As the California legislature passed the new Assembly Bill 35 (AB 35), many in the insurance industry are wondering how it will affect insurance premiums in the state. AB 35 will impact the value of claims in the primary layer of medical professional liability insurance, but its effect on pricing will depend on the type of insurance carrier, the structure of the program, and the type of healthcare facility.
Admitted carriers, which largely insure physicians, allied health providers, and smaller facilities/clinics, are not planning to increase their filed base rates in 2023 due to the complicated and time-consuming application process required to do so. However, some carriers may become more conservative in their underwriting review of new business, especially in high-risk specialty areas like obstetrics, emergency medicine, radiology, and surgery specialties. Other carriers may seek to increase prices by reducing discretionary credits or moving some of their portfolio to excess and surplus lines insurance companies.
Mid-size healthcare facilities and medical groups that purchase their primary layer of insurance from non-admitted carriers will likely see the most immediate impact on their rates, as non-admitted carriers can react more quickly to the changing landscape. Larger healthcare facilities that typically purchase excess insurance and self-insure some amount in the primary layers will see increased funding needs recommended from their actuaries in their retained layers. Excess insurance rates for healthcare systems are heavily weighted on the organization’s loss development, so as AB 35 changes impact underlying claim amounts, excess pricing will increase.
Insurance carriers writing coverage for providers and healthcare organizations that have captives or are self-insured are all anticipating increased frequency and increased settlement amounts next year. Most excess carriers are not imposing a specific rate increase in 2023 due to AB 35, but underwriters will be taking it into account as part of their review. Adverse loss trends, namely social inflation and increased severity in all venues, are pushing rates upward regardless of the impact of AB 35 at this point.
One uncertainty is how plaintiff attorneys may or may not change their behavior in 2023 in response to these changes. Plaintiff attorneys in California held off on filing new claims until after January 1, 2023, when the MICRA changes take effect. The changes provide a financial incentive for the attorney to file litigation, rather than settle a claim pre-litigation. Plaintiff attorneys may be less willing to timely settle a claim even after litigation is filed since the caps increase over time. Finally, plaintiff’s attorneys are now incentivized to name defendants in each class (physicians, facilities, unaffiliated providers) so that they can potentially access all three classes of the non-economic damages caps in any given claim.
As an expert in healthcare insurance, it’s clear that the impact of MICRA reform on insurance premiums will vary depending on the type of insurance carrier, structure of the program, and type of healthcare facility. Admitted carriers may seek other strategies to mitigate the deterioration of their results in their portfolio, while non-admitted carriers may react more quickly to the changing landscape. Larger healthcare facilities will see increased funding needs recommended from their actuaries in their retained layers, and insurance carriers writing coverage for providers and healthcare organizations that have captives or are self-insured are anticipating increased frequency and increased settlement amounts next year. The impact of AB 35 may take some time to play out on the excess layers, but regardless of its impact, adverse loss trends are pushing rates upward. Understanding these nuances is crucial to making informed decisions about insurance coverage in the changing marketplace.
For more information on Liberty’s National Healthcare Services Practice, please reach out to Tim Mooney, Senior Vice President (National Healthcare Services Practice Leader), The Liberty Company Insurance Brokers.
