Status of the Medical
Malpractice Marketplace
2005 Casualty Loss Reserve Seminar – Boston, MA
September 13, 2005
Jeremy Brigham, FCAS, MAAA
© 2005 Towers
©Towers
PerrinPerrin
Introduction
 The Medical Malpractice Environment
 Commercial Insurance Market Response
 Healthcare Industry Response
 Legislative Response
2
The medical malpractice insurance market has
undergone significant change over the past three decades
Evolution of the Medical Malpractice Insurance Market
Mid-1970s
 Period of “crisis”
Market
Conditions



Early 1980s
Rising claims
Inadequate rates

Wage/price control guidelines
Stock market falters

CA doctors strike

Soft market
conditions

Erosion of early
tort reforms
Mid-1980s
 Period of crisis for health systems


Late 1970s

Initial tort reforms

Malpractice frequency/ severity
subsidies

1970s
Competitive
Responses
Mid-1980s



“Bedpan” mutuals formed

Emergence of physician-owned
insurers in response to “availability
crisis”
“Affordability crisis”
1980s
Late 1970s
Most private insurers exit the market,
causing availability/affordability crisis
for health care providers
Significant rate increases
(20%+)
Reduced reinsurance capacity
Effort to ease exploding claims cost

Increased diagnostic testing

Improved peer review

Focus on risk management

Companies consent to claims made

Second batch of tort reforms
Late 1980s
 Inflation declines; loss cost trends
ease; frequency declines
 Second wave of provider-owned
companies emerge to provide needed
coverage
 Captive formation accelerates
 RRG/PG legislation passes
3
The medical malpractice insurance market has
undergone significant change over the past three decades
Evolution of the Medical Malpractice Insurance Market
Late 1990s
 Period of “crisis”?
Early – Mid-1990s
 Low inflationary period
Market
Conditions

Loss cost trends — low and stable
Managed care attacks medical cost inflation

Prolonged soft market conditions






Concern over claims “severity”
Large rate increases
Managed care backlash
1990s
Competitive
Responses
Rising claims
Inadequate reserves
Early-Mid 2000s
 Low inflationary period
2000
Today
Mid-1990s
2000 – today

Flood of companies into the market

Several insurers exit market

To compete, prices driven
down/mispricing common

New capacity emerges

Provider-owned companies’ capacity
diminishes and rebounds

Accelerated movement toward alternative risk
financing (i.e., captives, self-insurance trusts)
4
The Medical Malpractice Environment
Claim frequency is generally flat
5
The Medical Malpractice Environment
However, claim severity has been escalating…
6
The Medical Malpractice Environment
…and premiums did not keep up
with claim costs
Rate increases reflect “catch up”
Total claim costs
Premiums
7
7.0
1.75
6.0
1.50
5.0
1.25
4.0
1.00
3.0
0.75
2.0
0.50
1.0
0.25
0.0
0.00
Median Jury Awards ($millions)
Mean Jury Awards ($millions)
Malpractice Jury Awards Began an Upward
Spiral in 1998
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Mean
Median
8
Comparison of Large Awards – Top 10
1997
Total
2000-2001

$27,570,327

$269,000,000

$23,530,746

$108,000,000

$19,275,466

$100,000,000

$18,924,000

$75,000,000

$15,700,000

$60,686,150

$15,317,000

$49,594,684

$15,000,000

$41,444,531

$14,460,000

$32,767,410

$12,381,670

$31,100,000

$11,500,000

$30,000,000
$173,479,209
$797,492,775
Source: Jury Verdict Research
9
Where are the Most Troubled Claims
Occurring?
 Radiology – failure to diagnose
 OB/GYN
 Emergency Medicine
 Neurosurgery/Orthopedics
 Bariatric surgery
 Batch claims
10
Medical Malpractice Awards, 1997-2003
$2,500,000
$2,252,645
$2,000,000
$1,500,000
$975,000
$1,000,000
$1,000,000
$687,500
$648,000
$500,000
$500,000
$0
Childbirth
Diagnosis
Medication
Patient
Relation
Issues
Nonsurgical
Treatment
Negligent
Surgery
Source: Jury Verdict Research
11
Variable by Locale
 Healthcare is local
 Malpractice is local
 Chicago, Philadelphia, Miami difficult for
everyone
 Indiana, Wisconsin, California less difficult
 Problems and solutions are different
12
American’s Medical Liability Crisis: A National
View
NH
VT
WA
ND
MT
MN
OR
NY
WI
SD
ID
MI
WY
PA
IA
OH
NE
IL
NV
UT
CA
CO
IN
WV
KS
MO
VA
KY
OK
NM
AR
SC
MS
TX
AL
RI
CT
NJ
DE
MD
DC
MA
NC
TN
AZ
ME
GA
States in crisis
States showing problem signs
LA
Effective reforms halting crisis *
FL
States currently OK
AK
HI
May 2005
© 2004 American Medical Association . All rights reserved. The American Medical Association Crisis Map, while
copyrighted, may be reproduced and distributed, without modification, for non-commercial purposes so long as all
information and copyright notices are included.Commercial use requires permission.
Source: AON
*In addition to a cap on non-economic damages,
Texas voters passed a constitutional amendment.
13
Commercial Market Response
 Recap of financial results
 Commercial market response
 Where are we in the cycle now?
14
General Insurance Industry Trends
Source: A.M. Best, January 2005
15
Medical Malpractice Results
180%
Medical Malpractice Combined Ratios – A.M. Best
Crisis II
Crisis III
Crisis I
160%
140%
120%
100%
80%
60%
40%
20%
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
0%
Calendar Year
Combined Ratios
Investment Gain
Operating Ratios
16
Medical Malpractice Loss Reserve
Development
Millions
Adverse Development
$1,450
$1,250
$1,050
$850
$650
$450
$250
Favorable
Development
$50
-$150
1994
1995
1996
1997
1998
1999
2000
2001
2002
Coverage Year
Fiscal Year 2000
Fiscal Year 2002
Fiscal Year 2001
Fiscal Year 2003
17
Increasing claim severity has affected reinsurers
results more adversely than primary carriers
200%
175%
150%
125%
100%
75%
50%
25%
0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Coverage Year
Ceded Loss Ratio
Direct Loss Ratio
Net Loss Ratio
Source: A.M. Best.
18
Close to $2 Billion in Displaced Premiums
Completely Out of the Market Since 1996
Company
Peak Year
Peak
Year Premium

