rate softening or downward pressure on rates, at some point those lines certainly have to cross. When that will be, that’s sort of like trying to answer the question of why did claim frequency fall in the first place. I don’t think we have an exact timing for that in terms of when the market might harden. I do believe that there are more signs today than there was over the last year or two that would suggest it’s on its way.
McDONALD: Stan Starnes, can I throw that your way? What are you seeing in terms of price adequacy and do you see any signs that the prices and rates in general are going to have to change?
STARNES: It varies from state to state. In some states we see pricing that in certain isolated incidents borders on irrationality. In other states we see more generalized pricing that we doubt is truly adequate. I think one reality that people will have to deal with in pricing is the reality created by the current investment environment. Companies are going to have to rely on underwriting discipline in order to achieve the returns that are needed to support their policyholders or their shareholders and they cannot place a bet on the investment market. One thing that will hasten the hard market will be when you see companies resort to tactics that unfortunately have been used in the past, that is they extend duration in an effort to seek more yield. They place greater bets on the equity markets as opposed to more conservative bond markets. All of those things are tempting to do when you don’t have underwriting discipline and eventually those things will play a part in shifting the market from soft to hard.
McDONALD: Marc Zimmermann, whenever you talk about med mal of course it’s not just a homogenous market. You have different types of coverage, the hospital and facilities and doctors. But within the specialties we see differences in terms of availability and pricing. What are you seeing in terms of the various specialties or areas of concentration and how is that playing out in terms of capacity and pricing?
ZIMMERMANN: In regard to specialties, different carriers have different thoughts on what the differences are between the actual risk and perceived risk of a particular specialty. Our company historically has been more of a surgical writer. We do like the surgical specialties and we’ve historically steered away from the emergency medicine space. We generally like physicians operating in a group setting. We’ve seen in a post tort reform environment that doctors that historically had claims, have had a significant drop-off in the number of claims reported by those physician practices. So with this change there’s been increased capacity in our market. We try to take a long horizon and look at the physician’s claims history over many years to adequately price for the risk inherent in a physician’s practice regardless of the effect of tort reform. We are also
seeing many companies offering just claims-made policies and you’re not seeing as much occurrence policy writings as you saw in years past.
McDONALD: Dr. Anderson, did you have anything to add in that regard?
DR. ANDERSON: In regards to the question, when is the next hard market coming I would say this: it’s not going to come until after the next soft market. I don’t think that we’ve reached the next soft market. In other words, I think that the market is going to soften considerably before the inevitable subsequent hardening can occur. So I would say that we’re a number of years away from a true hard market.
McDONALD: One of the things when we spoke earlier that really stuck with me, you talked about the environment for doctors, their view of their practices and the med mal liability market. Can you just explain for everyone what you mean by that and how you think that actually affects the environment, their perceptions?
DR. ANDERSON: It is literally a multibillion-dollar question about why frequency fell off the cliff the way it did. As my colleagues on the panel have alluded to, there really isn’t any good explanation for it. There are several factors which might form a reasonable explanation for the decline in frequency in the med mal arena.. Nonetheless, there isn’t any explanation that explains why so much of the drop in the frequency occurred specifically between the years 2003 and 2004 and why we’ve seen a corresponding drop in frequency across the whole property/casualty environment.
I would add one specific thing, which I do believe, is a long-range moderator of frequency that did occur during this period of time. That is an increased physician risk aversion. I think that as physicians faced ever-increasing medical malpractice premiums, as their ability to choose among carriers became very limited and to face a surcharge or a nonrenewal, which could literally threaten the viability of the physician’s practice and livelihood, physicians became much more risk averse. By that I mean they obtained far more consultations. They refused to do, for example, emergency room coverage in areas where they were uncomfortable. Surgeons began to shy away from doing some surgeries that they might have done in the past, which they weren’t doing frequently. Those kinds of risk aversions I think are built permanently into the system.
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