Despite a slight improvement in net income in 2020, U.S. medical professional liability (MPL) insurers saw their sixth consecutive year of underwriting losses, according to a new AM Best report.
According to the new Best’s Special Report, “Continued Uncertainty Clouds the Horizon for MPL Insurers,” the ultimate impact of the COVID-19 pandemic on 2020 claim costs still is to be determined. On a positive note, the impact of rising claim severity, social inflation and escalating frequency of high severity losses tempered following the onset of the pandemic, as court closures and backlogs slowed down legal processes.
AM Best said it maintains a negative market segment outlook on the MPL sector, citing the following key reasons:
- Ongoing pressures of depressed demand;
- Rate adequacy concerns;
- Rising loss cost trends and social inflation diminished reserve redundancies; and
- The potential for additional claims owing to the pandemic.
The combined ratio for AM Best’s composite of MPL insurers deteriorated significantly over the prior five-year period due to increases in incurred losses and LAE incurred, and was 112.5 in 2020.
Rising medical loss costs, along with relentlessly competitive market conditions and a steady reduction in the amount of favorable prior accident-year loss reserve development all contributed to the deterioration.
Direct premiums written for the MPL composite was up 1.1% in 2020 to $7.9 billion, after increasing by 4.3% in 2019 and by 2.6% in 2018. This growth followed a prolonged period of soft market conditions and changing industry dynamics that dampened product demand.
Given the decade of soft market conditions, loss cost inflation, declining reserve redundancies and the prolonged low interest rate environment, many MPL insurers adjusted their pricing over the last year, according to the report.
Capacity constraints in the most challenged sectors, including hospitals and nursing homes, have driven substantial rate increases. However, sectors of the physician MPL market remain quite competitive.
Rate hardening is expected to gain further momentum in 2021 as unfavorable profitability trends persist.
AM Best said the MPL market still is likely to face one of its most difficult periods in a decade. MPL carriers, for the most part, have significant capital to help them weather the current storm. But they face significant challenges.
AM Best said the long-term survivors will be those that can attract and retain their insureds, find ways to mitigate the effects of social inflation and the growth of nuclear verdicts, effectively use innovation, navigate the legal challenges and significant liability uncertainties related to COVID-19, and keep their finger on the pulse on ever-changing legislative and judicial environments.
Source: AM best