The Next Malpractice Crisis

Standard and Poor's recently issued a report (U.S. Medical Malpractice Enjoys Profitability, But Tort Reform Still Uncertain And Volatility Anticipated) that predicts a "soft" cycle in malpractice insurance prices.  Or, in other words, S&P predicts that malpractice premiums will decline.  However, a portion of the report concerns me:

"More and more medical malpractice business is being placed in alternative risk mechanisms, threatening the profitability of traditional medical malpractice insurers. A growing number of doctors are choosing to self-insure or opt out of the traditional insurance market by setting up RRGs and captives. In addition, more insurers are entering the medical malpractice market and putting pressure on established players. These start-ups are capitalized with $5 million or less, which leaves them with insufficient surplus to survive the more turbulent parts of the market cycle. The only way for new entrants to survive will be for them to grab market share and market to doctors who want better rates. Underfunded and underpriced, these companies have high rates of failure. As such start-ups falter, business should flood back into the traditional marketplace and possibly reverse market softening."

Translation: Fly-by-night insurers are going to setup shop and lure doctors in with artificially low rates.  When it comes time to pay claims, the insurers will fold like a cheap towel, leaving malpractice victims uncompensated, and doctors hung out to dry.  This will cause two things to happen.  First, traditional insurers will take advantage of the decrease in competition by raising their rates.  Second, trial lawyers and juries will be blamed for both the rise in premiums, and the failures of these boiler room insurers.  Check back in early 2008 to see if I was right.

Is it any coincidence, by the way, that insurance profitability is up while the whole economy is up... or that it was down when the whole economy was down?