Rising Reinsurance Rates to Affect Already Hardening Malpractice Insurance Market

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BY VANESSA ORR
For the last year-and-a-half, a hard market has been unfolding in the medical professional liability sector, which provides malpractice insurance. And with a recent announcement by Lloyd’s of London, it looks like the difficulties the sector has been facing are about to get even worse.

“Lloyd’s of London just announced that in the first half of the year, they lost 400 million pounds ($520.08 million), compared to last year’s profit of 2.3 billion during the same period in 2019,” said Matt Gracey, medical malpractice insurance specialist at Danna-Gracey, the largest independent medical malpractice insurance agency in Florida. “The company is predicting that it will have payouts of more than 5 billion due to COVID, and they only have reinsurance for 2 billion of that.”

Insurance companies buy reinsurance so that if they have a bad year, they will be able to recover some of their losses from another insurance carrier.

“Some companies buy higher limits of reinsurance than others, based on the sheer gamble of how well they think the year will go,” said Gracey. “Some very large, stable malpractice insurers buy less reinsurance because they have a lot of money, but in years like this, it could mean that they’ll have a more difficult time because they didn’t buy as much reinsurance as their smaller competitors.”

As a result, reinsurance companies in the marketplace will soon be raising their rates, and these added costs—built into insurance policy premiums—will be passed down from the insurance company to policy holders. These rate increases will add to issues already facing the hardening market, including COVID, of course, and recent high jury awards and settlements in the $1 million and above range.

“There are many, many more million-dollar cases being settled and adjudicated than ever before, and the entire industry is now suffering because of these losses,” said Gracey, adding that the industry expects to see even more losses in court cases and settlements because of COVID, particularly in states that have not enacted COVID legal liability immunities.

While the federal government is trying to negotiate COVID-immunity protections for businesses, including those in the healthcare sector, this hasn’t yet happened on a federal level, and a limited number of states have enacted them across the country.

“If we can get some COVID immunities, and if the public’s goodwill toward medical professionals continues, there is some hope that rates will not rise as quickly as they could,” Gracey says. “But when a major insurance industry player like Lloyd’s of London comes out with terrible news like this, even if some other insurers are faring better, it will still drive prices higher as this ripples around.

According to Gracey, AM Best, the gold standard of rating agencies in America’s insurance market, reports that in 2020, the medical insurance sector is running at20 percent combined ratio—in other words, for every dollar an insurance company collects in premiums, on average, it is paying out $1.20 for claims and expenses.

“When you’re selling $10 hammers for $8, it’s hard to make up on volume,” said Gracey, adding that because it is a very competitive market, prices are being driven down to unsound actuarial levels.

Protect Yourself
In order to best weather the storm, Gracey recommends that health professionals make sure that they are insured by a financially sound insurance company.

“The bigger, the better in these harder market conditions,” he said. “The smaller insurers are already having troubles; some have already been declared insolvent and some are selling to bigger companies. In the case of insolvency, it’s not a pretty picture for the policy holders with some of the state guarantees out there.”

He also suggests that policy holders research the companies insuring them, and if there are any red flags, move to stronger, bigger companies as soon as they can.

“Over the last 13 years, smaller companies have competed with lower pricing, which creates instability,” Gracey said. “They aren’t collecting enough premiums to cover their losses and expenses. The bigger companies can weather these losses and slowly raise their rates to make them actuarily sound and fair, while smaller companies hold out as long as they can and then either “exit left” through insolvency or purchase, or raise their rates dramatically. Either option isn’t good.”