U.S. medical professional liability insurers reported an underwriting loss again last year, according to Fitch Ratings in a new report that says the results are drawing more scrutiny around reserves that are shrinking.

For the second consecutive year, the medical professional liability insurers (MPLI) market reported a statutory underwriting loss, with a 102 combined ratio in both 2016 and 2017.

Fitch said calendar-year results in MPLI continue to benefit from substantial favorable loss reserve development that averaged 20 percent of annual earned premiums for the last 10 years.

However, the level of reserve strength is declining, according to Fitch Managing Director James Auden. "Favorable development levels from the most recent accident years that represent the largest proportion of all reserves have fallen noticeably," said Auden.

The market is facing other pressures as well, including mergers and acquisitions and consolidation activity that could also pose more problems over time. "Consolidation of hospitals and healthcare practices is shifting physician employment toward larger groups that are more likely to self-insure and use captive or alternative risk programs, which will reduce demand for primary MPLI coverage," said Auden.

The MPLI line is a smaller product segment in the U.S. property/casualty (P/C) industry and the pricing and market performance tend to follow a different cycle than other commercial lines as large portions of market share are held by monoline writers, according to Fitch. Historical periods of profit volatility relate to the heavy litigation and legal settlement cost component of MPLI claims.

Specialty underwriters hold a large portion of the MPLI market share. These organizations have limited expertise and underwriting opportunities to deploy this capital outside of MPLI markets. "Excess capital and underwriting capacity in MPLI is a significant hindrance to any improvement in pricing going forward despite recent deterioration in underwriting results," said Gerry Glombicki, director at Fitch.

Fitch says larger medical liability insurers are motivated to grow through mergers with smaller peers. However, despite an increase in P/C market acquisition activity in the last two years, there have been only a few affecting he MPLI market. Still, Fitch added, the capital strength of many MPLI specialists limits incentives to seek merger partners as they are capable of withstanding considerable future adversity.