1. FINANCE 431 PROPERTY-LIABILITY INSURANCE
1/2/2019
FINANCE 431 PROPERTY-LIABILITY INSURANCE
MEDICAL MALPRACTICE INSURANCE INDUSTRY
Guest Lecturer: Gail M. Ross, FCAS, MAAA
April 8, 2008
TITLE SLIDE, OPTION #1
January 2, 2019

2. Historical Underwriting Results –P&C Industry
1/2/2019
Historical Underwriting Results –P&C Industry
FULL PAGE GRAPHIC SLIDE, DARK BACKGROUND
January 2, 2019

3. Historical Underwriting Results – P&C Industry vs. Med Mal
1/2/2019
Historical Underwriting Results – P&C Industry vs. Med Mal
FULL PAGE GRAPHIC SLIDE, DARK BACKGROUND
January 2, 2019

4. Medical Malpractice Industry - Combined Ratios
Historical Results
Medical Malpractice Industry - Combined Ratios
2001 : 153.3%
1985 : 163.5%
1989 : 89.1%
Combined Ratios
January 2, 2019

5. Medical Malpractice Industry – Investment Ratios
Historical Results
Medical Malpractice Industry – Investment Ratios
1992 : 51.5%
2002 : 12.4%
Combined Ratios
Investment Ratios
January 2, 2019

6. Medical Malpractice Industry – Operating Ratios
Historical Results
Medical Malpractice Industry – Operating Ratios
1985 : 126.1%
2001 : 134.3%
Combined Ratios
Investment Ratios Operating Ratios
January 2, 2019

7. Historical Operating Results
Medical Malpractice Industry vs. P/C Industry
Medical Malpractice Industry
P/C Industry
MEDICAL MALPRACTICE INDUSTRY
TOTAL INDUSTRY
Combined Ratios
Investment Ratios
Operating Ratios
January 2, 2019

8. Drivers of Poor Underwriting Results
1/2/2019
Drivers of Poor Underwriting Results
Litigation
Increase in number of claims brought against providers (e.g., doctors, nurses, hospitals, health systems).
Claim severities have risen drastically.
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

9. TEXT SLIDE, LIGHT BACKGROUND
1/2/2019
Losers - Insurers
Insurers have paid out significantly more on claims than they collect in premiums.
Medical Malpractice underwriting losses skyrocketed from $289.3 million in 1996 to $3.0 BILLION in 2001 (938% in 5 years!!).
Medical Malpractice insurers are forced to take large rate increases.
Some insurers have voluntarily exited the business; others have become insolvent.
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

10. 1996 — Top 20 Writers Early ‘98 AM Best Rank Company/Group Rating 1
St. Paul Group A+ A A- B+
A++ E 2
CNA Insurance Group 3
MLMIC — NY 4
Medical Protective Company 5
Health Care Indemnity Inc. 6
Doctors Company Insurance Group 7
Illinois State Medical Exchange 8
AIG 9
MMI Companies Group 10
PIE Mutual Insurance Co.
January 2, 2019

11. 1996 — Top 20 Writers Early ‘98 AM Best Rank Company/Group Rating 11
Physicians Reciprocal Group
NR-4 A- A 12
Princeton Insurance Companies 13
MIIX Group 14
Frontier Insurance Group 15
Norcal Mutual Insurance Company 16
ProAssurance 17
PHICO Ins. Co. 18
SCPIE 19
ProMutual 20
Farmers Insurance Group
January 2, 2019

12. 1996 Top 20 Writers in 2006 GONE FROM THE MARKET Early ‘98 AM Best
Rank
Company/Group
Rating 1
St. Paul Group A+ A A- B+
A++ E 2
CNA Insurance Group 3
MLMIC — NY 4
Medical Protective Company 5
Health Care Indemnity Inc. 6
Doctors Company Insurance Group 7
Illinois State Medical Exchange 8
AIG 9
MMI Companies Group 10
PIE Mutual Insurance Co.
January 2, 2019

13. 1996 Top 20 Writers in 2006 GONE FROM THE MARKET Early ‘98 AM Best
Rank
Company/Group
Rating 11
Physicians Reciprocal Group
NR-4 A- A 12
Princeton Insurance Companies 13
MIIX Group 14
Frontier Insurance Group 15
Norcal Mutual Insurance Company 16
ProAssurance 17
PHICO Ins. Co. 18
SCPIE 19
ProMutual 20
Farmers Insurance Group
January 2, 2019

