Malpractice Insurers Hit 105% Combined Ratio as Verdict Severity Doubles

From tracking medical professional liability reserving patterns over the past several years, the recurring theme is structural deterioration that rate increases have not yet caught. S&P Global Market Intelligence's latest analysis of Schedule P incurred loss and ALAE data confirms what many pricing actuaries suspected: the line generated a calendar-year combined ratio exceeding 105% in 2025 (excluding policyholder dividends), marking the fifth breach in eight years. Claims-made carriers booked $259 million in aggregate adverse reserve development. Occurrence business, by contrast, posted $15.7 million in favorable development, a divergence that tells its own story about how social inflation distorts different policy forms.

The severity numbers are stark. The Doctors Company's September 2025 actuarial study documented that the average of the top 50 medical malpractice jury verdicts jumped from $32 million in 2022 to $48 million in 2023 and $56 million in 2024. Inflation, both economic and social, added an estimated $4 billion in insured losses and expenses to physician-focused insurers over the decade ending in 2024, with $1.6 billion of that total concentrating in just the most recent three years. That acceleration rate alone should trigger a reexamination of any LDF selection anchored to pre-2020 development patterns.

105%+

CY 2025 MPL Combined Ratio (5th Time in 8 Years)

$56M

Avg. Top-50 Medmal Verdict, 2024 (Up From $32M in 2022)

$259M

Adverse Reserve Development, Claims-Made MPL (CY 2025)

The Severity Signal in the Schedule P Data

S&P Global Market Intelligence's analysis, authored by Husain Rupawala, Tim Zawacki, and Jason Woleben, identifies medical professional liability as "the most severity-pressured line in casualty insurance." The average unpaid severity per open claim for accident year 2018, the most recent year with enough maturity to be meaningful, reached $151,768, the highest figure across all casualty lines examined.

National Practitioner Data Bank figures reinforce the severity shift at the payment level. Physician-related payments of $500,000 or more accounted for 36.5% of all medical malpractice payments in 2024 (measured in real 2025 dollars), a new high for the line. Reports of claims exceeding $2 million have increased more than tenfold since 1990. The Doctors Company study noted that the frequency of claims exceeding $2 million surged 67% between 2013 and 2023, even after adjusting for economic inflation.

State-level variation in performance is extreme. New Mexico posted a direct incurred loss and defense cost containment expense ratio of 128.8%, the ninth consecutive year above 100%. Utah hit 143.8%. South Carolina came in at 125.7%. Against that, the U.S. aggregate was 75.9%, pulled down by states with tort reform caps that structurally limit severity exposure. These figures demonstrate that loss cost geography and the local tort environment dominate risk segmentation in this line, and a national-level combined ratio masks the jurisdictional dispersion that pricing actuaries must contend with.

Reserve Development: Claims-Made vs. Occurrence Divergence

The $259 million in aggregate adverse reserve development on claims-made MPL business in calendar year 2025 came from a concentrated set of carriers. Curi Holdings took $129.2 million in adverse development. Liberty Mutual booked $128 million. Farmers Insurance Group recognized $94.5 million. Physicians' Reciprocal Insurers added $59.3 million, and Risk Underwriters Group posted $41.6 million. Curi attributed its development to more claims proceeding to trial, a reduction in the COVID-19 pandemic case backlog, and a considerable increase in reported losses on prior coverage years.

The pattern across these carriers is consistent: pandemic-deferred litigation resolved at higher ultimate costs than earlier reserve valuations anticipated. Court closures in 2020 and 2021 compressed the reporting pipeline. When courts reopened, claims that had been aging in the background emerged with severity levels reflecting 2023 and 2024 verdict benchmarks rather than the 2019 or 2020 benchmarks embedded in initial case reserves. The result was concentrated adverse development hitting calendar years 2023 through 2025.

That occurrence business showed $15.7 million favorable is not reassuring. Occurrence policies cover incidents that happen during the policy period regardless of when reported. The favorable development on this form likely reflects older, more mature accident years where the bulk of development has already played out. Claims-made business, which responds to when a claim is reported, is far more sensitive to the current verdict environment because it absorbs the full impact of today's severity levels on newly reported claims.

