From Core to More: MPL’s Diversification Journey

The MPL industry has experienced a rocky past with serious affordability and availability issues, but is approaching the future with strategic diversification and growth. Tune in to our latest podcast to hear special guest Bill Burns, the MPL Association’s Vice President, Research and Analytics and host Jiffy Thomas, Sapiens’ Vice President, Head of MPL Practice, discuss the industry’s previous setbacks and ongoing structural change efforts, from international expansion to assumed reinsurance, and more.

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Jiffy Thomas: Hello and welcome to the Sapiens Insurance 360 podcast. I’m your host, Jiffy Thomas, Vice President and Head of MPL Practice here at Sapiens. And I’m so pleased that you’re out there listening. This is where we discuss the latest news, trends, and issues from across the insurance solution and technology spectrum.

In the global, diverse world of insurance, Medical Professional Liability insurance may not be the first sector that comes to mind. But of course, that doesn’t mean that MPL insurance doesn’t have a long-standing history and significant market of its own. Also known as medical malpractice insurance, MPL insurance became more standardized in the early 20th century as healthcare practices evolved. Heavy premium increases, tort reforms, including indemnity caps, and consolidation among insurers and healthcare providers have just been some of the highlights of the past 50 years. Today, the MPL industry continues to adapt to changing healthcare environments, legal frameworks, and medical practices, while diversifying in terms of risk management services, new coverage lines, mergers and acquisitions, and a lot more. With us today to speak to the MPL’s ongoing diversification journey is Bill Burns, who’s a Vice President of Research and Analytics at the MPL Association. Prior to joining the MPL Association, Bill also served as a Director on the Insurance Research team at Conning, where his main coverage areas were not only Medical Professional Liability, but also commercial auto reinsurance and general liability.

Bill, welcome to the program!

Bill Burns: Thank you, Jiffy! Happy to be here and I appreciate you having me on the show today!

Jiffy Thomas: Great, Bill. So let’s get started with you just giving us an overview of the MPL industry diversification efforts. Has the MPL industry tried to diversify in the past? Can you provide us some context and background color?

Bill Burns: Absolutely, Jiffy! So to answer this, I think it’s best if we go back and start at the beginning. So the MPL industry as we know it was created in the 1970s due to a crisis of availability. At the time, the commercial carriers dominated the market but were losing money because of rising frequency and rising claim severity. So they pulled out of the market and left a void where the insureds had no options. So the mutuals/bedpan companies were set up by medical and hospital societies to fill this void. But I think of these companies as special purpose vehicles that were largely designed to do one thing in one place. So if we fast forward about a decade to the mid-80s, we find ourselves with yet another crisis. But this one was a crisis of affordability and was again driven by rising frequency and severity. So at the time, the market found itself with loss ratios as high as 150%. And the only way to fix that problem is to raise prices. But then through a combination of factors such as tort reforms [and] improved patient safety, we saw underwriting results improve tremendously. Then, as icing on the cake, during the late-80s, the interest rate environment was very favorable to fixed-income investors. You had 10-year treasuries throwing off seven and a half to almost 10% at that time. So as a result of all this good news, the early ‘90s in particular, ‘91 to ’97, average operating results for this industry were about 67%, which meant that the industry was making $33 of pretax income for every $100 of premium. Well, policyholders surplus grew significantly, and companies found themselves with money to spend that they didn’t have before. So companies got to thinking, if we can do this in our home state, we should be able to make even more profit if we grow into other states and other sectors. So what you saw was, for example, the New Jersey doc company growing into Pennsylvania hospitals. You saw the Pennsylvania hospital company going into new Jersey docs and etc., etc. So it should be noted at this time the companies were also looking to get financial ratings. Many of them had no rating at the time. They were looking to get an ‘A’ rating potentially, which would allow them to diversify even more and not be 100% in their home markets.

Jiffy Thomas: Good, good. Thanks for that, Bill. So it sounds like, start small, start local, and then expand over to other states, right?

