Trends in Medical Malpractice Insurance Behind the Chaos American Academy of Orthopaedic Surgeons Washington, DC April 25, 2003 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY Tel: (212)  Fax: (212)  

Property/Casualty Insurance Industry Overview

P/C Net Income After Taxes ($ Millions) Sources: A.M. Best, ISO, Insurance Information Institute.  2001 was the first year ever with a full year net loss  2002 ROE = 1.0%

ROE: P/C vs. All Industries 1987–2003F Source: Insurance Information Institute; Fortune There is an enormous gap between the p/c industry’s rate of return and that of most major industry groups

ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2002 Source: The Geneva Association, Ins. Information Inst. There is an enormous gap between the industry’s cost of capital and its rate of return 14.6 pts10.2. pts US P/C insurers have missed their cost of capital by an average 6.9 points since 1991

Underwriting Gain (Loss) Source: A.M. Best, Insurance Information Institute $ Billions P-C insurers paid $30.5 billion more in claims & expenses than they collected in premiums in 2002

Medical Malpractice

ME NH MA CT PA WV VA NC LA TX OK NE ND MN MI IL IA ID WA OR AZ HI NJ RI MD DE AL VT NY DC SC GA TN AL FL MS AR NM KY MO KS SD WI IN OH MT CA NV UT WY CO Medical Crisis across the US Crisis states Crisis looming AMA: Crisis reached in at least 18 states ! PR AK Figure 1 Source: American Medical Association, March 2003

Medical Malpractice Combined Ratio Source: AM Best, Conning, Insurance Information Institute Trial lawyers have destroyed commercial viability of med mal. The future holds:  Increased mutualization  Local market collapses  HC Providers seeking govt. protection Insurers in 2001 paid out an estimated $1.65 for every $1 they earned in premiums!

Medical Malpractice: Underwriting Losses Source: Insurance Information Institute calculations based on data from A.M. Best. Med Mal underwriting losses exploded by $2.7 billion or 938% between 1996 and 2001!

Medical Malpractice: Cumulative Underwriting Losses The cumulative underwriting loss in Med Mal from totals nearly $10 billion! Source: Insurance Information Institute calculations based on data from A.M. Best.

Medical Malpractice: Losses & Expenses Paid vs. Premiums Earned Source: Computed from A.M. Best data by the Insurance Information Institute Over the period from 1996 through 2001, premium earned rose 16.8% while losses and expenses rose 68.9%

2001 Top Ten Verdicts Source: LawyersWeekly USA, January ValueIssueState $3 BillionTobaccoCalifornia $1 BillionLand ContaminationLouisiana $480 MillionPrivate Airplane CrashFlorida $312.8 MillionNursing HomeTexas $ 256 MillionPolice Auto CrashColorado $116 MillionIntellectual Property TheftVirginia $114.9 MillionMedical MalpracticeNew York $108.2 MillionInheritance DisputeTexas $107.8 MillionMedical MalpracticeNew York $94.5 MillionReal EstateCalifornia

2002 Top Ten Verdicts Source: LawyersWeekly USA, January ValueIssueState $28 BillionTobacco (Product Liability)Florida $2.2 BillionNegligence (Pharmacy Mal)Missouri $270 MillionPersonal Injury (Burn)Kentucky $225 MillionProduct Liability (Rollover)Texas $150 MillionTobacco (Product Liability)Oregon $122 MillionProduct Liab. (Auto Accident)Virginia $97.2 MillionBusiness FraudCalifornia $95.2 MillionMed Mal (Birth Injury)New York $91 MillionMedical MalpracticeNew York $80 MillionMed Mal (Birth Injury)New York $80 MillionProd. Liab/Personal Inj. (Auto)Missouri

Medical Malpractice: Tort Cost Growth is Skyrocketing Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute Over the period from 1990 through 2000, medical malpractice tort costs rose 140%, more than double the 60% increase in medical costs generally over the same period! Over the period from 1975 through 2000, medical malpractice tort costs skyrocketed by 1,642% while medical costs generally rose 449%, nearly 4 times as fast!

