The next 12 months could see an uptick in merger and acquisition activity among smaller risk retention groups writing medical professional liability coverage, according to one reinsurance broker.

Aon Benfield's William Fearnley Whittingstall said risk retention groups formed in 2002-2003 to fill market voids in capacity are at a pivotal moment in their lifespan and under a great deal of pressure.

Whittingstall said the risk retention groups in question write anywhere from $5 million to $50 million in premium and grew under hard market conditions. The subsequent soft market cycle has challenged their ability to maintain rate, particularly for a segment that is not known for cash flow underwriting.

"Right now, they are under a considerable pricing pressure from the bigger carriers who can more easily write on a cash flow basis, whereas as the risk retention groups really don't have the critical mass or balance to do that," said Whittingstall, who is in Chicago for the Physician Insurers Association of America's annual meeting.

Whittingstall said if rates continue to soften, something will have to change within the space. Some will have to look at alternative ways of doing business, possibly partnering up with other companies, selling outright or even contemplate an organized run-off, according to Whittingstall.

"That is something that has definitely been a level of conversation we've been having over the last six to 12 months," he said.

Whittingstall said risk retention groups at this level that have developed well-thought-out niche business plans will survive, but those with no wider reason to exist than to fill capacity must plot their next move if the soft market persists.

"I think you'll see survival of the fittest among the smaller MPL carriers, the RRG base of companies. It will be very interesting over the next 12 months to see what happens to those."

Reserve releases will be another consideration, according to Brian Alvers, a managing director of Aon Benfield Analytics. Alvers said his company's analysis shows that medical professional liability writers have released $5 billion in reserves over the past five years and it remains to be seen how much is left at this point.

"That certainly will drive a lot of things, like how much longer can they continue to reduce rates," Alvers said.

Medical professional liability writers have been able to capitalize on four consecutive years of favorable conditions. An A.M. Best Special Report released May 3, 2010, noted that during that span the medical professional liability sector "bested the property/casualty industry in a wide range of measures, including combined ratio, operating ratio, pretax returns and total return on equity."

In a recent A.M. Best webinar broadcast on May 12, Chad C. Karls, a principal and consulting actuary from Milliman, described the pressures that some start-up medical professional liability writers have faced.

Karls said there were 154 start-up medical professional liability companies that formed between 2002 and 2008. That group pertains to companies with 95% of their premium in medical professional liability and includes risk retention groups.

"We've seen 15 of those now go away in some shape or form," Karls said during the webinar. "Fortunately, most due to acquisitions or voluntarily saying I'm done with my self-insurance program, the market is softening now and I'm going to set aside this captive or this risk retention group, whatever it is that I set up and 15 of those have gone away. So, that's not an insolvency, but that has been one of the reasons why some of these companies are no longer in existence of the start ups that we identified."

(By Al Slavin, senior associate editor, BestWeek)