Math Behind Medical Malpractice Carrier Consolidation

Mar 24, 2020 at 11:45 pm by pj




With the recent acquisition of Norcal Mutual by ProAssurance, the medical malpractice insurance market continues to consolidate. I think this Insurance Journal link  paints a financial picture why Norcal’s board of directors voted in favor of the transaction to proceed and perhaps close the proposed deal toward the end of 2020.

In fact, in my opinion, I think we will see more carrier consolidation in 2020 and beyond. I’ll try to provide a simple explanation as to why.

Full disclosure, I know and am friends with many of the individuals working for both noted companies. I can assure you they are well-educated, seasoned professionals and this decision was evidence based. And if you have insurance coverage with them, understand both carriers have billions in assets and surplus and will be strong going concerns if the deal falls apart or does not get regulatory approvals.

Further, what drives this type M&A activity is the acquiring insurance carrier seeks to expand their service menu, broaden their licensing footprint, and capture more overall market share while the acquired carrier’s board of directors - understanding their financial situation and liabilities on their book’s - seeks to protect their insureds and shareholders best interests and also shield themselves from a potential director and officers claim. I’ll write about the D&O market segment another time.

A medical malpractice carrier survives based on conservative underwriting principals, its loss development and the actuarial mathematics - if not enough premium is charged and collected to off-set future losses and legal expenses, eventually the carrier goes bankrupt or worse goes into liquidation.

As I wrote in January (here), the medical malpractice insurance market continues to deteriorate based on negative underwriting results that have generated poor combined ratios. A combined ratio is a basic measure of a carrier’s profitability.

Since 2014, the overall medical professional insurance (MPL) industry has had a combined ratio over 100% - and we are now seeing an uptick in frequency (numbers of claims filed) and severity (claims paid) that continues to climb year-over-year on average now well-beyond $300,000 per claim paid.

Another contributing factor for Florida, has been the elimination of the pain and suffering caps that had been in place since 2003.

But let me take you back to my point about combined ratios and add another often overlooked insurance industry practice known as managing reserves. As I’ve detailed below the overall MPL carriers combined ratios from 2014 to 2018 (we are awaiting 2019 results) and overall aggregate loss and allocated legal expense (ALE) reserves per AM Best.

Anything over 100% indicates an underwriting loss and has to be offset the by better investment returns, cutting expenses and hope for future years having positive loss and claim development.


MPL Carrier Combined Ratio Loss and ALE Reserves (in $ millions)


2014: 116.1 -

2015: 118.2 -

2016: 118.6 $19,768

2017: 118.0 $19,490

2018: 117.8 $16,169

2019: ? ?


Source: A.M. Best - May 6, 2019 - Best’s Market Segment Report


I suspect readers are asking themselves a good question, excuse the cliche, but how can any business be profitable and keep the doors open spending about 18% more than they are bringing in the door?

The answer, in part, comes from how a carrier manages their assets and surplus and decides how much premium it needs to reserve away for future claims and claim management expenses (ALE).

But did you note the big change in loss and ALE reserves from 2017 to 2018? The MPL industry had a $3.32 billion reserve reduction. Where did all that money go?

The takeaway, in my opinion, not all, but there are medical malpractice carriers drawing from their prior year reserves to help fund business operations as they are being hit with new claims. And not properly reserving their current book of business. A dangerous game to be playing.

I will be curious to see what result we get for 2019?

The data I have shared comes from A.M. Best, the leading insurance industry credit rating agency. I suspect you’ve had insurance agents banter about A.M. Best ratings like A++ or A or B++. These ratings have a significant meaning.

In simple terms, it provides the consumer with a third party analysis and a rating measure as to the insurance carriers ability to pay their financial obligations.

They are charged with annually reviewing insurance carriers and market sectors and sometimes warning consumers about a bad trend. At present AM Best has a negative market outlook for the Medical Professional Liability insurance sector.

We have not experienced a hardening market in 15 years. The days when insurance was an easy renewal are gone. I recommend taking a hard look at your insurance program and make the necessary preparations to manage this emerging problem.


Robert Hall, a broker in healthcare products for ARCW Insurance in Pinellas Park, has over twenty-four years of experience in the healthcare, life sciences, and long-term care liability insurance and risk management business. He holds the ARM designation and has developed an expertise in healthcare, having placed complete insurance programs for hospital systems and large physician groups. He has also created captive feasibility studies and other alternative risk models. He has a strong understanding of HMO Reinsurance and Provider Stop-loss. Contact him at