PLUS Symposium Reveals Hospital Prof. Liab. in Throes of Deceleration

The hospital professional liability market is in the throes of deceleration. While there is emerging competition, many more experienced carriers are exiting the marketplace and losses are coming in faster and are more severe, panelists told the Medical PL Symposium, sponsored by PLUS.

Hospitals have been buffeted by the last three crises, according to Tim Morse, managing director, CNA HealthPro. “In 1973, there was a crisis in availability including the economics of the insurance business. The 1980s again saw a crisis in affordability and some availability, driven by hospital’s deep pockets,” said Morse, who moderated the panel. “The mid-1990s saw aggressive if not predatory competition—hospital culpability of all the actions was within their controls. But by the fall of 1999, warning flags had risen,” he said. “All was not well in the hospital medical liability marketplace.”

According to Morse, insurers had rate increases, capacity management, underwriting and heavy restrictions. “The medical liability crisis of the ’70s and ’80s were physician-driven,” he explained. “Now they are hospital-driven and the potential exists for irresponsible underwriting practices.”

Looking at the marketplace cycle, Sabrina Hart, executive vice president of Healthcare Group, Zurich North America Specialties, believes the cycle has peaked. “I don’t think we’re accelerating down the slope quickly,” she said. However, she cautioned about the speed of which the market could return to solvent conditions. “The predictability is more uncertain. If severity is the issue, we should look at pricing models that are more severity-based than frequency-based. We still see exposures increasing,” she said.

“Deceleration does not mean rate increases,” said Philip E. Reischman, executive vice president, Gallagher Healthcare Insurance Services. “We’re on a downward slope. All the retentions are pretty much where the market needs to be,” he said. “There is emerging competition—high capacity layers are lower offering rates. They are more optimistic in terms of their budgeting.”

Susan Huntington, senior vice president and Healthcare Practice Leader, Chubb Executive Risk, noted that there is a mismatch between buyers’ expectations and reality. “There are predictions that the industry is reserve-deficient,” she said. “The NACI Congress GAO study on the medical malpractice crisis finds that those in business from 1996-2001 have had on average increases of 140 percent. If prices are going down and losses are going up, how is this going to work?”

Paul McKeon, vice president, Transatlantic Reinsurance Inc., concurred. “Top layers have seen some price reductions as that’s where the newer capacity has come into. But there are relatively few players in the lower layers. While we’ve seen some price moderation in higher layers, we have some time to go with the lower layers,” he said. “The marketplace has moved itself into a better position than it was a year ago, but there are still a lot of questions out there on where this is going. Let’s not forget, a lot of carriers have run out of business.”

McKeon noted that the industry had no choice to get to this point. “Companies were going out of business. Either you got it right or you moved on,” he said. “There is nowhere else to go from here. Underwriters have embraced the models and pricing of this business.”

Reischman said that as new capacity came in, the industry saw supply lessen. “We’re now back to the other state of the cycle where supply is coming back in. And when prices fall and there’s a new supply and more competition, underwriters are going to make favorable assumptions.”

“There is a decrease in high volatility,” Huntington said. “We’ve seen a dramatic increase in claims payout settlements between $1 and $5 million. “It’s foolish in this market, which is different from past markets. While we have more supply, the losses are coming in faster,” she said. “They are reported faster, handled faster. The exiting carriers are speeding up the reporting,” she said. “Unlike prior soft markets, this market won’t stay like this for long because the losses are coming in much quicker.”

According to Hart, there is too much focus on top line. “To use the top line as your measuring stick is very dangerous,” she cautioned. “We must provide consistent promises and stability in the marketplace. Hospitals can manage better if there aren’t spikes.” She noted that the acceleration of losses will force the industry to react much quicker, rather than seven or 10 years down the road. “We must be accountable for what we’ve communicated. We need to balance the top line with the bottom line.”

Huntington said that there is more corporate and public scrutiny as a result of the medmal carriers. “Every analyst has a discussion on what are your mal results looking like? If you were in a multiline company, those days are way over.”

McKeon didn’t think they could rationalize the marketplace. “You walk away from a business if you don’t rationalize; that’s how we get into a soft marketplace. We fool ourselves into thinking we can be a big player, and we’re fooling ourselves and need to walk away.”

According to Morse, hospitals are fundamental competition. “They are taking more and more of the risk and it is more predictable. We’re creating greater volatility. As a result of these alternate risk vehicles, the industry has lost potential premium.”

Huntington disagreed. She thought it was an excellent trend that hospitals are retaining more risk. “In the ’80s and ’90s with risk transfer, these facilities abdicated risk to insurance carriers because we were willing to do that. A trend to accept financial risk will be a good thing for the health care system. Yes, it does take money out of our pockets from our industry from a premium perspective, but overall it’s good for the industry.”

Looking at the condition of the reinsurance marketplace, McKeon said that from a pricing perspective, it’s quite rational right now. “As more capacity hits the marketplace, we have the same recognition of severity issues, trend issues. How anyone rationalizes a $30 million verdict-it’s lost on everyone,” he said, asking, “How do we price that? We’ve seen some companies take CAT modeling and can predict the $5 million losses. Is it a one-in-five-year storm or a one-in-two-year storm? You start to entertain different thoughts when you have vulnerability.”

“The reinsurance market has become much more specialized in health market care,” Huntington said. “The dabblers are long gone. The number of reinsurers willing to accept med-mal risks are much fewer in numbers and have more of an expertise in health care business,” she said. “There are also more collegial relationships because they understand our business. There is more of a focus on discussions with our actuaries and claim audits. They are determining reserve deficiency, which makes a lot of sense in our current market.”

Looking at the future terms of conditions and what to expect, McKeon noted that the last year has been the most shocking in terms of loss development. “The movement in the last 12 months has been of more concern than others,” he said. “The vast majority of reserve hits have been on the primary side. The next step will be on the reinsurance side.”

Huntington added, “Just as we ask insureds to take on more risks, the reinsures will ask the same of carriers. If you’re dealing with high severity, there will be changes in the way these reinsurance arrangements are structured.”

Looking at the market three to five years from now, Huntington said that tort reform will probably pass on federal or state-by-state basis. “However, I’m not very optimistic tort reform will help this industry as many believe it will,” she said. “With medical costs going up, cost of living going up, economic damages are going to go up anyway.” She believed that there will still be commercial insurance available. “I don’t think the federal or state will assume the liability but leave it in the open market, but with the cap on pain and suffering.”

She also noted that the industry will be getting rid of joint and several liability so that each person is liable for their own liability. “There will be more self-insurance and we will not see this $100 million towers of insurance. Limits will come down and there will be fewer insurers. Don’t think the market will be able to sustain them.”

Both Hart and Reischman said that in the next three to five years they see a stable marketplace supported by rational underwriting, reasonable brokers and educated buyers. “It’s a more stable outlook,” Reischman said.