Midwestern Actuarial Forum
Fall 2003
September 24, 2003
Medical Malpractice: State Of The Line
Brian Alvers, ACAS, MAAA
Aon Re Services
Agenda
 Business Climate And Liability Tort Reform
Section 1
 Industry Analysis
Section 2
 Reinsurance And DFA Considerations
Section 3
Section 1
Business Climate And Liability Tort Reform
Medical Malpractice Crisis
 Insurers
 Increasing Loss Costs
 Inadequate Loss Reserves
 Poor Investment Results
 Hardened Reinsurance Market
 Insureds
 Availability Problems
 Affordability Problems
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Insurer Actions Taken







Base Rate Increases
Reduction Of Schedule Credits
Reduction Of Other Discounts (e.g., Claims-Free)
Reduction In Limits Offered
Increase In SIRs For Excess Business
Exit States/Territories With Poor Experience
Exit Line Of Business
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Insured Actions Taken






Physician Owned/Operated Insurers
Self-Insurance, Captives
Limit Services
Retire Early
Move To Other State/Territory
Practice Defensive Medicine
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Medical Malpractice Business Climate
Year 2002
In Crisis
Crisis Brewing
No Crisis
Source: AMA Member Communications - July 17, 2002
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Medical Malpractice Business Climate
Year 2003
In Crisis
Crisis Brewing
No Crisis
Source: AMA Member Communications - July 9, 2003
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States Actions Taken
 Florida
 SB 2-D Passed
 Still Needs Governor’s Signature
 Michigan
 HB 4980 and SB 633 Proposed
 Texas
 Proposition 12 Approved
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Florida SB 2-D
Caps On Non-Economic Damages
 $500K From Individual Doctors/Defendants, Not To
Exceed $1M From All Doctors/Defendants
Regardless Of Number Of Claimants
 $750K For A Single Hospital, Not To Exceed $1.5M
From All Hospitals
 $150K Cap For Emergency Room Physicians
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Florida SB 2-D
Rates Reflecting Savings
 Med Mal Insurance Rates Approved On Or Before
7/1/2003 Remain In Effect Until A New Rate Filing Is
Made Reflecting Savings Under The New Act
 New Filing No Later Than 1/1/2004
 The New Rate To Apply To Policies Effective Or
Renewed After Effective Date Of The Act (8/14/2003)
 Requires Insurers To Provide A Refund
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Michigan HB 4980 And SB 633
 Identical Bills Proposed From House And Senate
 Make It Easier To Recover Economic And NonEconomic Damages Based On “Loss Of Opportunity”
 Currently, Recovery Can Not Be Had Unless The
“Loss Of Opportunity” Is Greater Than 50%
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Texas
Proposition 12
 Constitutional Amendment Capping Non-Economic
Damages In Jury Awards To $250K In Cases Against
Doctors And Health Care Providers
 Approved By A 51% To 49% Margin On 9/13/2003
 Only 10% Voter Turnout
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States With “No Crisis”
 California, Colorado
 $250K Non-Economic Damages Cap
 Louisiana
 $500K Total Damages Cap
 Indiana
 $1.25M Total Damages Cap
 Wisconsin
 $410K, $500K For Minors
 New Mexico
 $600K Cap Excluding Punitive Damages
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States “In Crisis”
 FL, TX
 Reform Passed
 NY, IL, PA, NJ, GA, NC, WA, CT, KY, OR, AR, WY
 No Caps
 OH, WV, NV, MS
 Various Caps
 $250K to $500K
 Missouri
 $557K Cap
 $250K Non-Economic Damages Cap Vetoed By Governor
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Are Caps The Answer?
 Weiss Ratings, Inc. (www.WeissRatings.com)
 No
 Far More Important Factors
 Median Annual Payment Up More In States With Caps
(48.2% Versus 35.9% From 1991 To 2002)
 The PIAA (www.thepiaa.org)
 Says Weiss Makes Numerous Errors In Assumptions
 Total Claim Payouts Increased 52.8% In Cap States Versus
100.1% In Non-Cap States
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Are Caps The Answer?
 GAO Report (GAO-03-702)
 Losses Appear To Be Primary Driver Of Medical
Malpractice Rate Increases
 No Clear Policy Recommendations
 Other Factors Cause Increases
 Lack Of Comprehensive Data

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Especially Economic Versus Non-Economic
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Are Caps The Answer?
 Caps May Precipitate More Doctors Being Named In
Suits To Obtain Multiple Recoveries
 Reinsurers Not Factoring In Reduction In Claim Cost



