined ratios and declining reserves, a number of insurers had already started to tighten ship.

“Prior to the current pandemic event, we were seeing some insurers, including I’ll say Coverys, taking strategic steps, looking at the underwriting of their books, more closely looking at things like risk selection [and] taking some rate, whether through adjustment schedule rating or base rate changes,” said Joseph G. Murphy, Coverys chief operating officer, during the A.M. Best webinar. “This increased underwriting discipline we’re seeing throughout the market, we’re seeing some capacity withdrawal driving changes, some markets withdrawing from certain segments or even exiting the MPL line altogether, in tandem with some tightening of underwriting guidelines.”

According to Murphy, the industry is seeing rate increases that range from single digits to 30% or more, with individual providers seeing the lower end of that spectrum and hospitals and facilities seeing the higher end.

“Insurers are trying to determine their ultimate COVID-19 exposure,” he said. “All of us are doing that. All of that will impact thoughts as we go into pricing. Things like policy suspensions [and] premium payment delays may affect some insurers’ ability to pay claims if their income is down.

“How that will impact the ability to take some rate where needed in the pricing of a product remains to be seen. We’re also seeing, in some instances, regulators ordering coverage for pandemic events, premium credits for suspected lower exposure and things of that nature.”

Murphy emphasized the unprecedented nature of the healthcare delivery system’s current challenges, with the changing nature of MPL exposures, the increased use of telemedicine, the lack of personal protective equipment, the halting of non-emergent or elective procedures and the sharp decrease in outpatient visits due to stay-at-home measures or fear of being infected.

“These are the things that we as an industry are dealing with in terms of pricing, moving forward,” he said. “It’s important to think of pricing, both pre-COVID-19 and what the impact will be on pricing as we move forward.”