Medical professional liability insurers have enjoyed historically strong underwriting levels and combined ratios under 100 for several years, but the good times may be coming to an end as several factors are conspiring to chip away at profits over the next three years, according to a new report.

In its latest report, "Medical Professional Liability: Looming Threats to Solid Performance," Conning Research & Consulting says the regulatory and judicial environment, declining prices due to the market cycle, continued low investment returns and the movement of physicians from private practice into large hospitals — many of which self-insure — will challenge profitability in this line going forward.

"We see a picture of declining profitability, which we believe will lead to returns on capital falling below the average for the overall industry by 2015," the report says.

Conning notes that rates have medical professional liability rates have actually been declining since 2007, but now the added pressure of an expected acceleration in losses in the coming years could eat into insurers' profits, and they will not be able to rely on investment returns to make up the difference.

Conning points to the Patient Protection and Affordable Care Act as a reason why losses might escalate. "Physicians and hospitals will have to adapt to the influx of new patients expected when the individual mandate takes effect in 2014," says the report. "The impending increase in physician shortages may lead to longer waits for patients to book appointments, thus increasing the chances of complications."

On top of that, Conning says that tort-reform measures implemented in various states throughout the 1990s "are coming under challenge in a number of states. At the same time, some evidence of increases in severity, and also of potential increases in frequency, is beginning to emerge."

However, while "[g]rowing frequency and severity resulting from the ACA and larger jury awards likely will bring up losses," Conning notes that continued reserve releases are expected to mitigate the impact.

The ultimate impact on medical professional liability insurers depends on how many of these factors develop into reality, notes the report. In the worst case scenario, notes the report, rates continue to decrease, physicians continue to move to hospitals at the current pace, claim frequency and medical inflation rise more than expected and jury awards continue their growth. Should that happen, Conning says, "The convergence of these forces could drive up loss ratios rapidly. Upon seeing this sudden change in trends, insurers may be less willing to release reserves, thus compounding growth in incurred losses. In this scenario, insurers would be writing business at both an underwriting and an operating loss."

Conning adds, "Companies and providers that seek to navigate this scenario successfully would first need to have mechanisms in place to monitor trends in losses in a rapidly changing healthcare marketplace. This will be difficult in a long-tailed line undergoing inflection points and change and will require monitoring not only claims experience, but also claims notices, tort trends, geographic differences, and provider trends."

These companies, the report adds, will need to manage their loss experience by improving risk-management services to clients, educating medical providers on patient safety and lobbying for tort reform.

Special Reports /

Conning: Convergence of Factors to Halt Medical Professional Liability Profits

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