Just Too Early To Tell
Little Impact On Modeling For A Couple Of Years
Same True For Many Insurers
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Section 2
Industry Data Analysis
Industry Data Analysis
 Industry 2002 Schedule P (OneSource)
 Parts 1-4F
 Sections 1 (Claims-Made) And 2 (Occurrence)
 Develop Industry Losses And DCC To Ultimate
 Use Paid, Incurred Loss Development Methods
 Compare Ultimate Losses To Earned Premium
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Industry Loss and DCC Ratio
140%
Loss and DCC Ratio
130%
120%
110%
100%
90%
80%
1992
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1994
1996
1998
2000
2002
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Industry Loss and DCC Ratio
 Exposure
 Number Of Licensed Physicians
 Pros:



Easy To Get (Medical Marketing Services, Inc.)
Reasonable Estimate Of Exposure
Cons:



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What About Hospitals?
What About Tail And DDR?
What About Trend To Self-Insurance?
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Industry Loss and DCC Ratio
140%
$ Per Physician
11,000
130%
Loss and DCC Ratio
10,000
120%
Loss Per Physician
9,000
110%
8,000
100%
7,000
6,000
5,000
1992
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Premium Per Physician
90%
Loss and Loss Expense Ratio
12,000
80%
1994
1996
1998
2000
2002
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Industry Loss and DCC Ratio
 1994 – 1998
 Loss Per Physician Increased 36%
 Premium Per Physician Decreased 4%
 Exponential Trend In Losses Per Physician
 Trend Rate = 6.82%
2
 R = 98.4%
 Actual Trend Rate Higher, As Denominator Is
Licensed Physicians, Not Insured Physicians
 Generally Assume 7.5% - 10%
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Peer Company Analysis – Top 20 Writers
Capital Adequacy
Company
Rating
Lexington Insurance Company
A++
State Volunteer Mutual Insurance Co.
Continental Casualty Co
Truck Insurance Exchange
St. Paul Fire & Marine Ins Co.
NORCAL Mutual Insurance Company
Evanston Insurance Co
Medical Protective Company
% NPW
Med Mal
Surplus
12/31/2001
12/31/2002
Net Leverage
NPW / Surplus
(NPW + Net Liab.) / Surplus 2002 BCAR
12/31/2001 12/31/2002 12/31/2001 12/31/2002
Score
16%
1,746,113
1,763,654
0.5
1.1
1.7
3.0
179.8
A
A
A
A
A
A
A
100%
4%
26%
3%
100%
24%
99%
137,176
4,700,064
300,614
4,142,586
268,032
230,889
408,215
129,287
5,115,932
275,557
4,925,779
222,214
313,850
401,726
0.7
0.7
2.6
1.2
0.6
1.6
0.8
1.0
1.4
2.7
0.9
0.8
1.8
1.3
3.8
4.3
5.7
4.3
2.7
4.7
3.2
4.7
5.3
6.6
3.3
3.3
5.0
4.7
173.1
170.5
160.1
156.8
148.0
141.8
137.1
Health Care Indemnity, Inc.
American Physicians Assurance Corp
Medical Assurance Company Inc
Pronational Insurance Co.
Doctors Company Insurance Group
MAG Mutual Insurance Company
AAAAAA-
100%
74%
96%
96%
97%
97%
583,763
176,819
172,841
175,874
383,965
158,558
482,536
163,466
193,335
196,955
341,412
142,978
0.4
1.1
1.0
0.8
0.8
0.7
0.7
1.4
1.2
0.8
1.2
1.0
2.4
4.6
4.7
3.9
3.0
3.0
3.3
5.4
5.1
3.8
4.5
4.3
183.9
138.8
137.6
137.6
129.6
103.5
FPIC Insurance Group
B++
89%
107,914
126,610
1.4
1.1
5.2
5.5
125.4
ISMIE Mutual Insurance Company
B+
100%
241,406
170,517
0.7
1.3
4.0
6.6
87.0
Medical Liability Mutual Insurance Co.
B
96%
1,428,745
933,042
0.4
0.8
2.6
4.8
71.2
Princeton Insurance Company
B-
64%
141,602
107,239
1.7
1.1
7.3
9.7
73.3
MCIC VT Inc RRG
Physicians Reciprocal Insurers
NR-1
NR-4
96%
99%
10,114
68,559
10,352
73,110
2.0
2.0
2.4
2.1
13.1
12.2
Source: AM Best And The National Association Of Insurance Commissioners
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Peer Company Analysis – Top 20 Writers
Earnings Adequacy (5-Year Average)
Company
Rating
% NPW
Med Mal
Pre-Tax
ROR
Return on
PHS
Combined
Ratio
16%
24.4%
8.9%
97.1
Lexington Insurance Company
A++
State Volunteer Mutual Insurance Co.
Continental Casualty Co
Truck Insurance Exchange
St. Paul Fire & Marine Ins Co.
NORCAL Mutual Insurance Company
Evanston Insurance Co
Medical Protective Company
A
A
A
A
A
A
A
100%
4%
26%
3%
100%
24%
99%
0.0%
-1.2%
-6.4%
6.5%
2.1%
9.4%
15.9%
1.9%
1.0%
-12.3%
10.5%
-1.6%
11.6%
14.4%
134.7
123.1
108.6
117.8
122.7
98.8
106.0
Health Care Indemnity, Inc.
American Physicians Assurance Corp
Medical Assurance Company Inc
Pronational Insurance Co.
Doctors Company Insurance Group
MAG Mutual Insurance Company
AAAAAA-
100%
74%
96%
96%
97%
97%
9.4%
-8.1%
10.4%
-8.1%
0.2%
3.0%
5.4%
-6.3%
5.9%
7.5%
0.8%
-0.1%
114.1
126.2
111.0
134.2
115.3
120.9
FPIC Insurance Group
B++
89%
4.4%
3.1%
110.2
ISMIE Mutual Insurance Company
B+
100%
0.7%
-0.9%
131.1
Medical Liability Mutual Insurance Co.
B
96%
-6.3%
-0.8%
136.7
Princeton Insurance Company
B-
64%
-9.8%
-9.6%
130.6
MCIC VT Inc RRG
Physicians Reciprocal Insurers
NR-1
NR-4
96%
99%
-1.8%
5.7%
10.2%
111.7
120.8
Source: AM Best And The National Association Of Insurance Commissioners
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Peer Company Analysis – Top 20 Writers
Average Increase In Net Leverage = 28%
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
AM Best
Rating
A++
A
Net Leverage = (NPW + Net Liabilities) / Surplus
A-
B++ Or Lower
Year-End 2001
Year-End 2002
Source: AM Best And The National Association Of Insurance Commissioners
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A.M. Best Capital Adequacy Issues
 Remaining Medical Malpractice Writers Are Capital
Constrained
 Opportunity To Sell In Hard Market Hampered By
Poor Capital Adequacy As Measured By A.M. Best


