PLUS Medical Symposium 2017: Three Key Insights
For the last three years, my business partner, David Huss, has written blog articles about our collective experience at the annual PLUS Medical PL Symposium. This year, it falls to me to relay the major themes from the 2017 conference, which took place in March.
I always find it useful to consider the past as I ponder the future. So I re-read David’s previous PLUS Symposium reports, and found his three-year thought progression very interesting. Here are the highlights of his summaries:
2014: “Once new capacity stops entering the marketplace, excessive downward pressure on pricing will eventually be curtailed. This sets the stage for an environment that will allow carriers to price for exposures in a way that is more reflective of their actual experience.”
2015: “This year, my many conversations and observations have me coming away with the distinct impression that medical malpractice is trying to find the bottom of the market cycle. That means we are in for a rough ride.”
2016: “It’s true that, as predicted for 2015, the combined ratio for medical malpractice writers as a whole increased to about 100%, which means there is no underwriting profit left. It’s also true that, as predicted, investment returns on the whole continued to be under pressure. Finally, although reserve take-downs did not drop off as much as some expected, in the aggregate they were significantly lower than in the recent past.”
Where, then, is our marketplace destined to go now? That was definitely the question everyone was asking at this year’s PLUS conference. The answer depends on a number of factors. But I believe it all comes down to just a few key things. Thanks to perspectives gained at the PLUS conference, there are three overriding industry themes at play right now:
- MPL-focused carriers are under pressure to keep their combined ratios below 100%.
Before attending this year’s PLUS meetings, I had just read or heard about six different MPL-focused carriers that announced significantly poor results for Q4 2016. Notably, AIG announced some sizable reserve-strengthening measures, while Berkley Select and XL Catlin shut down their respective medical divisions. Obviously, the dwindling financial performance of these programs made them unviable in today’s competitive market. But does the underperformance of some mean that all carriers are struggling?
During my meetings at PLUS, I took the opportunity to ask most of my carrier-partners about their 2016 financial performance. Most told me that they were holding to just under 100% combined ratios while showing overall profitable figures. Only a couple of carriers noted that their ratios were well below that mark. Of course, these were only quick anecdotal comments and discussions, but it was clear that most carriers were also very concerned about staying below that line this year.
- Venture capital investments keep competition fierce.
In several of my meetings, my carrier-partners complained about the continued influx of “new money” entering the MPL marketplace. To some degree, I was surprised to hear about new carriers who are just entering the fold. My reaction was based on the feeling that prices for MPL insurance are so low currently that no one would want to enter as a new competitor, since it would be very difficult to compete with the many other carriers that are already established. However, a couple of trusted friends in the business provided some additional insight into these new investments.
My takeaway from those discussions is that the hedge-fund types who move their capital into a new insurance investment often do so while minimizing their own actual risk. Basically, it means many of these new players cede to reinsurers as much of their risk as possible. This allows them time to stave off developing claims while making a return to their investors in the early years. If this is true, it certainly raises the question of how long such venture money will remain in such a structure when their books start to mature after the first five years.
At a minimum, the high number of new programs backed by venture firms are certainly creating a ton of continued competition in a market already replete with options for some time now. So, the question remains: how long can “soft-market prices” remain?
- Health system M&A activity is slowing down.
Lastly, it appears inevitable that big health systems will slow their merger and acquisition activity. Obviously, the political climate has changed drastically in the last few months and buzz about that reality entered almost every conversation. However, the first attempt by new federal powers to change or replace the Affordable Care Act (ACA, or “Obamacare”) have already failed. It is unclear what, if any, future attempts to repeal and replace the ACA will be made. But, it seems like the pace of healthcare market M&A activity might be in for a substantial slowdown in a political climate filled with great uncertainty.
According to this recent article from Reuters, “Uncertainty…is forcing some U.S. hospitals to delay expansion plans, cut costs, or take on added risk to borrow money for capital investment projects…” If hospital systems start to slow their pace of growth, then how will that affect the MPL market we live in? For starters, I think it means we’ll all be left with more to insure rather than less. We’ve all seen the reductions in the number of insureds as large self-insured systems grow in the wake of M&A activity, leaving us with fewer insureds who tend to buy traditional insurance products. Now the question is, what do large systems do with their holdings until there is greater political certainty? Now, that’s a zillion dollar question!
Although I certainly can’t predict when a large swing in the overall market conditions may happen, I can say that there do seem to be “cracks in the dam” that shouldn’t be overlooked. Market-watchers of this industry can’t be surprised to know that some, if not many, carriers are struggling to find profitable business. While many still seem to have plenty of cash in the bank, they’re always looking for new ways to deploy that into something profitable. New venture capital-backed programs are keeping up the competitive pressure just as carriers need to find some room for even the slightest premium growth to avoid going over the 100% combined ratio benchmark.
This confluence of interests certainly sets us up for another challenging year as we navigate through the turbulence. And hold onto your hats, because this ride into the second half of 2017 could get even bumpier!