Bill Burns: Yes.

Jiffy Thomas: So, how do you think those diversification efforts have worked out, so far? And what have some of these companies learned from those experiences?

Bill Burns: Well, let’s keep it up until the hard market that we saw about 25 years ago. As I mentioned earlier, you saw a lot of companies diversify into markets where they had expertise, for example, doc company writing more doctors. You also had companies where they wanted to apply their MPL knowledge in other healthcare sectors. So doc company writing hospitals. However, the diversification we saw in the ‘90s was largely done on price. Why? Because the quickest way to burn into a market in insurance is to undercharge the competition. So that’s what companies did. They also tried going after better risks, for example, claim-free doctors, certain classes like anesthesia, etc., but the incumbent companies knew those risks. They knew their markets and they knew the defense attorneys. So in many cases, the risks that came to market were a lot of times bottom feeders. They weren’t the cream of the crop. So to your question on how this worked out, in a word, not so good. Industry combined ratio shot back up to the 140-150 range. Some companies took the diversification idea too far and found themselves priced out of business. Examples of that are PHICO, Frontier, a few others. Some companies just pulled out of the market, in particular, St. Paul, which was the largest writer of MPL at the time. Now for the surviving companies, a hard market set in and around 2001, which lasted for about five years. And we saw in some cases persistent year-over-year, double-digit price increases. This hard market, as I said, lasted until about 2006 when things settled down. So what were lessons learned? Well, one lesson is that it’s very easy to grow in insurance. All you have to do is underprice the marketplace. Another lesson is, profitability is a different story. So if companies insist on underpricing business, there will be a “road to Damascus” moment when they realize they can’t underprice forever. The third thing that came out of it is, I think the industry walked away more responsible about diversification and what that should look like.

Jiffy Thomas: Diversify, grow into other markets. But then there was a hot market that came into play, right? So other factors coming in. So just moving on after the dust settled on this last hot market, how has the industry looked to diversify its core operations to get some of those costs and loss ratios better?

Bill Burns: Well, things settle down. That’s the insurance industry. We have a crisis and then we move on. Our industry, what we saw post the hard market, companies continue to look to diversify. They just did it in a more responsible fashion. So you had companies that look to diversify in what they knew in other states, sometimes contiguous, sometimes across the country. But they went into the markets knowing more than they did, say, during the ‘90s, when they just jumped in the markets with both feet. There was a fair amount of M&A activity during that time. We had some companies like TDC, which made several purchases like SCPIE, FPIC, and now ProAssurance, which was the biggest news recently. ProAssurance was an acquirer of companies. I remember they bought the Podiatry Company about, probably 12 or 13 years ago. MAGMutual bought MD Advantage and West Virginia Mutual, so M&A activity is normal. That’s normal activity in any business. Some companies went into other lines of business. ProAssurance comes to mind, with the purchase of Eastern Alliance, which was a work comp, is a work comp specialty company. MAGMutual went into commercial auto to provide coverage for healthcare, auto risks. Then you have some companies going a little bit further. ISME has gotten big in the international space. Some companies are writing assumed reinsurance, they’re actually acting as full-blown reinsurers for healthcare writers. NCMIC and COPIC come to mind on that. And then you have some noninsurance areas. For example, Coverys got into the risk management and consulting as well as the education and training businesses and Curi is in the investment advisory business.

Jiffy Thomas: So, we went from companies vacating the markets to small mutual companies coming together, expanding. And then now you’re seeing a consolidation, mergers and acquisitions going on. Great! So, why are these companies looking to diversify today? What’s changing the, today’s environmental climate?