14. 1996 Top 20 Writers in 2006 DOWNGRADED 2006 AM Best Rank Company/Group
Rating 1
St. Paul Group 2
CNA Insurance Group A 3
MLMIC — NY NR NR A- 4
Medical Protective Company
A++ 5
Health Care Indemnity Inc. NR A- 6
Doctors Company Insurance Group A-
Doctors Company Insurance Group A 7
Illinois State Medical Exchange B+ 8
AIG
A++ 9 A-
MMI Companies Group A 10
PIE Mutual Insurance Co.
January 2, 2019

15. 1996 Top 20 Writers in 2006 DOWNGRADED 2006 AM Best Rank Company/Group
Rating 11
Physicians Reciprocal Group
NR-4 A- A 12
Princeton Insurance Companies
Princeton Insurance Companies NR 13
MIIX Group 14
Frontier Insurance Group 15
Norcal Mutual Insurance Company 16
ProAssurance
ProAssurance A- 17
PHICO Ins. Co. 18
SCPIE B+
SCPIE 19
ProMutual 20
Farmers Insurance Group
January 2, 2019

16. Losers – Healthcare Providers
1/2/2019
Losers – Healthcare Providers
Doctors and hospitals faced with lack of affordable insurance.
Hospitals have been forced to:
Eliminate certain procedures (e.g., deliveries)
Many docs have been forced to:
Retire early
Re-locate practice to lower litigious areas
Practice without adequate insurance
Drop risky procedures
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

17. States in Crisis - 2003 January 2, 2019
Source: American Medical Association
Source: American Medical Association
January 2, 2019

18. Losers – All of Us as Patients
1/2/2019
Losers – All of Us as Patients
More expensive health insurance
Harder to find some doctors for certain procedures
Increased diagnostic testing
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

19. TEXT SLIDE, LIGHT BACKGROUND
1/2/2019
Winners – Lawyers (?!?)
Only 46 cents on the dollar is returned to claimants – 22 cents for actual economic loss; 24 cents to pain & suffering
TEXT SLIDE, LIGHT BACKGROUND
Source: Tillinghast – Towers Perrin
January 2, 2019

20. Addressing the Crises – “Bed-Pan Mutuals”
1/2/2019
Addressing the Crises – “Bed-Pan Mutuals”
The first crisis in the medical malpractice segment occurred in the early 70s when several private insurers left the market because of rising claims and the inability to get adequate rates approved.
In response to the lack of available coverage, the hospital and medical associations in each state formed their own medical malpractice insurance companies to provide coverage – dubbed “bed-pan mutuals”(*)
These companies now write about 50% of the medical malpractice insurance in the US.
(*) A mutual insurance company is one with no capital stock that is owned and controlled by policyholders rather than stockholders.
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

21. Addressing the Crises – Captives
1/2/2019
Addressing the Crises – Captives
The high cost and lack of availability of medical malpractice coverage let some hospitals, doctor groups and health systems to form captive insurance companies (*)
Some reasons for forming a captive include:
Tax benefits
Incentives for loss control and more control over claims
Reduces overhead costs
Coverage tailored to the company’s needs
(*) A single parent captive insurance company owned and controlled by one company and insures that company and/or its subsidiaries.
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

22. Addressing the Crises – CAT Funds
1/2/2019
Addressing the Crises – CAT Funds
Some states formed catastrophe funds to address the issue of high severity claims
It was assumed that smaller claims had higher frequency and could be controlled by risk management initiatives.
Large severity claims were less frequent and often the result of “run-away juries” and increased litigiousness
Many of these funds have faced financial crisis as well due to:
Lack of adequate funding
Set up on a pay-as-you-go basis
Underlying retentions have not increased with trend
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

23. Addressing the Crises – Tort Reform
1/2/2019
Addressing the Crises – Tort Reform
CA Medical Injury Compensation Reform Act (MICRA) enacted in 1975 is cited as the model act for tort reform
placed caps of $250,000 on non-economic damages
collateral source rule – requires juries to be told if plaintiffs have other sources of compensation for their injuries
requires lawsuits to be filed within 3 years of injury
has a specific scale for attorney’s fees
periodic payments (rather than lump sum) for awards > $50,000
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

24. Addressing the Crises – Tort Reform
1/2/2019
Addressing the Crises – Tort Reform
Success of MICRA as evidenced by
mean jury award in CA of $400k from versus $1 million in NY, $800k in FL, and $850k in PA
frequency of > $1 million awards in CA is 32% the national average.
CA docs pay significantly less for medical malpractice insurance than in other states
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

