The issues that once drove dramatic increases in liability insurance costs for those in the health care industry have not disappeared, but the abundance of capital, improved risk management practices and adoption of tort reforms have helped soften pricing for this high-risk but ever expanding sector, experts in the field observed.

Paul A. Greve, executive vice president for insurance broker Willis Healthcare Practice, noted that while the loss history in this line has improved over the last five years–improving profitability and attracting more capital–it remains a very volatile business.

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

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

However, he was quick to note that the pricing trends cannot be traced directly back to the generally soft property-casualty market.

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

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

In 2007, AIG was the leading writer of medical malpractice insurance on a claims-made basis with 6.8 percent of a $9 billion U.S. market, according to direct written premium figures from Highline Data. For med mal occurrence policies, AIG ranked seventh with 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 leader for insurance broker Marsh, a subsidiary of New York-based Marsh & McLennan Companies.

She said price trends can range from flat to difficult, but rates typically are dropping 5-to-10 percent. For good risks–especially where tort reform has taken hold, or the particular risk demonstrates an excellent loss history–the rate drop can be as high as 15 percent, she added.

Mary Nolan, senior vice president of health care for Atlanta-based wholesale broker Swett & Crawford Group, noted that the health care line is completely different from where it was four-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 has peaked–specifically for specialty and managed care operations–is because of improved loss results and the robust growth nature of the health care business.

Indeed, she noted that by 2012, it is estimated that 10 million people 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 will not affect the growth that is taking place in the number of seniors,” noted Ms. Nolan. “Insurers see this as a growth market with life to it.”

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

She said a survey of hospital providers–authored by Greg Larcher, director and actuary for Aon Global Risk Consulting–indicates that there has been a 3 percent increase in severity trends over the past three years–”a fairly benign uptick from a couple of years ago,” she noted.

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

Mr. Greve pointed out that insurers are asking questions about obtaining the appropriate amount of premium, noting the vicious cycle of claims that can hit insurers.

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

From her own experience in the marketplace, Ms. Greening said pricing is soft, with rate reductions still negotiable in a range of 5-to-10 percent. But there is growing concern that the declines have reached their lowest point, she added.

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

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

However, she characterized the premium rate drop as a correction rather than a softening, pointing out that the early part of the decade saw “losses coming in like a flood,” which increased rates substantially.

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

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

Tort reform has taken hold in about 30 states in some form, said Mr. Greve, who also credits the publicity about the effects of frivolous lawsuits on health care costs as having some influence on consumers.

“There are fewer patients going into a lawyer's office to file suit,” he said, adding that could be an indicator that the attitude of the general public toward malpractice litigation may have changed.

However, some markets–such as New York, Pennsylvania and Florida–remain “problem states,” and any suit involving pediatric or obstetrics where a child is harmed can still produce a large damage award, even in states with tort limitations, the brokers noted.

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

Working with consultants, medical care providers have developed training programs that simulate emergencies and allow health care professionals to practice dealing with acute care situations, they observed.

There is also the substantial influence of the 800-pound gorilla in the market–the Center of Medicare Services (Medicare and Medicaid)–which has placed an emphasis on proper treatment and care.

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 quality improvement,” said Ms. Meidl, adding that such an emphasis has meant some insurers are providing premium credits of 4-to-8 percent for 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 the managers of health care providers–who see the payoff for all the attention paid and investments made for risk management in reduced premium costs.

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

Special Reports /

Price Cuts May Be Just What The Doctor Ordered, But Insurers Eye Sector's Growth

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