Proper pricing


Proper pricing

Risk management may be first class but losses above $5m continue to trend upwards, with implications for insurance premiums, says Justin Keith, vice president, Hiscox Bermuda.

Since the run up to and passing of the Affordable Care Act in the spring of 2010, many in our broader industry have debated how the shift in the way we pay for and deliver healthcare in the US will affect medical professional liability claims. Given that most medical malpractice insurance policies are now written on a claims made basis, prudent underwriters (including those managing captives and large self-insured trusts) need to consider the future settlement or verdict cost originating from a medical accident occurring today.

Actuaries assist greatly in this by applying trend and development factors to historical data, but these tools are not intended to be perfectly predictive and often we are still surprised by the harder to predict ‘super losses’—those exceeding $50 million—as well as the more subtle shifts in values of claims occurring with less severity but greater frequency. How can we predict when the actions of a single nurse or doctor will cause catastrophic injury to patients of an otherwise prestigious hospital? Or more to the point, how can we predict when the normal claims experience of an institution will suddenly turn abnormal and to what degree? Of course the answer is that we cannot, and the issues at play aren’t likely to become less complex.

The positives from healthcare reform

Evaluating the outside factors that affect the actuarial analysis doesn’t seem to be getting any easier and as healthcare reform continues to take form, its impact on our business remains unclear. There are certainly many positives from reform, not least that hospital mergers lead to greater resources and stronger balance sheets, while significant advances in risk management and patient safety programs are also being met with early claims resolution initiatives, ie, more sophisticated claims handling.

The negatives

These positives are countered however by issues such as the organizational disruption caused by mergers and acquisitions; varying sentiment of jury pools; and the sometimes unwillingness of plaintiffs to accept meaningful settlement amounts. Layer on the factors affecting these issues, such as medical inflation, challenges to tort reform, increasing life care plans, a slow economic recovery, increased attention to income inequality relative to individual costs of medical care and the persistent distrust of business and government leaders due to repeated corruption, and it only gets harder to predict the future value of present day events.

Insurance thrives on uncertainty

That uncertainty of course is why businesses buy insurance, and the availability of affordable malpractice coverage allows practitioners and hospitals to be bold in execution and to focus on their core business without fear of balance sheet impairment. Our industry is lucky in that we partner with and insure people who care deeply about what they do and who pour considerable resource into programs designed to reduce injury and increase quality of care. This will always be a good thing. However, some of the recent market losses have come from some of the highest quality facilities, despite the fact that they have excellent leadership, risk management and in-house claims teams.

There’s trouble ahead

In analyzing our own data and by looking at publicly available verdict information, we continue to see signs of potential trouble ahead. For example, 50 percent of the largest medical malpractice claims paid in history have been paid in the past five years (see Table 1). Indeed, based on our research, losses above $5 million continue to trend upwards, accounting for a larger proportion of total dollars spent in claims.

In the early 2000s the percentage was in the 7.5 to 10 percent range per year; now that figure has moved up in to the 15 to 25 percent range, and will go higher still. Given the higher limits purchased by insureds, there is also continued concern about the large single loss or batch claims activity.

Does the price reflect the risk?

The question remains, in the face of an uncertain future loss picture, are underwriters properly pricing for risk? And if they are not, what risk does that pose for insurance buyers? It is no secret that medical malpractice companies have returned satisfactory results in recent years and as a consequence this has attracted new entrants to the market. Yet results are more volatile when looked at over a greater period of time and we tend to forget how easily underwriting profit can disappear.

There have been significant advances in risk management and patient safety, but the current complexity and uncertainty of the healthcare environment should be ample warning that this is a class of business with the potential to inflict some nasty wounds. 








Justin Keith is vice president of Hiscox Bermuda. He can be contacted at:

Justin Keith, Hiscox Bermuda, ACA, USA