Current Issues In Medical Malpractice
Insurance
Carolyn L. Greene - Willis Re Inc.
John H. Mize - Tillinghast
April 2002
This document was designed for discussion purposes only and is not intended to present
detailed information on our analysis and findings. It is incomplete, and not intended to be
used, without the accompanying oral presentation and discussion.
S:\People\Mizej\Presentations\CAS Mtg 04152002.ppt
Current Issues in Medical Malpractice Insurance
Overview
 Financial Results
 Underlying Trends
 Primary Marketplace
 Reinsurance Marketplace
 Input on Renewals
 Opportunities for Actuaries
2
Financial Results
3
Current Issues in Medical Malpractice Insurance
M edical M alpract ice Rat ios - Cal. Y r.
200%
150%
100%
50%
2
0
98
1
9
96
1
1
9
94
9
92
1
9
90
1
9
88
1
9
86
1
9
84
1
9
82
1
9
80
1
9
78
1
9
76
9
1
00
0%
Loss & LA E
Source: Best’s Aggregates and Averages
4
Current Issues in Medical Malpractice Insurance
M edical M alpract ice Rat ios - Cal. Y r.
Loss & LA E
00
2
0
98
1
9
96
1
9
94
1
9
92
1
9
90
1
9
88
1
9
86
1
9
84
1
9
82
1
9
80
1
9
78
9
1
1
9
76
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
U /W Expense
Source: Best’s Aggregates and Averages
5
Current Issues in Medical Malpractice Insurance
M edical M alpract ice Rat ios - Cal. Y r.
U /W Expense
2
0
98
1
9
96
1
9
94
1
9
92
1
9
90
1
9
88
1
9
86
1
9
84
1
9
82
1
9
80
1
9
78
1
9
76
9
1
Loss & LA E
00
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
D ividend
Source: Best’s Aggregates and Averages
6
Current Issues in Medical Malpractice Insurance
M edical M alpract ice Rat ios - Cal. Y r.
U /W Expense
D ividend
2
0
98
1
9
96
1
9
94
1
9
92
1
9
90
1
9
88
1
9
86
1
9
84
1
9
82
1
9
80
1
9
78
1
9
76
9
1
Loss & LA E
00
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
Com bined
Source: Best’s Aggregates and Averages
7
Current Issues in Medical Malpractice Insurance
M edical M alpract ice Rat ios - Cal. Y r.
00
2
0
98
1
9
96
1
9
94
1
9
92
1
9
90
1
9
88
1
9
86
1
9
84
1
9
82
1
9
80
1
9
78
9
1
1
9
76
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
Com bined
Source: Best’s Aggregates and Averages
8
Current Issues in Medical Malpractice Insurance
M edical M alpract ice Rat ios - Cal. Y r.
Com bined
00
2
0
98
1
9
96
1
9
94
1
9
92
1
9
90
1
9
88
1
9
86
1
9
84
1
9
82
1
9
80
1
9
78
9
1
1
9
76
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
Invest m ent Gain
Source: Best’s Aggregates and Averages
9
Current Issues in Medical Malpractice Insurance
M edical M alpract ice Rat ios - Cal. Y r.
Com bined
Invest m ent Gain
00
2
0
98
1
9
96
1
9
94
1
9
92
1
9
90
1
9
88
1
9
86
1
9
84
1
9
82
1
9
80
1
9
78
9
1
1
9
76
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
Oper at ing
Source: Best’s Aggregates and Averages
10
Underlying Trends
11
Current Issues in Medical Malpractice Insurance
One Year Loss Reserve Development to Premium
6.2%
10%
0%
-10%
-7.5%
-20%
-30%
-40%
-26.3%
-33.7%
-50%
1997
1998
1999
2000
Calendar Year
12
Current Issues in Medical Malpractice Insurance
U.S. Median Medical Liability Awards and Settlements
$ in Thousands
800
700
600
Settlements
Awards
500
400
300
200
1993 1994 1995 1996 1997 1998 1999
Source: Jury Verdict Research
13
Current Issues in Medical Malpractice Insurance
Claim Frequency per 100 Physicians
20.00
18.00
16.00
14.00
15.2
14.2 13.8
13.4
16.5 16.0
14.3
15.1 15.5 15.6
12.00
10.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: St. Paul Physicians & Surgeons 2000 Year-End Update
14
Current Issues in Medical Malpractice Insurance
Observations: Trends
 Frequency relatively flat - but more concentrated mix?
