Medical Malpractice Insurance: The Soft and Fuzzy Hard Market
The medical malpractice insurance industry is cyclical. When there is too much supply, prices fall (soft market). When there is too much demand, prices rise (hard market). What makes the industry unique though, is that the underlying prices are based on predictions about lawsuits that will be filed in the future. It is a sophisticated guess. The time lag between collecting money and paying claims makes pricing tricky, and ripe for exploitation. Knowingly under-pricing coverage is known as “cash-flow” underwriting. It is a form of a Ponzi scheme in that, if new money keeps coming in, old claims can be paid. If it doesn’t, they cannot. And unless regulators are savvy and motivated enough to analyze historical reserving practices, this game can continue for quite some time. But like all good Ponzi schemes, they eventually come to an end.
Welcome to the new “hard” soft market - where there is still too much supply, so companies are forced to knowingly underprice policies to protect their market share. Companies with sufficient resources can afford to do this – for now. They can also look to acquire the companies that cannot.
For a variety of reasons – ranging from mismanagement to greed – some struggling companies do not sell, and instead liquidate. Note:
- Doctors and Surgeons National RRG
- Fairway Physicians RRG
- Louis and Clark, RRG
- Galen Insurance
- JM Woodworth, RR
Because the fallout from these liquidations has thus far been small, so too has the press. The question is, how far behind are larger companies?
There is an old saying, “To survive, a gazelle does not have to run faster than the lion, only faster than the slowest gazelle.” But each time a lion eats a gazelle, the next slowest gazelle is no longer safe. So seems true with the med mal market – each liquidation appears to be bigger than the last. Is your company next?
Now is a critical time for providers to engage consultants to analyze their companies’ balance sheets.
The hard market has just begun. Better get your cardio up!
Brian S. Kern, JD, is the Founder of Toro Risk Consulting Group, a highly specialized company that advises healthcare companies, insurance agencies and providers. For more information, contact firstname.lastname@example.org