Crisis in Medical Professional Liability Diminished, PLUS Panelists Say

States with meaningful tort reform are seeing stabilization in the medical professional liability arena from three years ago. Despite the decrease in claims frequency, however, severity persists and insurers must maintain adequate pricing and reserves going forward, panelists told the PLUS Medical Professional Liability Symposium.

“In states with significant tort reform, you’re seeing a chilling effect on attorneys,” said Kimber J. Lantry, executive vice president, Hudson Insurance Group. “We’re not seeing the kind of severity increases of 1997-2000.”

Paul F. McKeon, senior vice president, Transatlantic Reinsurance Company, noted that from a grassroots perspective, the claims counts may have changed, but the jury perspective hasn’t changed. “It’s no time to write more med mal,” he cautioned.

“Frequency trends have dropped, but severity trends haven’t dropped,” said David J. Kalainoff, executive vice president and chief underwriting officer, Max Re Ltd. “The large losses are still going to be there, though I don’t think it will affect reinsurance to any degree.”

According to Howard H. Friedman, senior vice president and CFO, ProAssurance Corporation, there has been a reduction in the claims filed over the past six months to a year. “But one thing we have to take into consideration is the claims bar is very well organized. I wouldn’t be surprised if there were an organized effort to minimize the number of filings just to take the pressure off and not make it a public issue,” he said.

Lantry pointed out that tort reform varies widely by state. “Illinois won’t have meaningful tort reform in the future and there are plenty of other states that have backed away, like Oregon and Wyoming, so you’re not seeing an improvement in trend. We’re not adequately reserved.”

There has been a huge stabilization in the insurance and reinsurance industry, according to Neil Morrell, executive director healthcare, Willis Re. “Underwriting and claims procedures have tightened up and rate integrity is different from three or four years ago,” he said. “Combined ratios are improved and we need to continue our reserve strengthening,” he said, adding, “The crisis seems to have passed for insurers and reinsurers.”

For the most part, on the primary side of the business, companies are not in crisis, as compared to 2001-2002, Friedman said. “Companies have made the pricing adjustments they needed to make. The crisis mentality is over; now it’s a matter of maintaining integrity in pricing.”

According to McKeon, there are no barriers to entry on the reinsurance side. “A lot of reinsurers are very bullish on this business,” he said. “You’ve got a lot of people making big bets that tort reform is the saving grace. But how do you rate adequacy over the long-term? There’s so much competition that flows into this business so quickly, that it doesn’t justify a long-term approach. The market doesn’t seem to allow that.”

“You can’t write this stuff profitably over the long-term,” Lantry maintained. “As you look at the profitability of these companies, what can you do to make it work over the long-term? As we study the cycles this line is so volatile that we need to make a lot of money before the bad cycle starts again.”

“When you look at the perspective of stock price, you have a lot of investors who try to determine a cycle, whether it’s insurance or financial,” Friedman said. “Increasing rates over the last few years has made up for the bad years. We’re trying to develop some return to hold us to the next cycle, which is why there is interest on the investment sector. It’s virtually impossible to get it right every year. We hope over time we get it right, but there isn’t magic to get it directly on target.”

Kalainoff noted that medical professional liability hasn’t been a crisis for the reinsurance market. “There is opportunity to make money and we are picking up a bit of marketshare,” he said. “But if we’re not pricing it right, we’re going to go out of business, too.”

“We need to create additional capacity with respect to risk retention groups,” said E. Dow Walker, chairman, Willis Healthcare Practice, who moderated the panel.

Kalainoff explained that the Bermuda market is the market of choice for captive organizations by reinsurance business.

Lantry said that the future was in self-insurance. “As we pass on these huge increases, the clients are in denial and they are taking the business away and are self-insuring or setting up captives,” he said. “The problem is the entrepreneurs are going to make money. Many of these start-ups aren’t going to be around in five years. They’ll collapse and won’t be able to pay the funds.”

The London market has reinsured a good proportion of the start-ups, according to Morrell. “The simplistic view is that there are some well run and some not well run. Some are set up with proper intentions with long term solutions,” he said. “The reinsurers are quite cautious in the product they provide to doctors. It’s all about the reason the doctor is buying the policy. Even the motivation is you want the policy and you believe you won’t get sued, it’s only natural to get the cheapest product you can find.”

