There’s no doubt that the traditional medical professional liability (MPL) insurance market and the MPL reinsurance market are closely linked. Both are coping with nuclear verdicts, depressed margins, and the impacts of COVID-19.
However, as the underwriter of the biggest risks in the MPL landscape and in other sectors, the reinsurance industry has the most exposure to nuclear verdicts and that has left reinsurance executives reevaluating their exposure to the MPL sector.
Unlike primary MPL insurers, there are no MPL-specific reinsurers. Instead, reinsurance firms operate over a wide variety of property and casualty (P&C) subsectors, which means they have a choice in terms of where to allocate capital. These companies tend to operate across a global landscape, a business perspective that offers both flexibility and constraints not seen in the primary insurance market.
Adaptability comes in the ability to offer a variety of MPL reinsurance across borders; constraints arise as investors, executives, and managers compare results across sectors, shifting capital to areas where returns are most attractive. This presents a challenge to the MPL reinsurance market—if reinsurers can’t generate returns at an attractive level, they may allocate it to other P&C sectors.
Both providers and the primary MPL insurance market need reinsurers just as reinsurers need providers and the primary MPL market. As the pandemic progresses—and eventually wanes—the balance between these three players that are dependently related will continue to shift. In the near and medium term, a tightening market is likely to continue, especially in light of poor results during the past three years.
“I believe that various lines of business in the casualty space, including MPL, are going to be facing upward pressure on rates and conditions,” said Ian Sawyer, head of casualty reinsurance at Sirius Group, a multiline reinsurer in London. “Even without COVID-19, casualty lines would be moving in this direction anyway, and it is something we will continue to see over the next several years.”
That being said, reinsurers are still, by and large, supporting primary MPL insurers and healthcare providers, said Anjanette Benning, executive vice president at Willis Re, a division of Willis Tower Watson. “Despite insurers’ awareness and need to review their possible exposure aggregations to the pandemic, they have in large part understood the need to continue to support healthcare providers who are actively responding to patient needs during the crisis.”
State of the reinsurance market
During the same period that claims severity has been rising over the past seven years, MPL insurance rates have been decreasing, said Bill Kaplan, global casualty chief underwriting officer at SCOR, a global reinsurance company based in Paris. “These unacceptable results have occurred for both MPL insurers and reinsurers, but particularly for reinsurers because we take more for the risk of severe claims,” he continued.
Kaplan described the market as in a state of “remediation and correction” in which rates are increasing for providers, but especially for hospitals. “We’re seeing carriers reduce limits, organizations increase retentions, and rates increasing,” he noted.
Andy Firth, president of MIEC, a mutual MPL insurer in Oakland, California, said that supply has decreased due to several large carriers leaving or reducing capacity in the MPL reinsurance market, which has left a gap in the market place. “Several insurers left or cut capacity because skyrocketing verdicts exacerbated a situation where they had been consistently reporting poor results and they apparently concluded they couldn’t succeed in the business of accepting transfer of this type of risk,” he said. “When you get reduced supply and the same demand, prices tend to go up, which is what has been occurring.”
While no organization went into 2020 expecting COVID-19, for the reinsurance industry the pandemic has accentuated trends that were already occurring, Firth continued. “Reinsurers made the decision that they weren’t going to take a beating anymore in terms of in certain lines of business, such as MPL,” he said. “When you add in the impact of severely depressed interest rates, there’s a lot of pressure on reinsurers and their management. This means that underwriters have less autonomy than they have had because management has instructed them that technical pricing requirements must be followed or that certain types of exposure aren’t acceptable.”
Impact of COVID-19
While hospitals and doctors have made significant progress treating COVID-19 since the initial surge of the pandemic in March, there are still many unknowns in regard to the virus. These unknowns create uncertainty in both the primary and reinsurance MPL markets, which makes underwriters and executives nervous about potential risk exposure.
“We now feel that COVID-19 leaves real exposure to some large metropolitan hospitals,” said Sawyer. “Unfortunately, the U.S. system is not about right or wrong, it’s whomever has the most resources and can force claims through. Whether you think a claim should be paid or not, I think there will be claims that will be interesting to see coming through the court system in regard to COVID-19.”
