Medical Professional Liability State of the Market

By Amy Buttell

In 2022, the medical professional liability (MPL) insurance market presented a mixed bag of results. While the industry’s combined ratio improved, posting its best results since 2017, the industry hasn’t generated an underwriting profit in nearly a decade. Direct written premiums grew by double-digits, representing the best performance since 2003, signaling a firm market and industry pricing power.

In this review of the MPL Association’s May 2023 Insurance Sector Report, we offer stakeholders insight into industry financial performance. In addition, we provide commentary on internal and external market factors and offer views on market providers. This report aims at a view of the entire industry, as opposed to specialist vs. commercial insurers.

This edition, which covers market performance and conditions as of December 31, 2022, explores key financial metrics including combined ratios of financial performance, premium growth, accident-year loss ratios, and reserve changes in prior accident years. We also examine four externalities with the potential to impact industry performance, including aberrant verdicts and social inflation, artificial intelligence, private equity in healthcare, and post-pandemic human resources issues.

Financial Performance

The combined ratio for the MPL industry improved from 108.1% in calendar year 2021 to 102.2% in 2022. While this represents the best performance for the industry since 2017 when the combined ratio was at 101.7%, the industry still has not generated an underwriting profit since 2013. Furthermore, almost all the improvement in 2022 was due to a drop of 5.1 percentage points in the loss and loss-adjustment expense (LAE) ratio from 82.2% in 2021 to 77.1% in 2022.

Specific breakdowns of the combined loss ratios for the top 20 MPL insurers may be found in Table 1 of the full report. Most of the improvement in the combined ratio was due to improvements in performance from these top 20 providers, with the highest performers including Fairfax Financial, Mountain Laurel RRG, CRICO, and Liberty Mutual.

Premium Growth

Direct Premiums Written—Top 20 MPL Insurers. Direct Premiums Written (DPW) for the MPL industry increased by nearly 11% in 2021, marking the first time since 2003 that the industry has recorded double-digit premium growth, and only the second time since 2006 that growth in the market exceeded that of the total property/casualty industry. This 11% growth was driven by several factors, including firmer prices in all sectors of the market and the gradual return to pre-pandemic levels of healthcare utilization. However, in 2022, premium growth was only 5.8%, a drop of almost 50% from the growth seen in 2021.

DPW in 2022 for the top 20 MPL insurers may be found broken down in Table 2 of the full report. Notably, 18 out of these top 20 reported premium growth in 2022, with the largest growth coming from Mountain Laurel RRG. Only two of the top 20 companies—Coverys and ProAssurance—saw DPW decrease, which stemmed from the physician sector.

Physicians. For the top 20 insurers, DPW increased by 2.6%, representing the smallest increase of any sector of MPL. Not only that, but DPW was also 6.3 percentage points lower than the previous year’s increase. Notably, 16 out of these 20 companies are physician-owned mutuals or risk retention groups (RRGs). The largest growth in DPW for physicians came from StarStone, whose premiums increased 465%. StarStone is an excess and surplus lines company, meaning the growth possibly comes from its insurance of private equity (PE)-bought physicians groups.

We found in a review of rate filings that the insured physician exposures for the top 20 companies have decreased on average 20% during the last decade. So even in the current environment of generally increasing rates, the overall drop in exposures has depressed premium growth.

Hospitals. Between 2018 and 2021, DPW for hospitals increased slightly less than 5% per year. However, in 2022, they grew by 13.1%. But this premium growth has not been consistent across companies—the top 20 increased 18.3% while all others decreased by 4.6%. Hospitals have recorded the highest loss ratios as a segment of the MPL industry for the last several years. That means it’s no surprise that premium growth surged more for this sector than the others. These ratios have been driven by several factors, most notably, excess layer losses that have been adversely impacted by social inflation. Table 4 of the full report indicates the hospital premiums for the top 20 insurers.

Other Professionals and Other Facilities. Here are some highlights for these areas:

• Other Professionals: DPW increased by 18.0% in 2021 but only 8.3% in 2021. A significant portion of the growth over the last two years can be attributed to Emergency Capital Management RRG, which was revived in March 2021. Remaining growth in the segment likely represents a combination of higher pricing and exposure growth.
• Other Facilities: This segment of the market is dominated by three insurers: Berkshire Hathaway, Liberty Mutual, and CNA. Most of the top insurers in this sector write through excess and surplus subsidiaries. This has been the fastest-growing sector for the past several years. Between 2018 and 2021, they increased around 20% per year before slowing down to 4.6% in 2022. This slowdown may be attributed to firmer pricing conditions and the continued exposure growth of non-hospital facilities.

2022 Accident-Year Results and Loss Reserve Development

This segment of the report breaks down the loss activity that took place in 2022 into two distinct periods: accident year 2022 and accident years 2021 and prior. We conducted this analysis to see how much of the 2022 calendar loss ratio came from that year and how much was due to (un)favorable loss reserve development in previous years.

