Med malcontent: Top medical malpractice writer St. Paul Cos. abandons the unprofitable business. Who will fill the void? (Briefing).

As the largest medical malpractice writer in the United States exits the market, the remaining companies will struggle to fill the void left behind, insurance observers said.

St. Paul Cos.' decision to withdraw from the market and post a $900 million charge, including $600 million to beef up prior years' loss reserves for medical malpractice, comes on the heels of two other companies also leaving the market this year. Phico Group Inc., which wrote $182.5 million in direct medical malpractice premiums for 2000, has been taken under control by regulators. Also, Frontier Insurance Group, which wrote $69.3 million in direct medical malpractice premiums, stopped taking on risk earlier this year.

In the last few years, loss costs have risen dramatically, rate adequacy has continued to slip and investment income has fallen, leaving many medical malpractice writers with unprofitable books of business. "It's a more challenging environment today than it was in the 1990s," said Jim Hurley, consulting actuary with Tillinghast-Towers Perrin.

Rising jury awards and litigation costs are driving the wave of red ink, said Geri Riley, assistant vice president at Conning & Co.

"It used to be someone had to make an error to get sued," Riley said. "Now you have failure to do something. These cases are being brought in hindsight."

Also, juries have become desensitized to large cash awards, Riley said. Jury awards for medical malpractice cases have increased from an average of $750,000 in 1998 to $800,000 in 1999, according to Jury Verdict Research Co.'s latest report.

With St. Paul's $575.2 million in medical malpractice premiums, that's close to $1 billion in capacity withdrawn from a market with $6.3 billion total capacity, Hurley said.

Turmoil or Opportunity?

"Turmoil is clearly the operative word at this point," Hurley said. "St. Paul's withdrawal creates a fairly significant vacuum in the market in terms of capacity. One can take two views of this: It creates a very large vacuum that will be difficult to replace, or others may view it as a very large opportunity."

That lack of capacity will put pressure on the market and help speed up rate increases. It also will push some insureds into the alternative markets, Hurley said. The capacity shortage may well be greater than $1 billion, he said.

"If St. Paul thought they had the premium right, they'd probably stay in the business," Hurley said. "When we're talking about a $1 billion shortfall, the bet that St. Paul is making is that is not enough."

The medical malpractice market is littered with failed companies. From Frontier and Phico to companies like PIC Insurance Group and PIE Mutual Insurance Co., both of which were taken over by regulators--some insurers are finding medical malpractice too dangerous to their bottom line.

Once a profitable product for insurers, medical malpractice has seen losses soar in recent years as combined ratios have skyrocketed. In 2000, the industry lost $1.30 for every $1 in premium it took in, according to A.M. Best Co. data.

"There are some people that are doing OK, but in general, the line is pretty bad," said Riley, who estimated that the industry is under-reserved by $5 billion, or about 25% of total reserves.

In the 1990s, when the market was soft, premium rates for med mal weren't adequate for loss levels. But the cost of losses wasn't increasing rapidly, and insurers could make up the difference through investment income, Hurley said. Also, some companies had anticipated higher loss costs and were able to reduce their reserves.

"Medical malpractice looked like a great line of business," Hurley said.