AM Best Maintains Negative Outlook for MPL Segment in 2022, Cites Rising Loss Costs, Increasing Severity, Diminished Reserves

AM Best maintained its negative outlook for the U.S. medical professional liability (MPL) insurance segment in 2022. In a Market Segment Outlook published recently, the global credit ratings agency cited the ongoing pressures of a depressed demand, rising loss cost trends, an increase in high-severity claims, social inflation and diminishing reserve redundancies as justification for continued concern.

Best has held a negative outlook for the MPL segment since 2018, initially citing changes in healthcare delivery methods and the migration of private practice physicians to large physician networks and hospital employment. In 2020, the rating agency began expressing concern over underwriting adequacy, rising loss costs, loss-severity trends and shrinking reserve redundancies, noting the sector was at its “weakest point in almost two decades” and faces “dim prospects for … profitability.”

Those challenges persist in 2022, and Best believes “the long-term survivors of these headwinds will be those who maintain price discipline, are able to attract and retain insureds throughout market cycles, continue to educate insureds, use innovation and data analytics to their advantage, seek effective ways to defend and mitigate the effects of social inflation (including the growing trend of life care plan verdicts), while navigating through the legal challenges and significant liability uncertainties related to COVID-19, as immunities reach their statute of limitations.”

Market Conditions on Front End of Firming

According to Best, MPL market conditions appear to be on the front end of some firming, as most carriers continue to adjust pricing. Modest rate increases that began in 2019 are “expected to gain momentum in the next 12 to 18 months. The compounding effect of these increases should manifest in 2022, as accident-year results may see the benefits from improved pricing. However, the pace of improvement will depend on rising loss costs, market conditions and price discipline.”

Despite the much-needed rate actions and improvements to the top line, Best cautions, operating and underwriting results are likely to remain pressured though 2022, as the “longer-term headwinds of rising severity, depressed demand and significant capacity in the physician segment are likely to temper a return to underwriting profitability.”

Best further warns any top-line growth in the segment will likely be countered by inflation, rising loss costs, low interest rates and the decline in investment income. These concerns have been exacerbated “by the reduction in favorable prior-year reserve redundancies, the inability to settle claims and the emergence of nuclear verdicts, social inflation and the erosion of tort reforms across the country.”

Pandemic Uncertainties Persist

While the MPL segment has been bracing itself for an influx of COVID-19 claims that test federal and state immunity laws, as of year-end 2021, these claims had not materialized. Claims frequency remains low when compared to pre-pandemic numbers, but Best believes that is unlikely to continue. Pandemic-related claims could yet materialize this year as “the statute of limitations for immunities nears the end and the ‘halo effect’ for healthcare workers dissipates.”

Best notes that densely populated areas remain the most impacted by the pandemic, and should immunity laws expire, are among the least desireable litigation venues. Other COVID-19 uncertainties include “the growing use of telemedicine and resulting cyber security threats, diminished availability of preventive care, and the delay or misdiagnosis of non-pandemic illness and disease.”