Impact of a Hardening Market and a Pandemic
Author – Allen Bosch, CPCU, ARM
Impact of a Hardening Market and a Pandemic on Malpractice Insurance Rates – A History Lesson
Last year, almost half of all medical malpractice carriers lost money. The Medical Liability Monitor reported that rates for certain carriers increased by more than 25%.¹ The pandemic is expected to have further impact on rates, so how do you protect your organization?
Some of the conversations I’ve had lately with clients and medical professionals center on why they’re seeing rate increases even though they haven’t had any claims. For the past 15 years, they could count on malpractice rates being flat or decreasing.
A History Lesson
Trends in insurance tend to be cyclical and to understand the insurance marketplace we are entering now, it is helpful to look back 20 years. At the start of the year 2000, malpractice insurers were being challenged by both claims and profitability and St. Paul Companies, a leader in the marketplace, exited at the end of 2001. This move jump started significant price increases and a lack of options that would last for four years. Due to these changes, healthcare practices got serious about risk management and states instituted tort reform to control claim costs. As the results improved for insurance companies that remained in the market, other companies took notice. They entered the marketplace, which drove down pricing and broadened coverage terms.
Since the beginning of the 2010s, the severity of claims that had been looming ended up exploding. In 2019, there was a jury verdict in Baltimore for a birth injury that reached $200 million. A little closer to home in 2018, there was a $30 million verdict in Orange City, Iowa. In 2005, at the same time malpractice pricing bottomed out, the average claim cost was close to $250,000. Last year that number increased to $375,000. In addition, there were 45 claims over $10M in the United States in 2019.
Drivers of Increasing Higher Claims and Verdicts
Here are some of the reasons this is happening:
- Attorneys have shifted tactics – One example is the Reptile Theory. The Reptile Theory focuses on safety and security issues to subtly encourage jurors to envision themselves in the same situation as a plaintiff.
- Tort reform has been overturned in a number of states which limits the ability of defense to control claim cost.
- Consolidation in healthcare has led to fewer risks which in turn has led to more competitive terms and pricing that led to unprofitability.
- Mergers have created super organizations which have become faceless institutions, and juries aren’t as conflicted to hand them large verdicts.
- There has been a shift in attitudes with millennials, as they don’t have issues handing down large verdicts.
Last year, almost half of the malpractice carriers lost money. Current market conditions are such that medical malpractice companies can no longer be afraid to raise rates.
Preparing for Rate Increases in 2021
What should your organization expect in 2021?
- Rates will go up around 2%-5% in 2021 in Minnesota. Most of the states in the Upper Midwest are stable except for Iowa, which is seeing rate increases over 10%.
- If you currently carry limits higher than $1M, expect those rates to increase or see minimum premiums that didn’t previously exist.
- If you haven’t had a risk management survey in a while, you should reach out to your agent or insurance carrier to see what they offer; develop a relationship with your insurance company.
- Make sure you have room in your budget for an increase in insurance premiums.
- Review the financials or ratings of your current insurance carrier and assess your options to have a Plan B in place.