The medical malpractice liability crisis proves to be
fatal for some insurers and opportune for others
By Phil Zinkewicz
At times such as these, when many companies are pulling away from a particular line of business, some enterprising insurers seize the opportunity to take advantage of a seller's market.
After a decade and a half of soft market conditions, the property/casualty insurance market has hardened drastically in just about all lines of coverage, but one particular line was showing signs of hardening even at the end of the last soft market. As early as 1999, a sharp increase in the number of medical malpractice law suits (plus ever increasing jury awards) joined forces with a long history of underpricing medical professional liability products. This caused insurers to begin pulling away from writing medical practice insurance for doctors, nurses, hospitals and other medical facilities. However, the shoe really dropped last year when St. Paul Cos., the largest writer of medical malpractice in the country, pulled out of the line altogether. That development alone sent shock waves throughout the insurance industry and the insurance regulatory community. Other insurers began following suit, leaving the medical profession in a state of panic.
Some insurers are remaining in the market or moving into some segments of the medical professional liability business. Two such companies are AIG and ACE USA Professional Risk.
But first the crisis. To understand how pervasive the medical malpractice insurance problem has been, let's look at state insurance department and legislative activity in terms of medical malpractice insurance.
In January, the Arizona insurance department held hearings on the availability and affordability of commercial casualty insurance for nursing homes, due in part to the increased costs of medical malpractice insurance. In order to assuage Arkansas doctors' fears that medical malpractice insurance might become totally unavailable, the insurance department issued a press release listing medical malpractice insurers in the state.
In Florida last year, limited tort reforms were passed to ease the medical malpractice insurance situation. The Pennsylvania legislature passed a comprehensive medical malpractice reform law intended to keep doctors from leaving the state because of soaring medical malpractice insurance premiums. In South Carolina, the nursing home industry is applying pressure on the state insurance department to establish a joint underwriting association (JUA) so that medical malpractice insurance is available.
Texas recently adopted regulations concerning "best practices" and risk management and loss control for nursing homes. In addition, nonprofit nursing home liability was added to the JUA. In West Virginia, the medical malpractice market experienced difficulties after St. Paul publicly announced that it was leaving that line of business and, since then, PHICO has gone into rehabilitation. The state recently established a stopgap liability plan and passed a new law allowing the legislature to shift premium shortfalls to an insurance malpractice plan owned and run by health care providers or to insurers through a JUA. The West Virginia Supreme Court recently upheld the $1 million non-economic loss cap for malpractice claims.
In Nevada, following a series of recent huge medical malpractice jury awards in Clark County, Insurance Commissioner Alice Molasky-Arman held hearings so that carriers and medical service providers could comment on the increasing difficulty in obtaining medical malpractice insurance. At that hearing, numerous doctors testified that the recent withdrawal of the St. Paul Cos. left them unable to obtain or afford coverage. As a result, there has been an exodus of doctors from the Las Vegas and Reno areas to other states. Health officials predict at least one-fifth of Las Vegas doctors, and possibly as many as one-half, will close their practices by the end of summer if lower malpractice rates cannot be negotiated.
A study recently released by the New Jersey Hospital Association (NJHA) found that hospitals' medical malpractice insurance premiums in that state jumped an average of 250% over the last three years, and 65% of facilities said skyrocketing insurance rates are driving some physicians out of the practice of medicine.
"We should consider this information a wake-up call," said Gary Carter, NJHA's president and CEO. "The fact that malpractice insurance is becoming more expensive is not great surprise. But we should be alarmed that these skyrocketing prices are driving many physicians out of medicine and threaten to have far-reaching effects on our state's health care system."
New York doctors are facing sharp increases in their medical malpractice insurance costs, which are already among the highest in the country. Rate increases ranging from 10% to 40% are already taking place in New Jersey and Connecticut.