Average Jury Award in Medical Malpractice Cases Source: Jury Verdict Research; Insurance Information Institute. The average med mal jury award more than tripled between 1994 and 2001! These awards (and countless settlements) are the principal factors responsible for today’s chaotic market conditions & higher rates.

Trends in Million Dollar Verdicts* *Verdicts of $1 million or more. Source: Jury Verdict Research; Insurance Information Institute. Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants

Health Benefit Costs Rising Sharply Source: NCCI; William M. Mercer, Insurance Information Institute. Health care inflation is affecting the cost of medical care, no matter what system it is delivered through

Investment Gain: Med Mal vs. All Commercial Lines* *As a % of net earned premium. Investment gains consists primarily of interest, dividends and realized capital gains and losses. Source: A.M. Best; Insurance Information Institute estimate Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing

Medical Malpractice Investment Gain* *Imputed from investment gain data as a % of net earned premium. Investment gains consists primarily of interest, dividends and realized capital gains and losses. Source: A.M. Best; Insurance Information Institute estimate Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing

Investment Overview

Net Investment Income History 1997 Peak = $41.5B 2000= $40.7B 2001 = $37.7B 2002 = $36.7B Billions (US$) Investment income in 2002 fell 2.8% due primarily to historically low interest rates Source: A.M. Best, Insurance Information Institute

Interest Rates: Lower Than They’ve Been in Decades *As of April 21, Source: Board of Governors, Federal Reserve System; Insurance Information Institute 1.Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund. 2.66% of the industry’s invested assets are in bonds

*As of April 22, Source: Ibbotson Associates, Insurance Information Institute Total Returns for Large Company Stocks: *  2002 was 3 rd consecutive year of decline for stocks  Will 2003 be the 4 th ?

P/C Industry Investments, by Type (as of Dec. 31, 2001) Bond Holdings, by Type Industrial & Misc. 32.5% Special Revenue 30.5% Governments 18.0% States/Terr/Other 15.4% Public Utilities 3.1% Parents/Subs/Affiliates 0.5% Source: A.M. Best, Insurance Information Institute Common stock accounts for about 1/5 of invested assets

Property/Casualty Insurance Industry Investment Gain * *Investment gains consists primarily of interest, stock dividends and realized capital gains and losses. Source: Insurance Services Office; Insurance Information Institute. Investment gains are simply returning to “pre-bubble” levels

Solutions

Frequency of $1 Million + Jury Verdicts (Per 1,000 Doctors) Source: Jury Verdict Research, American Medical Association, Insurance Information Institute. CA’s Medical Injury Compensation Reform Act, passed in 1975, has helped to contain jumbo jury awards, keeping med mal premiums affordable and health care available. The frequency of awards for $1 million and up in CA is 32% below the national average.

Median Med Mal Jury Awards Source: Jury Verdict Research ($ 000s)

Loss Cost Changes by Number of Major Reforms by State Source: Pennsylvania Medical Society Excludes Ohio, Louisiana and Texas States with only one medical liability reform saw loss costs increase by 352% between 1985 and 1998!

Annual Premiums in 2001 By Specialty Compared to California Source: Medical Liability Monitor $ 000 Average liability premiums for California’s physicians are at least 52% lower than in other states with no caps!

Few Simple Solutions to a Complex Problem Blame Game: So-called “consumer” advocates who say the crisis is the result of insurer investment losses or charged too little years ago, besides being generally wrong, are obfuscating the truth and delaying reforms. Solutions like taxing insurance premiums to fund med mal trusts are gimmicks that don’t solve underlying problem—not even a band aid. Prior-approval style rate regulation is a bona-fide failure Virtually universal agreement that MICRA-like caps on non-economic awards work  Many states now adopting such caps now Doctors: Reign in the the bad apples  Need allowances for high risk specialties/procedures

Insurance Information Institute On-Line If you would like a copy of this presentation, please give me your business card with address