Poor U/W Results Reduced Reported Surplus
Net Capital Required To Support Rating Increasing
Substantially



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Rising Net Premiums Through Increased Market Share And
Rising Rates
“Excessive Growth” Compounding Increased Required Capital
Assumed Reserve Deficiency
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Section 3
Reinsurance And DFA Considerations
Reinsurance Market Dynamics
 Past Results Reflect Inadequate Primary Rates
 Significant Increase In Severity And Frequency
 Severity Increases Have Greater Effect On Excess
Reinsurers
 Reinsurance Market Response
 Reinsurers Require Projected U/W Profit
 12% - 18% ROE
 Perform Extensive Actuarial Analysis



Huge Concern Over Severity Trend, Reserves
Restricted Capacity
May Increase Rate At Renewal Despite Rate Increases And
Exposure Reduction By Cedant
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Reinsurance Market Dynamics
 Reinsurer Focus Points
 Quality Of Business Plan/Underwriting Discipline
 Purchasing Philosophy Of Buyer
 Cedants Extremely Leveraged
 Higher Primary Rates, Surplus Down
 Pressure On Rating (AM Best, S&P)
 Pressure On Capital Adequacy (BCAR, S&P CAR, RBC)
 But Reinsurers Will Not Do Quota Share
 Consider Non-Traditional, Structured Program, And/Or
Lower Excess Of Loss Retention
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Reinsurance Considerations
In Medical Malpractice


Take Into Account Effective Rate Action

Not Just Base Rate Increases

Change In Schedule Credits/Debits

Change In Increased Limits Factors
Take Into Account Changes In Exposure

Limit And Attachment Profile

State/Territory Mix

Classification/Specialty Mix



Docs: OB/GYN, Cardiac Surgeons, Neurosurgeons
Hospitals: Teaching Versus Not, Size, Rural/Urban
Coverage

Not Just Per Claim (Per Doctor)

Watch Out For Clash, ECO/XPL
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DFA Considerations
In Medical Malpractice

Split ALAE Only From Indemnity And ALAE Claims

Could Be 80/20 Split

Lognormal Works Very Well For Severity

Both Indemnity And ALAE

Watch For Clustering

Correlation

Indemnity And Settlement Lag

Indemnity And ALAE

Don’t Forget Parameter Uncertainty

Coefficient Of Variation Worst Of All 10-Year Schedule P Lines
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