The Light at the End of the Tunnel for Medical Malpractice’

Skyrocketing insurance premiums, a dearth of companies writing medical malpractice insurance and doctors suspending their practices in protest are precipitating increased regulatory involvement and tort reform in the medical malpractice industry.

According to the American Medical Association, which released a study on the sector in June 2002, medical liability has reached crisis proportions in 12 states with 30 others showing problem signs. Though legislatures have been slow to address these concerns, insurance regulators around the country are assessing the crisis and seeking solutions through such means as state-run pools and tort reforms.

The Road Less Traveled
The medical malpractice industry has begun to reevaluate its late 1990s expansion when insurance companies diversified away from a regional focus to a national presence. This strategy has proved to be a perilous one. Many insurers have now scaled back their writings to concentrate on core geographic regions. For example, this past summer The MIIX Group’s management put its insurance subsidiaries into solvent run-off and created a new physician-capitalized insurer, MIIX Advantage, focused solely on its historically profitable New Jersey physician business. Unfortunately, such reassessment comes too late for some insurers to offset years of under-reserving.

For example, Pennsylvania and New York regulators took over PHICO and Frontier Insurance Group, respectively, in August 2001. Similarly, Virginia regulators recently took over Reciprocal of America. Instead of just focusing on key states, some writers have elected to completely exit the product line. The St. Paul, the second largest medical malpractice writer in the U.S. in 2001 according to A.M. Best, announced in December 2001 that it would no longer write this line of business because it did not believe it could do so profitably. In addition, a number of medical malpractice insurers have seen their ratings downgraded by the rating agencies. These factors have combined to cause major market dislocations and diminished capacity.

In the early 1990s the medical malpractice industry was a very profitable niche business with insurers benefiting from a hard pricing cycle and liability caps enacted in the late 1980s. Believing that there was a lucrative opportunity available, a number of insurers began to write outside of their historical footprint. In order to gain market share in new states, these insurers often resorted to underpricing their policies. As the competition increased in the late 1990s, profitability began to fall precipitously.

Editor’s Note: To see the full story, please see the Feb. 24 issue of Insurance Journal and Insurance Journal Texas/South Central. Vandecruze is a senior vice president at Fox-Pitt Kelton Inc., a leading investment bank specializing in the financial services industry. She is responsible for the firm’s regulatory advisory practice. Vandecruze specializes in capital raising issues for medical malpractice insurance companies and most notably was the financial advisor for The MIIX Group.