Medical professional liability insurance (MPLI) carriers are in a strong financial position overall and the insurers are exhibiting rate discipline in soft market conditions, according to a new report this week by New Jersey-based insurance ratings agency A.M. Best.

The Oct. 2 report, titled Stability in Soft Market Conditions Despite Premium Revenue Declines, examines MPLI sector conditions in 2010 and the early part of 2011. Key issues discussed include significant mergers and acquisitions, tort reform efforts in several states, and the trend toward hospital organizations acquiring physician groups.

The past year showed balance sheet equity positions and operating leverage measures improving to very favorable conditions and capitalization ratios rising to levels not seen in nearly a decade, the report said. While the underwriting profitability contracted last year, as had been anticipated, operating results were strong despite a decline in premium volume.

An Emerging Competitor

According to the report, MPLI writers showed strong operating earnings amid flat claim frequency rates and only modest increases in average claim severity. And in the past year, MPLI carriers have been spending time and effort in formalizing sound enterprise risk management processes and cycle-management techniques. In 2010:

• The MPLI market continued to outperform the total U.S. property/casualty industry composite in key financial indicators including combined ratio, operating ratio, net investment income and policyholder dividends.

• Carriers in a number of states indicated an emerging competitor for MPLI business is the phenomenon of hospital organizations acquiring entire physician practices and incorporating those exposures into the hospital’s own captive insurer or other insurance program.

• Despite progressive declines in premium revenues, the MPLI calendar-year pure loss and loss-adjustment expense (LAE) ratio has remained essentially flat the past three years at around 60 percent.

• The policyholder dividend ratio reached its highest level in five years at 5.3 percent.

Decline in Frequency Rates

The report also commented on possible reasons for the decline in frequency rates. It said most industry participants agree that part of the explanation is the result of the:

• Focus on education

• Application of best practices and standards of patient care

• Wide dissemination of risk-management programs to practicing health care providers

How the medical professional liability environment will change in coming months depends on several factors, according to the report. They include: the implementation of new health care mandates, the effectiveness of ACOs or similar mechanisms for managing health care costs, and the effects that inflation will have on the delivery of health care services and products.

Source: A.M. Best Company