So the situation is serious across the country. At times such as these, when many companies are pulling away from a particular line of business, some enterprising insurers seize the opportunity to take advantage of a seller's market. American International Group, for example, has rarely been known to be a market follower; and recently AIG, through its unit, the Lexington Insurance Co., took over the malpractice coverage for members of the American Psychiatric Association (APA), formerly insured by Legion Insurance Co., a subsidiary of Mutual Risk Management of Bermuda. Legion has been taken over by the Pennsylvania Insurance Department.
The APA is the largest organization of psychiatrists in the United States, with a total of 30,000 members, some of whom purchase their insurance through state-run programs or other alternatives. However, about 7,500 of those members had been insured through Legion. Analysts believe that Legion got into financial difficulty because the company tried to expand too rapidly and underpriced its malpractice products severely. AIG is coming into the picture with rates that are about 30% more.
Richard H. Bucilla, executive vice president for Lexington, calls the current medical professional liability market "relatively chaotic." Says Bucilla: "When the St. Paul pulled out of the malpractice market, a lot of business came into play. The problem is that there are not enough enthusiastic insurance company markets to field that business. According to A.M. Best, in 2001, the combined ratio for the medical malpractice insurance industry was 143. Break-even point, after investment income, is 115. Prices have to increase and companies are understandably being selective about the business they will write."
Bucilla says that "the major, major reason" for the present malpractice situation is the tort liability system. "The tort system is primarily responsible for the industry's loss costs," he says. "Also, the quality of U.S. health care is a major issue. The Institute of Medicine, over a year ago, suggested that between 44,000 and 98,000 deaths came about as the result of improper health care. That may or may not be accurate, but it is staggering to consider."
Lexington has been one of the leaders in the malpractice market for some years now, according to Bucilla. The deal to take over the portion of the APA's malpractice business is a new move for Lexington, but Bucilla says that psychiatrists are not as volatile a class of business as other physician malpractice areas. "We are primarily a facilities market," he says. "We do hospitals, long term care and other facilities."
Dow Walker, chairman of health care practice for the Willis Group, says that AIG's strategy in medical malpractice, in retrospect, was absolutely brilliant. "AIG is a contrarian company," he says. "When the market was soft, they continued to be a player but held back. Then when the market hardened and the price was right, they moved in. There were a lot of new malpractice companies formed in the soft market and the pressure on them to grow was intense. That hurt them very deeply."
Walker says that, on the primary side, rates are increasing between 35% and 50%. On the excess side, rates are going up between 100% to 200%, he says. "Physician-owned malpractice liability companies are faring a bit better, with rates rising about 10% to 20%. The problem in the marketplace is coming from severity, not frequency," says Walker.
The Willis executive says also that, after September 11, new companies began coming into the medical professional liability market. He mentioned specifically, One Beacon, W.R. Berkeley and ACE USA.
In fact, ACE USA Professional Risk says that it is entering the market "on a selective basis." The newly formed medical professional liability--ACE Medical Risk--will be led by Senior Vice President Ross Bertossi. The ACE Medical Risk team will be based in New York and will develop risk management solutions for the medical professional marketplace, the company said.
"We believe there is a market need on a national basis for financially sound medical malpractice insurers for hospitals and other health care facilities," says Bertossi. "On a nationwide basis, there are more than 50 carriers writing medical malpractice insurance, including physician-owned insurance companies. The medical malpractice market is estimated to be approximately $6.5 billion in direct premiums. We will be pursuing hospitals and some other select medical facilities. We will not look to insure physicians on a stand-alone basis or long term care facilities. ACE Medical Risk has written business in its first month of operation and has received a positive response in the marketplace."
Bertossi summed it up this way: "In a volatile line of business such as medical malpractice, the risk to large losses must be managed judiciously. This can be achieved by offering low limits of liability. This is a risky line of insurance and it is impossible to ensure a profit. The goal is to limit the downside exposure to the company and achieve a reasonable rate of return." *