Increased Loss Severity in Healthcare Liability Claims
The principal challenges faced by healthcare liability insurance carriers have remained constant since the crisis of the late 2000s, including poor investment returns, decreasing premiums, eroding rate, and expanding coverage demands. Today, these challenges are being exacerbated by the continued consolidation of the healthcare sector, as well as increased loss severity. Meaningful pricing correction is needed.
Hospital systems are experiencing unprecedented change. To remain competitive, hospitals are employing physicians, expanding operations through acquisitions, and pursuing strategic partnerships throughout the broader healthcare sector. Such actions have served to heighten the duration and magnitude of the healthcare organization’s risk profile. While frequency of claims has decreased slightly, or remained flat, the frequency of severity – especially related to eight figure losses – has risen dramatically.
Ironshore’s recent study of hospital professional liability loss trends paints a bleak picture. The frequency of closed claims counts with financials greater than $5 million is increasing 10 percent annually. The frequency of claims counts with financials greater than $10 million has risen 7 percent. Factors influencing frequency of severity include a savvier plaintiffs’ bar, collective juror mentality, litigation funding, batch claims, and advanced medical technologies.
The proliferation in the number of claims with paid indemnity is compounded by the deteriorating paid ALAE (allocated loss adjustment expenses) ratio. Claims with indemnity reflected 55 percent of total claims in 2006 and reached to 66 percent of total claims in 2013. Comparatively, the paid ALAE ratio was 24.5 percent in 2012, a 2.9 point increase from 21.6 percent in 2006.
According to company filings, hospital professional liability carriers’ gross ultimate loss ratios are nearly 90 percent on a current accident year basis. Yet, despite the increasingly more complex operating conditions for hospital systems and the deteriorating loss environment, rates have continued to decrease. That trend is not sustainable in today’s environment.
The dynamics in healthcare professional liability are playing out amidst the backdrop of a transformative insurance industry landscape. In 2017, Hurricanes Harvey, Irma and Maria, combined with the devastating California wildfires, resulted in a record-breaking year of catastrophe losses for the insurance industry. Overall event-related claims are currently estimated at a range of $80-$115 billion. Unlike previous years of high CAT losses, interest rates have continued to remain historically low, prior year reserves are drying up, and calendar-year losses are impacting balance sheets. There is a compelling need for rate pricing corrections across all business lines in 2018.