The issues that once drove dramatic increases in liabilityinsurance costs for those in the health care industry have notdisappeared, but the abundance of capital, improved risk managementpractices and adoption of tort reforms have helped soften pricingfor this high-risk but ever expanding sector, experts in the fieldobserved.

Paul A. Greve, executive vice president for insurance brokerWillis Healthcare Practice, noted that while the loss history inthis line has improved over the last five years–improvingprofitability and attracting more capital–it remains a veryvolatile business.

Continued price softening, he said, has raised the issue ofwhether insurers are collecting enough premium–especially for aline of business notorious for its long-tailed claims.

“The questions have to be asked: Is pricing responsible? Isthere enough there to pay claims?” said Mr. Greve. “It's a viciouscycle, especially on medical malpractice claims–the boom andbust.”

However, he was quick to note that the pricing trends cannot betraced directly back to the generally soft property-casualtymarket.

“This [health care liability] marketplace is so highlyspecialized that it is not affected by industry trends,” he said.“If there is a catastrophic natural disaster that affectsreinsurers, then maybe that will affect medical malpractice, butthis line tends to trend to a great degree in isolation.”

(Editor's Note: Mr. Greve and others interviewed for thisarticle spoke to National Underwriter before troubles at AmericanInternational Group emerged two weeks ago, resulting in downgradesof AIG's property-casualty subsidiaries and the extension of an $85billion federal government credit facility to ease holding companyliquidity issues at the parent company.

In 2007, AIG was the leading writer of medical malpracticeinsurance on a claims-made basis with 6.8 percent of a $9 billionU.S. market, according to direct written premium figures fromHighline Data. For med mal occurrence policies, AIG ranked seventhwith a 3.1 percent share of a $2 billion market.)

Depending on the venue, price decreases can differ dramatically,according to Holly D. Meidl, national health care practice leaderfor insurance broker Marsh, a subsidiary of New York-based Marsh& McLennan Companies.

She said price trends can range from flat to difficult, butrates typically are dropping 5-to-10 percent. For goodrisks–especially where tort reform has taken hold, or theparticular risk demonstrates an excellent loss history–the ratedrop can be as high as 15 percent, she added.

Mary Nolan, senior vice president of health care forAtlanta-based wholesale broker Swett & Crawford Group, notedthat the health care line is completely different from where it wasfour-to-five years ago, with “limitless capacity” that is“representative of changes taking place in the [health care]industry.”

She said the reason why reinsurer interest in the line haspeaked–specifically for specialty and managed care operations–isbecause of improved loss results and the robust growth nature ofthe health care business.

Indeed, she noted that by 2012, it is estimated that 10 millionpeople will be living in some type of elder-care facility,underscoring the sector's massive growth potential.

“No matter what happens within the health care industry, it willnot affect the growth that is taking place in the number ofseniors,” noted Ms. Nolan. “Insurers see this as a growth marketwith life to it.”

According to Audrey Greening, managing director for Aon healthcare, a unit of Chicago-based insurance broker Aon Corp., theloss-frequency trend has remained flat across the board over thelast three years.

She said a survey of hospital providers–authored by GregLarcher, director and actuary for Aon Global RiskConsulting–indicates that there has been a 3 percent increase inseverity trends over the past three years–”a fairly benign uptickfrom a couple of years ago,” she noted.

Despite the market's persistent softening, there are concernsthat the cycle's downturn could be bottoming out.

Mr. Greve pointed out that insurers are asking questions aboutobtaining the appropriate amount of premium, noting the viciouscycle of claims that can hit insurers.

“Things have been as stable in this line as they have in a longtime. We just have to watch the challenges,” he said.

From her own experience in the marketplace, Ms. Greening saidpricing is soft, with rate reductions still negotiable in a rangeof 5-to-10 percent. But there is growing concern that the declineshave reached their lowest point, she added.

A turn in the market, however, will not come from a loss incapacity, but instead because of deterioration in the lossratio–which would happen quickly, warned Ms. Meidl. “Even at itsworst in 2003, capacity was still there,” she added.

In the short term, at least, no hardening is expected in thenext six-to-nine months, according to Ms. Nolan, who added that thehope is pricing will level off eventually.

However, she characterized the premium rate drop as a correctionrather than a softening, pointing out that the early part of thedecade saw “losses coming in like a flood,” which increased ratessubstantially.

“The pendulum is swinging back to a certain extent,” shesaid.

What has helped this line of business improve over the years isthe combination of attention to risk management and tort reform,market observers contend.

Tort reform has taken hold in about 30 states in some form, saidMr. Greve, who also credits the publicity about the effects offrivolous lawsuits on health care costs as having some influence onconsumers.

“There are fewer patients going into a lawyer's office to filesuit,” he said, adding that could be an indicator that the attitudeof the general public toward malpractice litigation may havechanged.

However, some markets–such as New York, Pennsylvania andFlorida–remain “problem states,” and any suit involving pediatricor obstetrics where a child is harmed can still produce a largedamage award, even in states with tort limitations, the brokersnoted.

On the risk management side of the coin, brokers said healthcare providers are continuously finding ways to improve patientcare and other quality initiatives.

Working with consultants, medical care providers have developedtraining programs that simulate emergencies and allow health careprofessionals to practice dealing with acute care situations, theyobserved.

There is also the substantial influence of the 800-pound gorillain the market–the Center of Medicare Services (Medicare andMedicaid)–which has placed an emphasis on proper treatment andcare.

If providers fail to follow procedures, or make costly,preventable errors, then CMS won't pay, in some cases.

“What we spend a lot of time talking about is continued qualityimprovement,” said Ms. Meidl, adding that such an emphasis hasmeant some insurers are providing premium credits of 4-to-8 percentfor good loss trends.

While the practice is not universal, it is growing, she noted,pointing out that the credits also have a positive effect on themanagers of health care providers–who see the payoff for all theattention paid and investments made for risk management in reducedpremium costs.

“It's an excellent trend in the marketplace, and we would liketo see more insurers doing it,” she said.