AM Best revised its outlook on the US medical professional liability (MPL) insurance segment to stable from negative, citing improved rate adequacy, the diminishing impact of pandemic-related exposures, persistently redundant loss reserves, higher reinvestment rates, and improved overall returns.
The Best’s Market Segment Report, “Market Segment Outlook: US Medical Professional Liability,” notes the segment’s proven ability to adapt to various market cycles despite tort reform challenges. However, offsetting factors in the outlook change include the segment’s shrinking pool of solo practitioners, persistent economic uncertainty, volatility in the equity markets, rising reinsurance costs, higher claims severity, and the persistence of social inflation.
As the legal system reopened post-pandemic and became fully operational in late 2022 and 2023, the expected significant negative impact on the MPL segment’s loss ratio was minimal. The segment successfully navigated changes that came with pandemic-related claims and tort reform challenges. It achieved this by implementing rate increases and growing its premium each year since 2017, according to the report. Despite the advances, the MPL segment faced another year of underwriting losses in 2022.
Inflationary pressures have spurred rising claims demands as well as higher settlement and judgment trends that will affect both existing and future reserves. However, the level of favorable development has grown in the past two years, with a positive impact on results.
“Given the segment’s generally robust balance sheets, investment income remains a key driver generating overall returns on revenue that exceed industry averages,” said Vicky Riggs, AM Best associate director. “This should play an even larger role as interest rates remain higher for longer. Further appropriate pricing adjustments should also drive additional positive momentum in 2024.”
The MPL segment predominantly invests in fixed-income securities generally held until maturity, according to the report, and operating performance will likely benefit from free cash flows and the ability to reinvest in higher-yielding fixed-income securities, which could be used to offset underwriting shortfalls. And despite the segment’s overall capital position having been adversely impacted by volatility in the capital markets, its risk-adjusted capitalization based on Best’s Capital Adequacy Ratio (BCAR) remains at the strongest level.
What remains to be seen are the potential impacts of rising loss frequency as well as escalating burnout rates, staffing shortages, and further growth of alternative care providers. The potential for these trends to negatively impact frequency while severity continues to rise could impede the progress the segment has made the past several years, according to the report.
This article is reprinted with permission. It first appeared in the December 2023 issue of Medical Liability Monitor. The editor is Michael Matray. www.medicalliabilitymonitor.com