Why Standard LDF Selections Break Under Social Inflation

Loss development factor selection sits at the core of MPL reserve estimation. The standard method builds a loss triangle, calculates age-to-age factors (the ratio of cumulative incurred losses at maturity n+1 to cumulative incurred losses at maturity n), and selects factors using weighted averages, volume-weighted averages, or medial methods. The implicit assumption is that the ratio of cumulative losses at successive maturities is roughly constant across accident years. When that holds, a five-year volume-weighted average of historical age-to-age factors produces a reasonable estimate of how current accident years will develop.

Social inflation breaks this assumption. The Doctors Company's actuarial analysis documented that losses emerged 21.8% faster than expected during 2022 through 2024. Loss development factors that "should change little except for random variation" have instead been rising across physician-focused MPL insurers. When claims mature faster and at higher severity levels than historical patterns predict, an LDF selection anchored to, say, a 2015-2019 experience period will systematically understate ultimate losses at early maturities.

Consider a simplified example. Suppose the historical 12-to-24 month development factor for a claims-made MPL book was 1.80, meaning cumulative incurred losses at 24 months were typically 80% higher than at 12 months. If social inflation accelerates severity emergence at early maturities, the true factor for recent accident years might be 2.10 or 2.20. An actuary selecting 1.80 based on a five-year weighted average that includes pre-2020 years will produce carried reserves that fall short by 15% to 20% at the 24-month evaluation. That gap compounds at every subsequent maturity link in the chain, because the tail factors are applied to an already-understated base.

Milliman's 2025 Medical Professional Liability Update, drawing on a database of over $26 billion in incurred losses and approximately 40,000 closed claims from 2014 through 2023, estimated unlimited severity trend at 5.0% annually, up 0.5 percentage points from their 2023 review. The severity trend for losses limited to $5 million was 4.5%. That half-point gap between unlimited and limited trend quantifies how the tail of the distribution is growing faster than the body. For LDF purposes, this means that recent accident years carry a disproportionate share of their ultimate cost in large, late-developing claims that historical factors do not anticipate.

ILF and ELF Recalibration Under Non-Stationary Severity

Increased Limits Factors (ILFs) translate the expected cost at a basic policy limit (typically $100,000/$300,000 or $200,000/$600,000 for MPL) into the expected cost at higher limits. The derivation integrates limited expected values from the empirical severity distribution at each policy limit. An ILF of 2.5 at the $1 million/$3 million limit, for instance, implies the carrier expects 2.5 times the basic-limit loss cost when extending coverage to that layer.

The stationarity assumption is central: ILF tables are calculated from a severity distribution estimated over a multi-year calibration window. When the underlying severity curve shifts, as it has with the top-50 verdict average jumping 75% in two years, ILFs calculated from the old distribution understate the relativity at higher limits. The probability mass in the right tail has increased, meaning the ratio of expected losses at $1M/$3M to expected losses at $100K/$300K is higher than the published ILF table reflects.

The arithmetic is straightforward. If E[X ∧ L] denotes the limited expected value at limit L, then ILF(L) = E[X ∧ L] / E[X ∧ B], where B is the basic limit. When nuclear verdicts shift the severity distribution's upper tail upward, E[X ∧ L] at high limits grows faster than E[X ∧ B] at the basic limit, because the basic limit is already capped by its ceiling. A $56 million average top-50 verdict generates no additional loss to a $300,000 per-occurrence policy compared to a $32 million verdict, but it generates substantially more loss to a $1 million, $5 million, or $10 million excess layer. The result: excess layers are systematically underpriced relative to primary when ILFs lag the current severity environment.

Excess Loss Factors (ELFs) face the same challenge from the opposite direction. The ELF at a given attachment point A equals [E[X] - E[X ∧ A]] / E[X], representing the proportion of unlimited expected losses that exceed the attachment. When severity thickens in the tail, the probability of loss exceeding attachment point A rises non-linearly. Traditional Pareto or lognormal fits calibrated to pre-2020 data produce attachment-point exceedance probabilities that are too low, because the fitted parameters reflect a lighter-tailed distribution than what juries are now producing.

Milliman's data on lag periods by claim size illustrates why the tail recalibration matters practically. Claims settling between $1 million and $5 million averaged 1.36 years from occurrence to report and 3.80 years from report to close. Claims above $10 million averaged 0.95 years to report but 3.36 years to close. These are the claims driving ILF and ELF inadequacy, and they take years to fully develop in the triangle, meaning the actuarial signal arrives well after the pricing cycle has moved on.

