The new face of high-risk malpractice

Rock-bottom rates, lower claim frequency, and tort reform are the good news—but there's more to the story

By Elisabeth Boone, CPCU

If the history of medical malpractice insurance is ever written, chances are it will sound more like a Jay McInerney novel of 1980s angst than an orderly chronicle of coverages, premiums, and market trends.

Since the medical malpractice crisis of the early 1970s threw the market into chaos, physicians and their insurers have been forced to devise solutions for the host of challenges they face as they try to deliver quality care in a regulation-bound, intensely litigious environment where market stability often seems to be the stuff of fantasy.

That's a daunting prospect for a doctor who has a clean, claim-free record. For physicians in high-risk specialties, or who have any kind of claims history, the stakes are exponentially higher. The same is true for providers who have been sanctioned by their state's medical board or who have been identified as having a substance abuse problem.

Understanding the needs of high-risk physicians and tailoring coverages to address their exposures requires specialized expertise and scrupulous underwriting, as well as the flexibility to craft solutions that improve the profile of a high-risk provider.

That's the mission of Professional Underwriters Liability Insurance Company (PULIC), an excess-surplus insurer that specializes in insuring high-risk physicians. PULIC is a subsidiary of The Doctors Company (TDC), which was established in 1976 at the height of the first medical malpractice insurance crisis. Owned by physicians, TDC is an inter-insurance exchange that writes claims-made medical malpractice coverage on an admitted basis for physicians and surgeons in 49 states. Founded in 1989, PULIC is admitted in California and Utah and writes primarily claims-made coverage on a nonadmitted basis in 44 states and the District of Columbia. Both TDC and PULIC carry an A rating from Weiss and an A- rating from A.M. Best.

A market in flux

Nine years ago, when Rough Notes published its first profile of PULIC ("Rx for Doctors," April 2002), physicians were struggling to obtain coverage in an extremely tight market. As a result, even physicians who had clean records turned to companies like PULIC, which had remained a stable force in the market. The problem was exacerbated for high-risk providers, many of whom faced the threat of closing their offices or losing hospital privileges because they were unable to find insurance.

Since those difficult days, the market for medical malpractice coverage has undergone nothing less than a seismic shift. The property/casualty market overall remains in the throes of one of the longest soft cycles in decades, with few solid signs of hardening.

The resulting fierce competition for business has driven premiums down to historic lows, even for traditionally troublesome classes like medical malpractice. The physicians who in the early 2000s were desperately seeking coverage at any price are now finding it readily available at a fraction of the cost they paid just a few years ago. That includes many of the high-risk practitioners that PULIC was established to serve.

The rest of the story

The prolonged soft market is a key factor in the changing picture for medical malpractice, but PULIC's senior vice president, Stephen Freedman, says there's much more to the story.

As the hard market of the early 2000s began to ease, he says, "Between 2004 and 2005, claim frequency in medical malpractice, as in most lines of property/casualty, pretty much dropped off a cliff, to the tune of about 40%."

What could account for such a precipitous decline in medical malpractice claim frequency?

For one thing, Freedman says, "The patient safety movement had an impact in terms of improved patient care. Also, tort reforms enacted during the hard market made it harder and more expensive and therefore less profitable to file a malpractice claim."

In some states, like Pennsylvania and Texas, Freedman points out, "There was outrage that doctors were closing their practices and leaving the state because of tort laws that clearly favored plaintiffs. In Texas, there was such a huge outcry that the legislature enacted a constitutional amendment to implement tort reform. The reforms were so strong that they turned the state around from being one of the worst judicial hellholes for malpractice cases to being a state where every carrier wants to write business."

What's more, Freedman adds, "There are carriers, such as The Doctors Company and PULIC, that will not just roll over and pay a claim. I think the plaintiff attorneys came to realize that they were not just going to get quick settlements and that taking a case to closure was an expensive proposition on their end, so they'd better have a legitimate case from the get-go."

"A lot of plaintiff attorneys say that there's more money to be made in product liability or nursing home cases or class action suits," comments Shannon Micevych, PULIC's vice president of claims. "The plaintiff bar has always been willing to take the cases with the potential for large damages. Many plaintiff lawyers say that what tips the balance for them are expert witness fees. In many jurisdictions, the plaintiff must have an affidavit from an expert witness in order to file a case. That's a big expense, and on a smaller case it cuts into the profit."

Notes Cheri Priddy, vice president of underwriting, "There are a lot of theories about the decline in claims and suits against physicians, and I don't think it's any one factor. To me it looks like a 'perfect storm' of tort reform, improvements in patient safety, and carriers fighting claims instead of just agreeing to settle."

It's popularly believed that malpractice insurers usually settle claims just to make them go away and to save the expense of going to trial. Not so, says Freedman: "About 80% of malpractice claims are closed with no indemnity payment. Of course, the insurer incurs the costs of defense, but insurers are far more aggressive in defending claims."

