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Health care organizations covering their medical malpractice risks in captives experienced a bit of a surprise during midyear renewals: determined pushback from reinsurers tired of absorbing severe losses caused by negligent or rogue physician behavior.
Reinsurers have likely been offsetting losses in the medical professional liability insurance business for many years by using reserves or profits in other lines to support underwriting at a loss, but several factors contributed to a more determined effort by reinsurers to raise rates and retentions during recent renewals, experts say.
“While they have been asking for rate for more than a year, at this past July 1 and June 1 renewals, we’re seeing them actually successfully get those increases,” said Lisa Hamer, Chicago-based senior vice president with Marsh USA Inc. “A flat renewal for a client with no losses is considered a win, and I think we’re going to see that continue to be the case going forward, especially in jurisdictions where there have historically been more losses like Cook County (Illinois) and Philadelphia County.”
For large hospital systems and academic medical centers that self insure their medical malpractice risks through captives, “we are actually seeing a bit of an increase in frequency of severity for typical medical malpractice claims,” said Joanne Gundersen, vice president and medical malpractice leader with QBE North America in Simsbury, Connecticut. “In the eight-figure category of verdicts, we’re seeing a little bit of a bump up again. For the July 1 renewal season, we definitely saw some markets making some changes in either their pricing or their limits.”
Liability claims against physicians are not a rare event, with 34% of physicians having a claim filed against them and 16.8% sued two or more times, according to a series of reports published by the American Medical Association in December and January. But premium increases have been relatively infrequent, with only 13.4% of 2017 premiums higher than 2016 premiums.
In 2015, the average indemnity payment — money paid to a claimant or plaintiff for adjudicated damages — was $365,503, a 10.7% increase from 2006, but these payments were 5.9% lower in 2015 than in 2006 after accounting for inflation, according to AMA data. Average expenses such as for defense attorneys and expert witnesses, however, rose by 64.5%, or nearly 40% after accounting for inflation.
“Are the reinsurers getting a little bit nervous because of the severity of some of these and demanding higher retention at that primary level in the captive or risk retention group?” said Anne Marie Towle, executive vice president and captive practice leader with JLT Insurance Management USA based in Indianapolis. “That’s going to become more of a trend.”
The most notable medical professional liability event in the Bermuda market was a $190 million settlement reached between Baltimore-based hospital system Johns Hopkins Medicine and former patients of gynecologist Dr. Nikita Levy, experts say. In February 2013, Dr. Levy was discovered to be videotaping his patients, was terminated by the hospital system and shortly thereafter committed suicide.
Rising concern about so-called batch claims — catastrophic incidents that injure a number of patients — and settlements was a key factor during recent renewals.
“In all my discussions in London and Bermuda with reinsurance companies, they aren’t concerned about our individual risk management capabilities,” said Courtney Claflin, Oakland, California-based executive director of captive programs with the Office of Risk Services for the University of California, which has a single-parent captive called Fiat Lux Risk and Insurance Co. and a risk retention group called UC Health RRG that sells medical malpractice insurance to physicians and physician groups affiliated with the university’s medical centers. “They’re more concerned about the litigious nature of the business with batch claims. Batch claims were a big topic this year. They are concerned about litigation trend, and as a result they are looking for rate and higher retentions, and they stuck to it.”
The university employs 7,000 to 8,000 physicians insured by Fiat Lux, with about a $90 million spend for reinsurance. “Fiat Lux took more participation in the quota share arrangements that I have with syndicates and reinsurers, so I became a bigger participant with higher retentions and quota shares,” he said. “Premiums were a little bit up even with the higher retentions, so I saw some hardening in the market.”
Litigation efforts have expanded into nontraditional jurisdictions in addition to the well-known “judicial hellholes.” “We pay particular attention to venue deterioration,” said Susan Pateras, chief operating officer and health care practice leader for Ironshore Bermuda in Hamilton, Bermuda. “Health care is still regionally delivered, and across the different regions there are different levels of liability because some states may have tort reform, some tort reform is better than others, certain states are highly litigious. As we see the increase in severity, is that becoming a new trend? Are those one-off responses, or are those creating a shift in what was potentially a good venue into a venue that is now moderate or a venue that we need to pay particular attention to?”
The growing use of captive insurers to cover cyber risks is providing policyholders with a mechanism to modify insurance coverage to fit their needs, according to industry experts.