In our last post we did a quick overview of the numbers from this year’s annual malpractice insurance rate survey put out by Medical Liability Monitor. There, we saw that the trend of static to declining rates continued for 2013 as it has for the past several years. Today, we’re going to step back from the specifics of this year’s poll and look at the larger, historical trends in medical liability rates. We’ll look at what the trends are, why they are what they are, and speculate a bit on what we can expect in the future.
While it’s easy to feel like malpractice insurance is always costing you more, especially in the midst of a languishing economy and the financial costs and uncertainties associated with the changing legislative landscape (HIPAA, HITECH, PPACA, etc.), the reality is that we are right in the middle of a period of unprecedented stability and even decline in malpractice insurance rates.
Since 2006, there has been a near 20% decrease in direct written premiums across the medical professional liability field. Since 2008, overall average rates have gone down every single year. Additionally many companies have reported increases in the number of credits and/or new credits being offered over the past several years.
Why do medical liability rates continue to decline?
So, why is this happening? Why do medical liability rates continue to decline? That question can be answered on two levels. The first is the more obvious. Rates are continuing to decline because insurance companies are continuing to post record profits and therefore can afford to reduce rates in an effort to remain competitive while still maintaining a strong financial position.
But the fact is that simply begs the more fundamental (and more mysterious) question: How can rates be declining even as providers are posting near record profits? That is the question that insiders in the industry have been puzzling over for several years, and which no one is certain of the answer to. However, even if the overall picture remains a bit mysterious, there are some fairly straightforward partial answers.
- Decreasing number of claims – While the reasons for a decreased number of claims are hard to pinpoint exactly, the fact remains that as of 2012, the number had fallen by half over the course of the previous decade. Fewer claims mean less risk and fewer payouts, which of course means lower premiums.
- Modest severity of claims increases – While the average cost to defend claims has gone up fairly substantially since 2005, the average cost to insurers per claim has increased only marginally in the past few years.
Beyond this, it’s hard to say why insurance companies continue to do well despite all the signs of a soft market. But one thing is for sure, while the situation may make speculators and those in the malpractice industry nervous, at least in the short-term this strange confluence of soft markets and strong profits seems to be good for everyone.
Further, it seems pretty likely that this trend will continue for at least the next few years, and really for the foreseeable future. It won’t be permanent, nothing is when you’re talking about markets, but the situation is unlikely to change quickly. That’s because, as you can see from similar historical patterns (see Chart No. 4 on page 5) it’s only a financial squeeze that is likely to make the industry adjust, and even so the response usually comes a few years after the financials start suffering.
All that is to say, the malpractice insurance industry isn’t likely to raise medical liability rates until they are at least two or three years into an uncomfortable financial trend and right now they are about nine years into a pretty good financial trend. So, perhaps when we begin seeing an average combined ratio well over 100% across the industry we can surmise that within a few years rates may begin to tick up. But for now take heart; your medical professional liability rates shouldn’t be going anywhere but maybe down for the foreseeable future, and even if they do go up a bit here or there, it’s not likely to be very substantial, and you’re still almost certainly paying less than you would have been ten years ago.
For more of the raw data from an industry perspective, you can check out this analysis from the 2012 polling data.