Claims Severity and Pressure on Premiums
For the last several years the medical professional liability (MPL) industry has been experiencing financial pressure in response to the changing healthcare system and social inflation. This increase in the frequency of severity of claims, along with an extended period of downward competitive pressure on premiums, is prompting needed adjustments across the entire industry. Locally, in the Pacific Northwest, Physicians Insurance’s experience also shows an increase in severity of claims. In the past four years the number of claims settling for more than $1M and $2M has jumped 100% and 300% respectively.
Aside from the increase in the frequency of severity of claims, another contributing factor is the cost to defend claims. Using 2007 as a baseline, the costs to defend a claim had a nearly 50% increase for claims between 2007 and 2018. Not only are claims resolving for higher indemnity but it is also costing more to defend them.
As a mutual company that is owned by and operated for the benefit of our members, we take rate actions very seriously. For many years, we have operated at an underwriting loss, being able to offset some of this loss with investment income. However, with investment income down and claim severity continuing to rise, we need to bring our pricing in line to cover the true cost of insuring healthcare practices in 2020 and beyond.
We are not alone in experiencing financial pressure in response to the changing healthcare landscape. The entire medical professional liability industry (and to a larger extent the property and casualty industry) is experiencing a firming of the market prompted by increases in losses. Most carriers have already responded to these changing conditions by taking filed rate action, some multiple times, but PI has been an outlier as we have tried to maintain flat rates as long as possible.
For PI, our last filed rate changes were a 10% rate decrease in Washington in 2009, a 15% decrease in Idaho in 2010 and a 20% rate decrease in Oregon 2012. Starting in 2019 rate increases have been taken by MedPro and TDC for Washington, Oregon, and Idaho. CNA took early rate action by increasing their base rates and certain specialty rates in 2012 (overall impact of 7.8%), and again in their overall rates by 12.9% in 2013, and by another 6% in 2015. PI is really the outlier here as we haven’t taken any filed rate increases in 15 years.
PI is not at financial risk. By all key metrics PI is financially strong. PI’s Underwriting Expense Ratio is consistently lower than our peer group: which means we consistently spend much less to run our business.
However, we do outspend our peer set on defending our members and paying claims because we work in environments with no tort reform as well as we are willing to spend money needed to defend a case and take it to trial.
Because our focus is always on the member, since 2015 we have operated at an underwriting loss. Despite rising case defense expenses and reinsurance costs, the investment income PI has offset the underwriting losses. However, along with the now historic lows in interest rates, these underwriting losses are unsustainable, and we need to make changes now to be able to continue to provide future coverages.
While we have avoided raising rates for several years, some of the states we serve will see an increase in 2021 (effective 1/1/21):
Rates are currently being reviewed by the WA Office of Insurance Commissioner and are pending approval.
The rate increase for Oregon is 15%. Interestingly in Oregon, indemnity severity quadrupled in Oregon in 2015-2019 compared to the prior five years. The adjustment to the base rate considers this important factor.
Most carriers in the Pacific Northwest already took rate increases.
- The top 5 admitted carriers in the Pacific Northwest have all taken recent rate increases, some as early as 2012. In contrast, PI’s last filed rate changes were decreases -- a 10% rate decrease in Washington in 2009, a 15% decrease in Idaho in 2010 and a 20% rate decrease in Oregon 2012.
- Starting in 2019, there has been a large uptick in the amount of rate increases that our competitors have taken: MedPro and TDC both increased their rates, sometimes two years in a row, for Washington, Oregon, and Idaho.
- CNA took early rate action by increasing base rates and certain specialty rates in 2012 with an overall impact of 7.8%, then another increase in their overall rates by 12.9% in 2013, and by another 6% in 2015.
PI is the outlier in that we haven’t taken any filed rate increases since 2005.
This is really a difference between past performance of the company versus current and future results.
For the past several years the company has relied on investment income to offset underwriting losses. This is no longer possible due to the combined impact of social inflation (which is increasing verdict and claim amounts) along with the continuation of historically low interest rates. This means the current base premiums are insufficient to cover projected losses and the buffer of investment income is no longer capable of offsetting losses.
At the same time, Physicians Insurance has returned a portion of its policyholder surplus to members in the form of a dividend. That means for those earlier years, there was more premium earned than was needed to cover losses and expenses.
Contact your underwriter or account manager to learn more about how the market may be impacting your rates for 2021. You can reach us by calling 800-962-1399.