PIE Mutual
1996
$
193,210,000

Physicians Reciprocal Group
2003
$
203,782,000

Frontier
1997
$
119,702,000

St. Paul
1996
$
650,361,000

PHICO
1998
$
212,486,000

MIIX
1999
$
241,773,000

Reliance
1998
$
54,217,000

ROA / DIR
2002
$
69,965,000

Washington Casualty
2001
$
28,445,000

Farmers
2002
$
231,074,000

TOTAL
$ 1,950,852,217
Many Additional Companies Have Retrenched
19
Other Capacity Issues
 Notable Downgrades/ Exits:
 Kemper (gone)
 TVIR
 Princeton
 OHIC
 SCPIE
 APAC
- Washington Casualty (1Q-03)
- Church Mutual (LTC mkt.) (1Q-03)
- Royal (LTC mkt.) (2Q-03)
- Farmers (Hospitals, phys) (3Q-03)
- MCIS, Lex (PEL/HMO Re)(3Q-03)
- ERC (PEL) (3Q-03)
 Zurich
 ERC
Source: A.M. Best Company
Top 20 of 1996 - % of Writings at ‘05
Rating of B+ or Less
20%
Out of Business
or Left Market
39%
Still Writing
& B++ or Better
41%
21
New Capacity since 9/11
Carrier
ACE Healthcare
One Beacon
Berkley Medical Excess
Endurance Specialty Ins., Ltd.
AWAC
Arch Capital Group Ltd.
Darwin Professional U/W
Renaissance Re (BDA)
Max Re (BDA)
Beazley Program Inc
Aspen Re
22
Commercial Market Response
 Significant price increases coupled with increased deductible levels and
self-insured retentions
 Inner aggregate
 Swing rated contracts
 Restricting terms and conditions:
 Most “occurrence” business has converted to “claims made”





Carriers imposing specific conditions on the reporting of excess loss
and potential excess losses
Tail/extended reporting period (ERP) provisions
Collateralization for retentions
Risk management
More exclusions
“Follow form” reinsurance of captives less prevalent
23
The “hard market” may have peaked

After several years of substantial double digit rate increases and better results,
many carriers will be seeking only inflationary increases

Price adequacy

Market pressure

Regulatory pressure

Increases in Hospital Professional Liability retention levels seen over the past
several years are stabilizing

Due to the recent capacity shortages and the market correction, substantial new
capacity has entered the market

Commercial carriers, provider owned carriers, captives, RRGs, other
alternative risk vehicles

Tort reform may reduce loss costs

Capacity and program structure options are available in all venues ( even difficult
ones)

Strict underwriting is helping providers with strong and proven risk management
programs
24
Physician Market
 Physician market conditions:
 Double digit increases still occurring in some markets
 Sub-standard market the only market for some
 Significant interest in considering alternative vehicles
 Hospitals/Systems trying to help physicians with problem
 Channeled programs
 Win/Win programs – changing the game!!
25
Healthcare Industry Response
 Financing
 Purchasing less limits
 Alternative risk financing vehicles
 Risk management/quality control initiatives
 Focusing management’s attention on quality
 Claims practices changing
— engaging patient at time of incident
— mediation
— fast settlements when liability exists
 Quality initiatives designed to fix problem areas
 Specialty focused (OB, ER, etc.) quality programs emerging
26
Alternative Risk Finance
Risk Financing Continuum
Multi-state risks
Group program
HIGH
Fronting
required
Exchange
Administration
For Profit
Large
Hospitals/
Systems
RRG Reciprocal
RRG
High Risk
States
Small
hospital
s
Low risk
States
Captive
Trust
Retention
Deductible
Guaranteed Cost
LOW
Financial Risk/Complexity
HIGH
27
Overview of the Insurance Market
Healthcare Captive Formations
 Estimate that 90% of the top 100 healthcare systems own at least one
captive
 Healthcare Captive Statistics:
Active Healthcare Captives at Year-end:
 Cayman Islands:
 Bermuda:
 Vermont:
 Hawaii:
 South Carolina:
Total
 Healthcare RRGs
(Included above)
2002
197
110
42
13
7
369
37
2003
212
110+
62
15
21
430
77*
*81% of RRGs formed
in 2003 were HC
Sources: CIMA / A.M. Best Captive Reports / Domicile Captive Managers / Risk Retention Reporter
28
Legislative Response – Tort Reform
 Federal level: House has passed a tort reform bill with caps similar to
MICRA, Senate has not yet voted
 Laws affecting medical malpractice have been passed in many states:
 Texas
 Florida
 Ohio
 Mississippi
 Arkansas
 Georgia
 Others, and more on the way
 Impact of tort reform
 Soft vs. hard cap
 Will it be upheld?
 Will plaintiff bar find alternate routes?
 Before/After
29