Buyers of medical malpractice liability insurance may see pricing begin to harden as insurers pursue elusive profits and start turning away poor risks.

In the short term, however, rates should continue to be relatively low as insurers compete for customers, analysts say.

The medical malpractice market today generally is split between physician mutual insurers, which were created about two decades ago in response to insurance availability problems for physicians and hospitals, and mainstream commercial insurers, some of which are testing the waters after leaving the market years earlier.

Although competition has pushed a few physician mutual companies from the scene recently, most have adapted, according to Robert Partridge, a director with Standard & Poor's Corp. in New York. S&P recently prepared an analysis of the medical malpractice market, as well as a ranking of the leading underwriters in this market based on 1997 direct premiums.

The mutuals are diversifying their products, offering policies that cover group practices, expanding into adjoining states, taking up allied business such as physician claims management, or entering joint partnerships with larger insurance companies, Mr. Partridge said.

Some have replaced occurrence-based coverage with claims-made policies to adjust pricing for doctors' experience more efficiently and to increase profits. Others have abandoned the mutual structure and converted to stock companies outright.

Physician mutual companies are vying "for survival and success," said Dick Bucilla, executive vp of Boston-based Lexington Insurance Co., a unit of American International Group Inc., and head of AIG Healthcare.

"They're not going down without a fight," he said of the doctors' mutuals.

AIG is the sixth-largest underwriter of medical malpractice coverage, according to S&P. AIG companies will write about $200 million in malpractice premiums this year, Mr. Bucilla said.

To insurers considering entering the malpractice sector, it "looks profitable, at times," but numbers can be misleading, said Tom Hermes, a principal with Tillinghast-Towers Perrin in Hartford, Conn. Some companies use prior-year profits and returns off of surpluses to brighten an otherwise lackluster bottom line, he said.

Another recent trend in medical malpractice insurance is that buying decisions are increasingly in the hands of professional administrators who choose on behalf of group practices or hospitals and who are skilled at rate negotiation, Mr. Partridge said. Previously, doctors would make these decisions themselves based mainly on loyalty to a particular insurer, he explained.

"With the advent of managed care, the buying decision is now starting to go away from the individual practitioner to a group and, in some cases, to a risk manager in a group," said Mr. Partridge.

Physician mutuals may be more likely than commercial insurers to work closely with the doctor in a malpractice case, and the decision to settle may be left to the physician to decide, said Winnie Ouko, an associate director at Standard & Poor's.

"When you switch over to a commercial carrier, they look at the economics of litigating the case vs. settling," she said. "So even in cases when a doctor may not be actually liable, they may settle because it's economically expedient to do so."

The price of medical malpractice insurance may be ready to move upward, according to Chuck Buikema, assistant vp-risk and insurance management for Falls Church, Va.-based Inova Health Systems.

For six years, Mr. Buikema has purchased medical malpractice insurance for Inova, an integrated delivery system consisting of five hospitals, more than 200 staff physicians, several clinics and a health maintenance organization.

"I truly believe (pricing) is starting to harden," Mr. Buikema said. Inova finances its primary malpractice insurance through a Vermont-based reciprocal risk retention group. A Bermuda-based captive insurer provides some reinsurance to the Vermont group, and the remainder of reinsurance is provided by St. Paul Fire & Marine Insurance Co. of St. Paul, Minn. and Employers Reinsurance Corp. of Overland Park, Kan.

As profits remain low in medical malpractice, insurers are consolidating, competition is beginning to diminish and some insurers are holding the line on price decreases, Mr. Buikema said. Time is on the side of larger commercial insurers that can afford to take chances with malpractice insurance programs backed by billions of dollars in surplus, he said, whereas physician mutual companies may find themselves "gobbled up by the major players out there."

"I'm not sure they really can survive," he said.

But Walter Squire, a New York attorney who manages several captive malpractice insurance programs, said there is plenty of capacity in the malpractice market for both physician mutuals and commercial insurers, and the latter may "be hurt by a history of periodic withdrawal from the market."

"If they can get over that, I think they can give doctors' mutuals a run for their money," Mr. Squire said.

Buyers of malpractice insurance "with long memories" may favor physician mutual companies, because most commercial insurers abandoned the sector around 1975, said Edward J. Amsler, assistant secretary of New York-based Medical Liability Mutual Insurance Co. MLMIC is the third-largest medical malpractice underwriter, according to S&P.

"We understand the book of business through history," Mr. Amsler said. "Being a mutual, we also understand our role is to charge the lowest rate consistent with the solvency of the company."

S&P's Mr. Partridge said there are still many healthy physician mutual companies in existence.

"There are plenty of very strong doctors' mutuals," he said. "However, the competition we're seeing. . .is significant."

Not all of the competitors, however, are excited about vying in the present soft market -- not even those leading the industry.

"We simply are unwilling to aggressively compete for new business under the terms and conditions that are now present in the marketplace," said Tim Morse, president of St. Paul's Medical Services Division. With $402.7 million in premiums, St. Paul was in 1997 the second-largest underwriter of medical malpractice insurance, S&P reported, trailing first-place CNA Insurance Cos. by $6.4 million.

"A marketplace correction is in the offing," Mr. Morse added, pointing out that St. Paul had, for the first time in 12 years, instituted across-the-board rate increases for medical malpractice insurance last year.

Insurers, more than before, are being selective about the business they pursue, Mr. Morse said. "Carriers are picking their spots."

Other commercial insurers offer medical malpractice insurance as part of complete packages of health risk coverages, even when the coverage is not profitable alone.

Simsbury, Conn.-based Executive Risk, for example, decided about two years ago to enter the malpractice market in order to be a full-service, one-stop provider to doctor groups, hospitals and long-term care facilities, said Susan Huntington, an attorney and director of health care risk management for the insurer, which S&P does not rank.

Executive Risk has seen more and more malpractice claims filed related to managed care, Ms. Huntington said. Such suits typically allege that doctors made bad diagnoses, that facilities lack staff, or that physicians are paid an insufficient capitation rate to ensure quality care.

In the next few years, Ms. Huntington predicted, there will be an increase in managed care-related malpractice claims filed against doctors and hospitals and, in some states, against the managed care organizations themselves, as a result of patient rights legislation.

"I would characterize (the increase) as a tsunami," she said.

For a copy of the S&P report, or a complete listing of its ratings, visit its World Wide Web site at www.standardandpoors.com.