Bill Burns: There’s two big changes that have and are taking place, Jiffy. First, following the last hard market, one of the dynamics that truly benefited the industry was a drop in claim frequency. And we’re talking a drop of maybe 30, 40%, where the claims just went away. So at the time, the market was assuming prices that would cover a certain number of claims, but those claims didn’t appear. So the pricing in hindsight, was very overstated in some cases. What that led to was significant, favorable loss reserve development. And what that did was ultimately, it found its way into the policyholder surplus because the money wasn’t needed to pay claims. So between, say, 2006 and last year, 2024, policyholders surplus for this industry went up about 200%. So you have a number of MPL companies finding themselves sitting on large amounts of surplus and looking for ways to profitably deploy the money.

Jiffy Thomas: Uh huh!

Bill Burns: The second reason behind this, is that the whole picture of healthcare is changing. So about 10 years ago, physicians represented about 60% of the MPL market as we know it, in terms of written premium. Today, though, doctors only represent about 45% of the market. And this drop largely represents doctors that have gone from independent practice to becoming employees of hospitals or healthcare systems. If you think about Optum, which is a subsidiary of UnitedHealth, I believe they employ or work with one out of every 10 doctors in the country. So as a result, the doctor companies are looking for ways to grow, because the exposures just aren’t there in the doctor’s space.

Jiffy Thomas: Thanks, Bill. That’s, that’s an interesting dynamic trade here. You sitting on a bit of cash and premium, but the market’s shifting, people going more over to the hospitals. So for our last question here, what are some of the current paths MPL insurers should take in terms of diversification and what words of caution or encouragement would you put out there for MPL listeners?

Bill Burns: Well, we touched on a couple of them, Jiffy. International business assumed reinsurance and the tried-and-true method of expanding into other states, but cautiously, and with the right partners; don’t just jump in. There’s also a few other options I’d like to touch on that companies probably want to think about. And this message is largely directed at the mutuals, because by definition, the commercial companies in our space are already diversified. I think med malas a percentage of overall premium for commercial companies is maybe a 2%. So we’re talking here really about the mutuals that are largely in MPL. One thing they can think about doing is making structural changes. You might hear about companies setting up mutual holding companies, where the mutual company converts to a stock company, and the mutual holding company owns the stock, and now has access to capital markets. There’s also nonstructural changes, which could be affiliations or strategic partnerships, with other insurers that offer coverages needed by your MPL customers. work comp, cyber. It’s kind of a convenience, one-stop-shopping type of approach. Now, where we are seeing growth in this space is in the other facilities, the non-hospital, facilities, surgery centers, medi-spas where most care is delivered today. However, many of those risks are being written in the excess and surplus lines market. So if companies want to get into that other facility space, they should consider either setting up an excess and surplus line subsidiary or maybe partnering with an ENS company whose paper they can write up. Another interesting approach would be through an RRG. Now, RRGs have historically been used to insure a specific group of risks. For example, a group of docs that thought they might be better risks than their commercial or mutual company was charging for. So they set up an RRG to provide the insurance. Today, some companies are using RRGs as a growth vehicle, and this is because RRGs are less regulated than mutual companies and could have more flexibility in terms of pricing and coverage. And the last one I can think of is, is through program business. We hear talk about the MGA market and how that now exceeds over $100 billion in premium. And in order to write that business, the MGAs need partner companies. So many of these programs are written in the ENS market with a focus on property and GL. So it’s not med mal necessarily in play, but it is a way to diversify through other lines of business. So those are just some of the options that we can think of, Jiffy.

Jiffy Thomas: Thanks for your thoughts, Bill. I think we have just scratched the surface on the topic of the MPL diversification, much less where the MPL industry is going altogether. So hopefully we can have you again on the program to see what additional progress has been made. We’ll work on that! But in the meantime, thank you so much for appearing on today’s program and for sharing your valuable insights, Bill!

Bill Burns: Jiffy, the pleasure is mine. Thank you again for having me!

Jiffy Thomas: And to our listeners, as always, thank you so much for spending your time with us today. We love hearing from you, so if you have any comments or would like to follow us on social media, please reach out to us on our channels. And obviously don’t forget to subscribe to the podcast. We’ve got so much more coming, so stay tuned to our Sapiens Insurance 360 podcast. Bye now!

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