“There is a cycle and the market will soften and prices will go down,” Walker said. “These physicians, who are seeking lower prices, will go back to the market and leave the captives and risk retention groups. Did that new facility manage properly, price adequately and who will clean up the mess? This will be a concern several years down the road.”

“The market is going to soften,” Lantry warned. “They will be committing the same mistakes as they were in the early 2000s and as they go to dissolve the captives the whole thing will collapse,” he said. “The talent pool has been diluted and those left haven’t learned their lesson.”

Looking at tort reform, Friedman said there’s been a lot done over the last two years. “There’s a lot more on the plate, another initiative or bill and the variations are tremendous from state to state. Some states have very effective laws, some have loopholes,” he explained. “There are legislative initiatives that need to be interpreted. At first when tort reform is in place, it looks good, then the traditional environment changes, state Supreme Court strikes it down.

“You have to try to determine when it’s the right time to jump in, in terms of rates, and the likelihood that tort reform will be upheld,” said Friedman. “You only have one opportunity to set the price. There are no retroactive adjustment features.

“The other issue is the difficulty of pricing from state to state, even if you are comfortable with its legislative initiatives,” he said. “All tort reform isn’t created equal. Interpretations by judges are different from state to state. You have to determine how to apply to a particular state.”

The same debate is taking place in London, according to Morrell. “To give no credit must be wrong because even if you build up five to seven years over time, it must have affected settlements and decisions along the way,” he said. “It’s a question of how much credit do you give; whether a reinsurer writes a program or not. Maybe tort reform is the wrong thing for them to take the risk.”

“There’s a fundamental business in the way the market is priced in the U.S., London and Bermuda,” Kalainoff said. “People have been around long enough to see where there was tort reform passed, everything was front loaded and 18 months later it was overturned.”

“London has the highest concentration of experience; a lot more experience than Bermuda in this area,” Morrell said. “I don’t think it’s right to say that London prices it differently.”

Looking at the passage of tort reform by the federal government, the panelists thought it unlikely there would be a passage.

McKeon noted that there had been some incredible efforts by the American Medical Association. “There’s not as many demonstrations today as there were 24 months ago or walkouts that there were, however. We’re cresting on the level of the general public.”

Looking at the influence over insurance and reinsurance from rating agencies, McKeon noted that there is a real concern in terms of pricing. “From the rating agencies standpoint, they encourage everyone to go outside the med mal line. Anytime you have someone questioning reserve positions, it is a good thing,” he said.

“It’s pretty well known there have been a lot of problems with solvencies,” McKeon said. “We have a difficult time trying to figure out who is the next difficult company out there. We try and sell a promise to pay on the insurance and reinsurance front, if you can’t figure out who’s going to be around to pay that, you devalue a product immensely,” he said. “The companies that have gone down, generally speaking, have not been a surprise to anyone in this room, they may have been rated A, but everyone talks about the dumb deals. It’s not as simple as spread sheeting. The brokers have a responsibility to differentiate who is not a true A, even though they are rated as such by an agency.”

According to Friedman, rating agencies have a dismal way of rating the medical malpractice market. “They are having problems,” he said. “They lack any available, consistent, verifiable information about exposure. Premium volume is the only level of exposure, a very poor amount of information. There’s no verifiable way to measure exposure,” he said. “Until there is a means of doing that, the regulators are working with one hand behind their backs.”

Looking at the prediction for insurance and reinsurance capacity for 2005 and 2006, Kalainoff said in terms of new capital starting up, it takes time to get operational. “We’re probably not seeing new capital in any market,” he said. “It takes a while to have meaningful change. I haven’t heard about new capital entering the Bermuda marketplace.

“The market is softening a bit. How much is anybody’s guess,” Kalainoff said. “Transparency is our friend and foe. There will be more transparency in the business, and we’re going to get more aggressive in pricing. In terms of new capital, there will be a more aggressive pricing market as things become more transparent.”

Friedman noted that capacity is going to have to come into the industry through the reinsurance marketplace or generate earnings. “Those deals are not over, but winding down.

The biggest challenge over the next few years is recruiting and training new people,” Friedman said. “It’s hard to keep them because the competition is severe. If you don’t have the good people to do it, it’s tough. We’re losing many defense attorneys to the other side. We’ve lost a lot of good talent that is hard to replace.”