Best: Med-Mal Insurers to See Changes in '08

Medical malpractice insurers again posted very strong underwriting results in 2007, a year that was a mirror image of 2006 in many respects. A.M. Best Co. expects the medical malpractice market’s operating returns to narrow—but remain profitable—in 2008, as adequate pricing gives way to a more competitive marketplace.

• In 2007, surplus levels expanded, and underwriting and investment gains fortified the asset bases to offset the negative influences of a deteriorating interest-rate environment.
• A weaker interest-rate environment likely will carry into 2008, creating additional compression in the medical malpractice market’s profit margins as new money is reinvested in lower yielding securities.
• As the pricing environment softens, an effective risk management framework will be tested, and management’s ability to properly identify, manage and monitor its business will be essential.
• Over the past five years, exceptional underwriting and strong cash flows have led to a compound annual growth rate in capital and surplus of 13.6%.
• A.M. Best has noted an uptick in the policyholder dividend component of the combined ratio, as a number of mutuals are returning unanticipated profits to their policyholders.

• Despite the temptation to release reserves and compromise the integrity of pricing, medical malpractice insurers need to avoid this recurring pitfall by looking beyond today for the sake of the future.

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