Ground Shifting for Medical Liability Insurers: Moody’s

Although it comprises just over two percent of annual direct premiums for the U.S. property and casualty insurance industry, the medical professional liability (MPL) insurance business is integral to the U.S. healthcare system, which today accounts for almost one-fifth of the nation’s gross domestic product.

Historically among the most volatile sectors, the MPL business has performed strongly in recent years, according to a new report from Moody’s Investors Service. But the report also suggests that this MPL track record could be tested as competition heats up, investment returns remain low, tort law challenges arise and the nation’s healthcare system undergoes change.

“The MPL sector has broadly outperformed the overall P/C sector in the past few years as a result of strong pricing in the early 2000s, coupled with substantially reduced claims frequency,” says Moody’s vice president and author of the report, Alan Murray. “Nevertheless, historically strong operating margins are likely to come under some pressure due to intense premium rate competition and lower fixed-income investment returns.”

With claims trending down since the middle of the decade as a result of favorable judicial decisions, as well as state-level tort reform measures, insurers have reported favorable reserve development trends.

Nonetheless, some recent challenges to state laws aimed at controlling MPL litigation costs have raised the possibility of their repeal. “Claim frequency and severity trends, and therefore insurer profitability and premium rates, can be highly sensitive to changes in the legal environment as well as medical cost inflation,” Murray says.

But the most fundamental force acting on the medical professional liability insurance sector is the evolving nature of healthcare delivery in the U.S. The shift toward multi-specialty and multi-state physician networks and hospitals, as well as integrated regional and national healthcare organizations, in particular, are likely to drive structural change in the sector, Murray says. “And we expect a corresponding shift in market share toward MPL insurers with multi-specialty and multi-state underwriting and claim-servicing capabilities for both individual medical practitioners and institutional healthcare organizations over time.”

The Moody’s report is titled “U.S. Medical Professional Liability Insurance: A Specialty P&C Insurance Sector Tied Closely to Structure of Healthcare Delivery.”