Navigating Through the Current Phase of the Medical Malpractice Market Cycle
Presented by Matthew Dolan OneBeacon Professional Partners www.onebeaconpro.com
Program Objectives
1.
Understanding the market cycles and what drives carrier behavior and how this behavior could impact your placement
Evaluating the carrier’s operating model and the stability of your potential carrier Determining how to most effectively purchase a high quality and sustainable risk transfer program in a softening market
2. 3.
“Between the idea And the reality Between the motion And the act Falls the shadow Between the conception And the creation Between the emotion And the response Falls the shadow” The Hollow Men T.S. Eliot
And so it goes…cycles repeating themselves
Then – 2001 “According to the most recent conning study, the industry is in the midst of the most serious financial crisis in its history” Now – 2007 New report confirms “Medical Malpractice Crisis is over” Robert Hunter – AIR spokesperson and Director of Insurance for the Consumer Federation of America states that “The end of the hard market of sharp rate increases, less competition and cutbacks in coverage has occurred and a soft market is now in place
Then – 2001 A.M. Best estimates that the medical malpractice industry segment has incurred over $17.3 billion in underwriting loss since 1976 Now – 2007 A.M. Best’s estimate of the full year (2006) combined ratio is 93.3% AIG’s loss ratio in 2006 for nine months is 50.9%. The lowest since 1987 St. Paul/Travelers Group’s loss ratio in 2006 for nine months is 46.8% Berkshire Hathaway Insurance Group’s loss ratio in 2006 for nine months is 56.1% Conning estimates that the medical malpractice combined ratio will fall significantly below 100 to an estimated 95.2%
Soft Market Focus vs. Hard Market Forces
Soft Market Drivers The actions of others Uncertainty of cost (false perceptions of profit) Excess surplus-capital needs to be deployed Accident year vs. calendar year accounting Misguided market share initiatives and growth strategies Hard Market Drivers Dual pricing objectives Numerator and denominator work Constrained/Limited Capacity Low interest rate environment
Regardless of the drivers or the behaviors – the industry cycles are driven disproportionately by the industry participants, mainly carriers and are rooted in our own inability or disinclination to “right price” the business
Soft Market
The actions of others Uncertainty of cost – (false perceptions of profit) Moving left and compounding the implications of their
decision (large limit, broad terms, lower price Cumulative results of the industry suggest that the decision to move left cannot be completely justified
Soft Market
Quality
H
L H = High Quality/High Cost L = Low quality/Low Cost H
Price/Placement
The “Right Priced Environment”
Price, placement and quality Constrained capacity The left of the line environment
The right of the line environment
ROE expectations
The “Right Priced Environment”
Quality
H
L H = High Quality/High Cost L = Low quality/Low Cost H
Price/Placement
The Hard Market
Numerator & denominator work Dual pricing objectives Commercial premium $$; leave the market
Hard Market
Quality
H
L H = High Quality/High Cost L = Low quality/Low Cost H
Price/Placement
Cost of Capacity
Attachment $15mm – $24mm Rate per Million $12,000 Implied Funding 136 Implied Frequency 0.7%
$25mm – $34mm
$35mm – $49mm $50mm – Over
$10,000
163
0.6%
$8,500
191
0.5%
$7,500
217
0.5%
Pricing/ROE Assumptions
Industry-demonstrated propensity for loss 2001 CY loss > $2 billion Risk loads must be imbedded in ROE targets
15% - 17% > risk-free rate
Premium-to-surplus ratio must contemplate volatility
of business and specific risk portfolio
The Wreckage
There is real danger created by soft market behavior
PHICO St. Paul MMI Frontier ERC
Failed models with a demonstrated inability to navigate the soft market
Avoiding the Wreckage
Insureds and insurers must engage in a bilateral comprehensive underwriting of one another
The carrier’s role is to Provide stable capacity over time
An insured, with the expert advice of its agent or broker must evaluate the business model and attendant practices of an insurer. High quality, enduring business relationships emerge from the natural intersection created when there is a common view on
Quality Tactics Service Transparency Experience Expertise
Do you have a fundamental understanding of:
The quality of an insured’s risk pool The company’s premium growth in the past couple of
years and projected growth in the upcoming years
The company’s use of reinsurance
The claims handling ability of the company The quote and hit ratios of the company
The geographical spread of the company
The persistency rate of the company
Conclusion
The medical malpractice market remains extremely
cyclical
Understanding market cycles and how your carrier is
navigating the market cycle is an important part of your risk transfer decision making process
Underwrite your carrier as carefully as they
underwrite you
Understand the difference between cost and value