However, Kaplan noted that several factors may lead to fewer COVID-19 claims going forward, which would be a positive for providers, MPL insurers, and reinsurers. “First, fewer provider visits and procedures were done for several months in the spring and the early summer in many parts of the U.S. and that could lead to a decline in cases,” he said. “Secondly, frontline healthcare workers are seen as heroes. Thirdly, many states have granted immunity from civil liability in treating COVID-19 related cases. That has led us to not exactly relax in regard to COVID claims, but also realize that the situation may not be as bad as we initially envisioned it.”
Benning noted that reinsurers are coping with widespread uncertainty regarding COVID-19, which in some cases may affect how they allocate capital. “Reinsurers are keenly aware of the potential impacts of the pandemic and are evaluating their overall exposures to this loss event far beyond the MPL sector,” she said. “They are encountering impacts from property, event cancellation, workman’s comp, and other insurance units. Because of the nature of their business, reinsurers seek a holistic assessment of the impact of COVID on all of their lines of business.”
The reinsurance market is on a trajectory to continue to increase rates, limit coverage, and clarify policy terms to increase profitability and protect itself from the social inflation that has contributed to nuclear verdicts in many jurisdictions. Reinsurers occupy an important position in the MPL ecosystem in that they provide coverage for potential large verdicts, not just for primary MPL insurers but also for captives across the country, Firth noted.
The waves of hospital and provider consolidation that occurred throughout the last decade—and that are likely to continue to occur— have definitely impacted both the MPL primary and reinsurance markets. This consolidation has created a generally more sophisticated MPL insurance buyer, as larger hospital networks and bigger provider networks leverage buying power and more knowledgeable buyers in an attempt to achieve economies of scale and better rates and terms. This is one of the factors that has kept MPL rates low until fairly recently.
Viewing consolidation and COVID-19 together means that reinsurers have to be more aware of the changing climate in medicine, from the surge in telemedicine to new innovative procedures that have evolved to deal with COVID-19, Sawyer said.
“These situations can result in the execution of new ideas on the ground or expansion of practices that might not necessarily be fully covered within an MPL policy, not because they are bad ideas, but that they are new without a lot of history for insurers and reinsurers to price them effectively,” he continued. “If these situations end up producing a loss, that’s tough for the reinsurer to swallow.”
Having more lead time to understand and evaluate new procedures and new practices can result in a better understanding of what’s happening and more appropriate pricing and terms, he said. “Frequently, we as reinsurers come up with questions about new products or procedures that providers or primary insurers haven’t thought about.”
Another area of concern for reinsurers that is likely to continue post-pandemic is social inflation, Kaplan said. “I think there is no sign that social inflation is abating, which means that the remediation in the market in terms of premium increases definitely needs to continue until we believe we are getting an adequate premium and return in exchange for this increased severity of court verdicts,” he continued.
The reinsurance market is critical to the health of the entire MPL universe—to primary insurers, providers, and patients. “Maybe I’m being idealistic but I believe there will be lessons that both buyers and sellers of risk will re-learn about trading with a long-term perspective,” Firth said.
“A healthy reinsurance market supports the risk transfer of large, unusual healthcare outcomes,” said Benning. “This allows healthcare providers to maintain focus on patient care, which is where their resources should be focused.
A healthy reinsurance market also supports the capacity that is necessary for healthcare providers to compensate patients for unintended negative outcomes.”
“It is also important to note that reinsurance spreads the risk of managing volatile outcomes in that reinsurers can balance that risk with other non-correlating lines of business while supporting primary MPL insurers to maintain a variety of product options for the industry,” she continued.
For all participants in the market to remain financially healthy requires both buyers and sellers to understand the current nature of the market and the impact of severe verdicts on all stakeholders. In order to provide appropriate levels of coverage, insurers and reinsurers must be adequately compensated for the exposure they are taking on. In addition, providers need to know that they can receive the coverages they need to provide care for their patients. This is especially important in the COVID era, where the stakes are so high. When all stakeholders are aware of and appreciate each other’s position, that enables open dialogue to continue and the market to remain as healthy as possible.
Kaplan is hopeful that the federal government will work with the MPL primary and reinsurance markets to create a coverage model not just for COVID-19, but for any future pandemics. “It’s very important to be proactive in this area because it’s naïve to think that we won’t see another pandemic for another century,” he said.