Tort Reform Caps Quantify the Pricing Asymmetry

The AMA's 2025 Policy Research Perspective on medical liability premiums provides a natural experiment in how severity caps alter the actuarial calculus. In 2024, 49.8% of reported MPL premiums increased year over year, up from just 13.7% in 2018. That 36-percentage-point swing over six years signals a market approaching hard-market conditions, though still below the 77.4% of 2003 and 82.1% of 2004.

The geographic split is revealing. States without noneconomic damage caps averaged 4.5% rate increases in 2024. States with caps averaged 1.2%. That 3.3-percentage-point differential quantifies the actuarial value of tort reform: caps truncate the severity distribution at a known dollar threshold, reducing both the expected value and variance of the excess layer. For pricing actuaries, this means the ILF and ELF recalibration problem is concentrated in uncapped jurisdictions. A carrier writing $1M/$3M policies in California (which raised its MICRA cap to $750,000 for non-death cases and $1 million for death cases in January 2023 under AB 35, with annual inflation adjustments) faces a structurally different excess loss distribution than one writing the same limits in Florida, New York, or New Mexico.

Hawaii and Pennsylvania illustrate the extreme end. In 2024, 50% and 49% of premiums in those states respectively increased by more than 10%. Sixteen states saw at least one premium increase exceeding 10%, up from 11 states in 2023. The widening of states experiencing double-digit rate action signals that severity pressure is no longer confined to traditionally plaintiff-friendly jurisdictions.

Third-Party Litigation Funding: The Latent Severity Accelerant

Third-party litigation funding (TPLF) adds a layer of severity risk that most carriers' trend selections and loss development assumptions do not yet explicitly model. Under TPLF arrangements, private investors fund lawsuits in exchange for a portion of the settlement or judgment. These investors report internal rates of return exceeding 20%, which creates a financial incentive to hold out for larger awards rather than settle early.

The Doctors Company's actuarial study estimated that TPLF could cost insurers between $13 billion and $25 billion over the next five years across all liability lines. For medical malpractice specifically, TPLF lengthens litigation timelines and raises settlement targets, because funded plaintiffs face no cash flow pressure to accept early offers. This has a direct actuarial effect: it fattens the right tail of the severity distribution while simultaneously extending the development period, meaning claims that eventually settle large also take longer to close.

For LDF selection, TPLF introduces a correlation between severity and development speed that violates the independence assumption in standard chain-ladder methods. Large claims develop longer (Milliman's data shows $1M-$5M claims averaging 5.16 years from occurrence to close), and TPLF ensures that more claims reach those large-claim thresholds. The LDF at early maturities therefore understates both the number of claims that will eventually exceed case reserves and the amount by which they will exceed them.

Why This Matters for Pricing Actuaries

The convergence of 105%+ combined ratios, $259 million in adverse claims-made development, accelerating LDFs, and doubling verdict severity creates an environment where standard actuarial methods systematically lag the risk. This is not a one-year blip. The pattern has persisted for five of the past eight years, and the underlying drivers, social inflation, litigation funding, and pandemic-deferred case resolution, show no signs of reverting.

For MPL pricing actuaries, the concrete action items are specific. First, reselect loss development factors using only post-2019 experience, or at minimum weight recent diagonal periods at 2x to 3x the standard volume weight. The 21.8% acceleration in claim maturation speed documented by The Doctors Company means that including 2015-2019 diagonals in a five-year average dilutes the signal from the current regime. Second, recalibrate ILF tables using the most recent two to three years of closed-claim severity data. If your ILF table was last fitted in 2020 or 2021, the excess relativities at $1M/$3M and above are stale. Third, segment ILF and ELF recalibration by tort-reform status. The 3.3-percentage-point rate differential between capped and uncapped states is an empirical lower bound on how much the severity distribution varies by jurisdiction.

Patterns we have seen across MPL rate filings suggest that many carriers are still selecting LDFs from a five-year or seven-year weighted average that blends the pre-pandemic soft market with the current severity regime. That blended selection produces a carried reserve that looks adequate on a point estimate but understates the probability of adverse development by 15% to 25% at early maturities. The $259 million in claims-made adverse development in CY 2025 is the balance sheet consequence of that selection error. Carriers that do not update their LDF and ILF methodologies to reflect the current non-stationary severity process will find themselves in the same position next year, and the year after that.