25. Addressing the Crises – Tort Reform
1/2/2019
Addressing the Crises – Tort Reform
Recent tort reforms in other states:
TX 2003 – limit on paid & suffering to $250,000 and total recoveries on death claims of $1.6 million.
PA 2003 – venue rules and certificate of merit requirements
WA 2006 – allows docs to apologize for medical mistakes they made without allowing the admission to be used against them in court.
IL 2005 – caps on paid an suffering, certificate of merit, qualification of experts. In a landmark 2007 decision the Cook County Circuit Court ruled that caps on paid & suffering were unconstitutional, thereby nullifying the entire act. Likely to be appealed to IL Supreme Court
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

26. Addressing the Crises – Claims-Made Coverage
1/2/2019
Addressing the Crises – Claims-Made Coverage
Until the early 1970s almost all medical malpractice coverage was written on an “occurrence” policy form.
The occurrence policy covers the insured for any medical malpractice lawsuit that occurs during the policy term regardless of when the claim is reported (i.e., whenever the lawsuit is brought).
For example, Dr. X bought an occurrence policy for the year During that year he performed surgery on Patient A and forgot a sponge in her abdomen. In 1980 Patient A is having abdominal problems and the sponge is discovered. Patient A sues Dr. X for malpractice in The 1970 occurrence policy would cover the claim despite the fact that the claim is not brought until 10 years after the policy expired!!
This is a very difficult coverage for actuaries to price due to the long reporting “tail”.
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

27. Addressing the Crises – Claims-Made Coverage
1/2/2019
Addressing the Crises – Claims-Made Coverage
As a result of an upswing of late reported claims, and increase of average cost of claims, most insurers writing med mal coverage switched to claims-made policy forms in the 1970s.
The claims-made policy covers the insured for any medical malpractice lawsuit that is reported during the policy term.
Since the insurer’s liability is not open ended, it is for actuaries predict costs and thereby set a price for the coverage.
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

28. Features of Claims-Made Coverage
1/2/2019
Features of Claims-Made Coverage
FIRST YEAR CM = If you’ve had a prior occurrence coverage, when switching to CM coverage you only need to worry about claims reported in the year that occur in the year (since prior occurrences are covered under the prior occurrence coverage – regardless of report date.
SECOND YEAR CM = Covers for claims that occurred one year ago and in the current year that get reported in the current year.
THIRD YEAR CM = Covers for claims that get reported in the current year that occurred in the current year or the two prior years.
FOURTH YEAR CM = Covers for claims that get reported in the current year that occurred in the current year or the three prior years.
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

29. Features of Claims-Made Coverage
1/2/2019
Features of Claims-Made Coverage
MATURE CM = Covers for claims that get reported in the current year that occurred in the current year or at least four prior years.
TAIL COVERAGE = If a provider decides to stop purchasing CM coverage (e.g., doctor retiring, hospital switching to a new insurer), coverage needs to be purchased to cover for claims that have occurred since the CM coverage began but have not yet been reported.
RETROACTIVE DATE = The date from which the CM policy will begin providing for occurrences that get reported in the year of CM coverage.
PRIOR ACTS COVERAGE = When a new insurer provides coverage for claims that occurred in prior years without a time limit on the past date of occurrence.
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

30. Claims-Made vs. Occurrence
1/2/2019
Claims-Made vs. Occurrence
TEXT SLIDE, LIGHT BACKGROUND
Retroactive Date = 1/1/04
January 2, 2019

31. Typical Cost Differences
1/2/2019
Typical Cost Differences
“Step Factors”
1st Year CM Rate ≈ 30% x Occurrence Rate
2nd Year CM Rate ≈ 55% x Occurrence Rate
3rd Year CM Rate ≈ 70% x Occurrence Rate
4th Year CM Rate ≈ 85% x Occurrence Rate
Mature CM Rate ≈ 95% x Occurrence Rate
Tail Coverage ≈ 2.0 x Expiring Mature CM Rate
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

32. TEXT SLIDE, LIGHT BACKGROUND
1/2/2019
Where are We Today?
Seeing improvement in underwriting results
Rate increases
Declining frequency
Although cost of medical malpractice insurance has improved, it is still much higher than it was 5 or 6 years ago
Doctors that formed captives are staying there
Doctors who reduced their coverage at the height of the crisis are not looking to raise their limits despite lower rates.
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

33. TEXT SLIDE, LIGHT BACKGROUND
1/2/2019
Where are We Today?
Initiatives to make medical malpractice more affordable
More risk management
Actions to remove medical licenses from the few who truly commit malpractice
Encourage disclosure of medical errors sooner so that claims can be resolved more quickly
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019

34. TEXT SLIDE, LIGHT BACKGROUND
1/2/2019
QUESTIONS ??
TEXT SLIDE, LIGHT BACKGROUND
January 2, 2019