New capacity

In 2004 and 2005, as the medical malpractice market was beginning to ease, Freedman says, "New companies came into the market with new capital, and existing carriers had cleaned up their balance sheets and were eager to get back in the game. Risk retention groups were cropping up everywhere, and a lot of surplus lines markets saw an opportunity to write business. At that point we had the reverse perfect storm of the hard market as we moved from severely restricted capacity and high rates to seemingly limitless capacity and declining premiums," Freedman observes.

"In today's market, every doctor seems to be a standard risk; almost no physicians are considered high risk. In our end of the business, which is high-risk physicians, the market is extremely soft. Right now there are about 15 carriers specifically targeting this business. Also, several risk retention groups are not targeting high-risk doctors per se but are trying to write doctors who are not standard risks. They're not offering a compelling argument for the insured to change carriers, other than price. There's a lot more capacity in the E&S high-risk marketplace, and I think that's accelerating the speed with which the market is deteriorating. Much of what we see is normal competition, but some of the things that are being done are downright irresponsible," Freedman declares. "We don't see that changing anytime soon, because a lot of carriers are living off past reserve takedowns.

"When claim frequency dropped in 2004 and 2005, the carriers didn't know whether it was real or just a blip," Freedman explains. "So they continued to price malpractice coverage based on the historical frequency averages. After the fifth or sixth year of the frequency staying down, the carriers realized that they had charged too much for the coverage and rates started to decrease significantly. Thanks to the extra reserves they had stockpiled in 2003, 2004, and 2005, the carriers' balance sheets make them look more profitable today."

That picture, Freedman points out, may be deceptive. "On an accident year basis, insurer profitability is significantly down. If you look at the calendar year, which includes reserve adjustments, companies look profitable—but they're living on the 'stored fat' of the past."

What about loss ratios?

"In the high-risk malpractice market, loss ratios clearly are up from where they were in 2005, 2006, and 2007," Freedman says. "Based on what I've seen carriers paying in commissions, and what I know it takes to run an insurance company and underwrite risks and resolve claims, I would venture to say that insurers in this market are probably writing at a 100% combined ratio. In the standard malpractice market, our parent company, TDC, believes that the combined ratio will approach 100% in 2012," Freedman says.

Received wisdom—and simple common sense—dictate that, as the combined ratio in any line approaches 100%, carriers rededicate themselves to underwriting discipline and risk-based pricing.

"That's what companies always say they're going to do," Freedman observes wryly, "but what they actually do may be quite different. No one wants to be the first to raise rates and feel the pain when that $500,000 account leaves because someone else will write it for $450,000. When the market last got hard, in 2002, companies were running combined ratios in the 120s, so we may have a way to go. On the other hand, with investment income where it is today, carriers aren't getting 15% or 18% returns; they're lucky if they get 4% or 5% these days. That may mean that the soft market won't last as long because companies can't rely on investment income. I've been in the business long enough that I'm not confident that we're going to learn from the past. If we did, underwriting cycles wouldn't continue to happen as they do."

Because of the explosion in capacity and resulting competitive pressures, Freedman says, PULIC has been forced to cut premiums simply to retain existing business. "We've dropped our rates significantly since the soft market started; our rates are down on the order of 50% from the peak of the hard market. New markets are coming in today and slashing 20% off our rates. I think a lot of these markets will fall by the wayside, but it's going to take some time."

The "new" high-risk doctor

As a result of all the forces that have been reshaping the medical malpractice market in recent years, the PULIC executives are seeing a different kind of applicant for the high-risk coverage they offer.

"With the standard market non-renewing or declining very few doctors, the ones who do get non-renewed or declined are really the most difficult to place," Priddy remarks. "We're seeing the doctors who have had a lot of claims or board actions. Five years ago, if a doctor had two claims in 10 years, he or she would be forced to seek coverage in the high-risk market. Today that doctor likely will be able to stay with a standard carrier. The applicants we're seeing now are the doctors who have cost a standard company a lot of money. We're also seeing a lot of applicants who have been with other nonstandard carriers and are getting shopped every year. In that situation, we can't often be competitive, because it all has to do with price."

The competitive climate for high-risk malpractice, Priddy points out, varies by state. "For example, in Arizona it's hard for us to write a lot of business because there's so much capacity, and so many carriers are writing high-risk business at near standard rates. That means we have to look carefully at whom we're going to write."

As the ancient cliché has it: What goes up must come down, and that's a home truth about insurance market cycles. High-risk physicians, Priddy comments, are not alone in entertaining the notion that the current soft market will continue indefinitely and that there's no end in sight for readily available coverage at bargain-basement prices.

"We encourage brokers to advise their clients to put the extra money away because inevitably premiums will rise and coverage will no longer be so readily available," Priddy says. "It's hard to get this message across, and one reason is that many high-risk doctors still think that premiums are too high in the nonstandard market."

In the best of times, the world of high-risk medical practitioners is fraught with challenges. As a physician-owned insurer that specializes in this market, PULIC is committed not only to protecting doctors with quality insurance coverage but also to supporting the responsible practice of medicine.

For more information:

Professional Liability Underwriters Insurance Company

Web site: www.pulic.com