The medical professional liability insurance (MPLI) market in the United States significantly improved in 2021, reversing a four-year trend of declining performance while maintaining a 108 percent combined ratio. Earned premium growth associated with recent material premium rate increases will most likely improve segment performance further in 2022. According to Fitch Ratings, a return to underwriting profitability is less likely due to challenges derived from the competitive nature of the MPLI market, as well as uncertainty on incurred loss due to economic volatility, higher inflation, and any post-pandemic revival of litigation activity.
The MPLI segment is clearly benefiting from the commercial insurance market’s hardening phase, with 2021 net written premium approaching $10 billion following a 10.4 percent annual increase, well above the 4 percent three-year average from 2018 to 2020. The improved combined ratio was due in part to lower premium growth-driven expense ratios and favorable prior-year reserve development of 3.2 percent of segment calendar year earned premiums.
Larger annual underwriting losses in MPLI continued to erode reserve strength. From 2015 to 2019, favorable development averaged 12 percent of annual earned premiums. Due to higher loss severity, accident-year (AY) loss ratios have risen from initial estimates for each most recent period from AY 2017 to 2020.
Following many years of flat to declining rates, MPLI pricing trends remain positive. However, signs of waning momentum for rate increases are visible across multiple liability lines, including MPLI, raising concerns about pricing’s ability to keep pace with loss cost trends over time.
A pause in claims settlement patterns and judicial activity caused by the pandemic is now subsiding as courts reopen and healthcare utilization returns to pre-pandemic levels. MPLI is greatly influenced by social inflation, or changes in societal norms, legislation, and multimillion-dollar jury sentiment that increase litigation activity and settlement costs. Higher general inflation in the United States adds to the uncertainty of loss severity.
Fundamental market factors will continue to put pressure on segment growth and profitability in the future. Demand for traditional MPLI coverage is expected to fall as hospitals and medical facilities continue to consolidate, as physicians transition from independent practices to employment with hospitals and larger medical groups.
Professional liability coverage purchasing practices of larger groups tend to favor self-insurance and the use of captives to manage risk. According to a recent Physicians Advocacy Institute study, the percentage of US physicians working for hospitals or corporate entities increased to more than 69 percent in January 2021, up from 62 percent in January 2019. Larger MPLI writers are adapting by broadening their product offerings and services to include medical facilities, but many smaller regional carriers lack the expertise and capacity to go beyond physician coverage.
The MPLI market is distinct from other commercial insurance product lines in that it is dominated by a small number of national multiline carriers. Over 55% of premiums are from MPLI-focused specialty underwriters. Most MPLI specialists are very well capitalized based on statutory capital measures and risk-based capital ratios, but they also have a limited geographic scope and few opportunities to deploy capital profitably outside of MPLI.
As the market for physician coverage shrank, carriers prioritized retaining existing business over pricing adequacy and returns on capital. As a result, a return to significant underwriting profits in the MPLI lines is likely to be predicated on either capital erosion for specialty writers through an extended period of large underwriting losses or increased market consolidation through merger activity. While ProAssurance Corp.’s acquisition of NORCAL in 2021 may presage further acquisition activity in the space, there are likely more active buyers than willing sellers among MPLI specialty writers.