A.M. Best Special Report: Medical Malpractice Sector Mends, But Remains Cyclical.

OLDWICK, N.J. -- The medical malpractice insurance sector for years has been viewed as an industry in crisis. In 2001, the crisis heightened when St. Paul Cos., the nation's leading medical malpractice insurer, exited the market, leaving more than $583 million of malpractice premium in search of a new home. During this tumultuous time, the entire medical malpractice professional liability industry was struggling with rapidly escalating loss costs, woefully inadequate rates and the need to significantly strengthen reserves--the same factors that drove St. Paul Cos., and others, from the market, this according to a special report by A.M. Best Co.

In 2002, the tide began to turn as medical malpractice insurers took action to improve profitability--including raising rates and tightening underwriting standards--and tort reform measures were enacted in a number of states. The results began to pay off in 2003 and continued through 2006. In 2006, the medical malpractice industry and the overall property/casualty industry, in fact, had their best underwriting year since the mid-1990s. Companies also have been reporting healthier balance sheets and solid capital growth.

As such, in January 2007, despite softening rates and increasing competition, A.M. Best assigned a stable outlook to the commercial lines industry, which includes the medical malpractice sector. Although the sector's results have improved, A.M. Best is taking a long view of the market and is emphasizing sustainability in its consideration of rating upgrades due to the cyclicality of this business.

During the last soft market, the medical malpractice segment diversified by expanding into additional lines and territories. A.M. Best's recognizes that companies that lack diversity, either geographic and/or product, generally are at greater risk than those that are well-diversified. However, A.M. Best cannot overemphasize that diversification is simply a risk factor and should not be construed as a prerequisite.

The medical malpractice sector responded to its crisis by implementing changes designed to positively influence poor results. These adjustments included substantial rate increases and re-underwriting initiatives that typically consisted of more stringent underwriting criteria, non-renewals, emphasis on risk management and the suspension of policyholder dividends. The general movement away from occurrence to claims made policies also represented an important development in the mending process. Also worth noting is that these improvements took place when companies were fortifying loss reserves.

Underlying all the good news is the nagging question of when the tide will turn, given this segment's, susceptibility to insurance cycles. For this reason, A.M. Best believes that medical malpractice insurers need to be vigilant. The ability to survive will depend on myriad factors, including management's adherence and dedication to price and reserve adequacy. Equally important are the effects of state tort reform.

BestWeek subscribers can download a PDF copy of all full special reports at no additional cost or a combination of the PDF copies plus all related spreadsheet files of the report data at no additional cost from our Web site at www.bestweek.com.

Nonsubscribers can download a PDF copy of the full special report (8 pages) for $55 or a combination of the PDF copy plus the spreadsheet file of the report data for $140 from our Web site at www.bestweek.com. Call customer service for more information, [phone], ext. 5742.

Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.