Malpractice Insurance Premiums Increased 22%, Despite Fewer Claims

The number of malpractice claims filed against hospitals and physicians dropped 14% last year, even as premiums rose 22% on average, according to a report by the American Society for Health Care Risk Management and Aon.

An analysis of Aon’s database found that 4,718 medical professional liability claims were filed within six months of occurrence in 2020, 14% lower than the average of 5,514 reported claims from 2015 to 2019. That translates to a claim frequency of 0.54% per occupied bed equivalent, compared to annual frequency rates that ranged from 0.63% to 0.71% from 2014 to 2019.

Also, the number of claims that closed within six months plummeted to 826 in 2020, compared to numbers that ranged from 1,587 to 2,072 in each of the preceding five years.

The researchers speculated that COVID-19 strategizing may have been a factor.

“The current thinking in the industry is that COVID-19 related claims that occurred last year may be filed by plaintiffs closer to the expiration of the statute of limitations in the hope of securing better outcomes as the ‘hero’ effect enjoyed by frontline healthcare workers subsides,” the report says.

Insurers are clearly cautious. The report says average premium rates increased by 22% at renewal last year, based on a survey of 67 healthcare systems. Insureds paid an average of $50,000 for every $1 million in insurance limits, up from $42,000 under the preceding insurance program.

The financial data reported to regulators doesn’t show that insurers are suffering. According to the National Association of Insurance Commissioner’s annual market share report, the medical professional liability line experienced a loss ratio of 79.4% in 2020, including loss, defense and cost-containment expenses.

Bermuda-based insurer Sompo International augmented the annual report with an analysis of factors that are making excess insurers uneasy about premium adequacy.

Sompo said increasing severity is driving more claims above the insured retention into excess coverage layers. What’s more, retentions have not increased at a pace that matches increased exposures and inflation.

The report says the number of claims that settled for more than $10 million has been increasing steadily in recent years. In 2019, there were 38 such claims in Sompo’s database, compared to 11 in 2010. Similarly, the number of claims in excess of the insured retention has increased, from 33 in 2010 to 70 in 2019.

In most cases, self-insured retentions have not kept pace with increases in exposure, the report says. For policyholders with retentions ranging from $5 million to $10 million, exposures grew by 38% from 2010 to 2020 but retentions increased an average of only 12%. For policyholders with retentions of $10 million or more, exposure increased by 46% from 2010 to 2020 while increased only 16%.

“Ultimately we expect that changes in both actuarial and underwriting historical assumptions brought on by the fact that SIRs – specifically those >$5M – have not kept pace with exposure, inflation, or claim severity growth, will result in continued market hardening as carriers push for higher SIRs, increased pricing, as well as more restrictive coverage terms and conditions to manage the increasing frequency of claim severity,” Sompo concluded.

Sompo noted that on average, it takes 3.49 years to close a medical professional liability claim. The insurer said the sharp reduction in early claim closures noted by the Aon data may be attributable to courtroom closures because of COVID-19.

Aon said that overall capacity for the professional medical liability line was relatively unencumbered for the first half 9f 2020, but several carriers have stopped underwriting malpractice risks, leading to hard market conditions.

The report says survey results shows that insured retentions increased last year, to an average of $7.8 million from $6.9 million in 2019. Also, purchased insurance limits decreased to $83.5 million in 2020 from $85.9 million the year before.

Medical professional liability exposures are expected to continue to increase. The report predicted no change in claim frequency, but established a 3% severity trend in 2022 for both general liability and physician professional liability.