Accident Year 2022. Highlights include:

• From 2013 to 2018, ultimate loss and LAE ratios increased from 78% to 92%, with most of the deterioration coming from the claims-made sector. From 2018 to 2021, ultimate loss and LAE dropped to 82% due to a decrease in claim activity resulting from the pandemic, with improvement stemming from the same sector.
• The ultimate loss and LAE ratio has remained steady at 82% from the previous year. We posit two possible causes: either companies expect results from accident year 2022 to perform better than initial loss ratios and assume there is some reserve redundancy, or price increases to date have not been enough to move the needle.

Accident Years 2021 and Prior. Highlights include:

• If loss reserves for prior years prove better than expected, the calendar year loss ratio will decrease; conversely, if they prove worse than expected, the calendar loss ratio will increase.
• In 2022, the industry experienced favorable reserve development for prior years totaling $470 million, which reduced the 2022 combined ratio by 4.5%.
• Insurers usually wait several years before lowering loss reserves. However, in 2022, almost all the favorable development came from accident years 2020-2021 or the COVID years. What’s responsible? Either a premature lowering of reserves industry-wide or a recognition of pandemic claim frequency declines.
• For companies experiencing the largest favorable and unfavorable reserve development, LAE calendar loss was 5.1 percentage points lower than in 2021, but without improvement in the 2022 accident-year loss ratio. That means that all the improvement is attributed to favorable loss reserve development for 2021 and prior years.

External Factors

1. Aberrant Verdicts/Social Inflation

   In 2013-2019 there was a steady increase in MPL verdicts of $10 million or more, a figure which dropped abruptly in the pandemic years due to court closures. Social inflation describes the increase of payouts and loss ratios due to noneconomic factors resulting from the high costs of litigation—itself attributed variously to growing general distrust of large corporations, changes in jury demographics, rollbacks in tort reform, increased legal advertising, etc.

   Anger at the healthcare industry by consumers in general is also on the rise. We divide this into four categories:

   • Negative consumer experiences, including longer wait times for appointments, increased paperwork, and more frequent claim denial.
   • Lack of transparency from hospitals in providing estimated costs in coordination with Medicare and Medicaid.
   • Relentlessly rising costs of deductibles, premiums, and prescriptions.
   • Size and power of legacy stakeholders such as CVS and UnitedHealth, which retain the largest profits in the industry by far.

2. Artificial Intelligence (AI)

   The impact of AI on healthcare in general and the MPL industry in particular is unclear. However, some implications include: A potential increase in the accuracy in diagnostics by analysis of large data sets and patterns,

   • A potential reduction in claims from error and negligence by helping providers in real-time data analysis,
   • An indeterminate impact on responsibility and liability factors between healthcare providers and AI developers,
   • A potential redefinition in the standard of care potentially leading to new expectations of providers and altering the legal landscape of malpractice,
   • A potential reduction in claims from error with the ability of AI systems to learn from their mistakes,
   • Potentially, new kinds of legal challenges and the necessity of new regulations, guidelines and liability frameworks to address malpractice issues related to AI.

3. Private Equity and Healthcare

   As Dr. Robert Pearl wrote in Forbes, PE firms offer physicians the potential to increase incomes while reducing insurance-related hassles. However, in exchange, they are required to give up significant control over their practices. PE firms achieve this improved outcome by driving down costs, primarily in staffing. That being said, PE very carefully selects healthcare sectors to maximize profitability by establishing monopolies in areas such as:

   • Emergency rooms, 25-40% of which are now staffed by PE companies.
   • Specialty services in hospitals like anesthesia and radiology, which contract with PE.
   • Individual practices by paying physicians higher amounts.
   • Surgical centers reliant on patients who have the “right insurance.”

   Dr. Pearl believes that market conditions would indicate faster growth of PE in healthcare. However, physicians often value autonomy and are reluctant to cede their authority to non-physicians and non-healthcare providers, as well as being concerned about the potential impact on their patients’ quality of care.

4. Post-COVID19 Human Resources Issues

   The pandemic placed unprecedented pressure on healthcare systems. Nurses especially faced longer working hours and higher levels of stress and burnout, with potential implications on quality of care. Many hospitals and other facilities struggled to meet the needs of their patients due to labor shortages. This has increased staffing costs at a time when it is harder to attract and retain nurses as well as physicians and other staff, a demand which can only increase in time with the aging population.

   With limited HR, companies are turning to new technologies and solutions to improve patient outcomes and increase efficiency, notably: telehealth, remote patient monitoring, incorporating AI into patient data usage and storage. Addressing the labor shortage in healthcare will be essential to decreasing the likelihood of medical malpractice and will require increased collaboration between insurers, providers, educators, policymakers, and other stakeholders.