 $1 million limits severity trend: 5% to 8%
 Higher trends for long-term care
 Greater frequency of shock losses
15
Primary Marketplace
16
Current Issues in Medical Malpractice Insurance
Market Drivers
 Poor financial performance
 Physicians - price competition/use of reserve
redundancies
 Hospitals - pricing discipline/aggregate maintenance
 Investment yields
 Loss of capacity
 St. Paul leaves marketplace
 PHICO, Frontier, PIE, etc. - Gone
 MIIX financial troubles
 More to come?
17
St. Paul – Major Markets
State
Share
SC
AR
NE
SD
ND
NV
IA
MN
WV
LA
DC
DE
NC
KS
GA
50.4%
50.0%
47.4%
42.2%
39.9%
39.5%
32.9%
38.8%
30.7%
27.0%
26.7%
26.4%
24.6%
22.9%
20.8%
Average
34.7%
Position
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
Source: CCS
18
Current Issues in Medical Malpractice Insurance
Market Drivers
 Poor financial performance
 Physicians - price competition/use of reserve
redundancies
 Hospitals - pricing discipline/aggregate maintenance
 Investment yields
 Loss of capacity
 St. Paul leaves marketplace
 PHICO, Frontier, PIE, etc. - Gone
 MIIX financial troubles
 More to come?
19
Current Issues in Medical Malpractice Insurance
Current Status of Medical Malpractice Market - Primary
 Physicians
 Premiums almost uniformly on the up-swing
 Driven by losses, investment income, elimination of
balance sheet conservatism, and reinsurance costs
 15% or larger increases in filed rates common
 Reduction in discounts - material but tough to quantify
 Issue is affordability more than availability
 Hospitals
 At last - excess insurers listen to actuaries!
 Focus on specific and aggregate attachments
 Large premium increases combined with retention
increases
20
Current Issues in Medical Malpractice Insurance
Current Status of Medical Malpractice Market - Primary
 Long term care
 General deterioration in loss experience - with a few very





bad jurisdictions
Historically large rating credits
Heavy underwriting, large premium increases and
new/higher retentions
For-profit vs. Not-for-profit
Some opportunistic pricing?
Flight to alternative markets
21
Reinsurance Market
22
Current Issues in Medical Malpractice Insurance
General Reinsurance Overall
 Results no better than primary market
 Top twenty reinsurers, 2000 combined ratio 114.2% versus
113.8% for 1999
 U.S. reinsurers reported a 141.6% combined ratio for 2001
 Enough is enough – adequate pricing or let business go
23
Current Issues in Medical Malpractice Insurance
Domestic Reinsurers
Twelve Months Ended December 31, 2000
1999
Combined
Ratio
2000
Combined
Ratio
9/30/2001Co
mbined
Ratio
American Re-Insurance Company
115.3%
117.1%
136.1%
Converium Reinsurance (NA) Inc.
107.6%
116.7%
111.8%
Employers Reinsurance Group
116.2%
117.0%
132.0%
Everest Reinsurance Company
103.3%
103.2%
115.6%
NAC Re (XL Re)
146.5%
173.3%
117.3%
Odyssey America Reinsurance Corporation
129.8%
104.8%
113.7%
Swiss Re American Corporation
109.5%
121.4%
176.3%
Transatlantic Re
106.4%
100.4%
116.7%
24
Current Issues in Medical Malpractice Insurance
Reinsurance Considerations
 Field of domestic reinsurers has been reduced by two-thirds
from a decade ago:
 120 stand-alone companies operated, 30 remain with most
linked to global partners
 The five largest reinsurers control over 38% of the estimated
$125B market
 To compete reinsurers must have many times the capital
formerly required, A.M. Best: “the price of reinsurers’
admission, driven by market forces, is moving toward $1B of
Surplus”
25
Current Issues in Medical Malpractice Insurance
A Sampling of Consolidations in the Reinsurance Arena
 Overseas Partners: Reliance Re
 X.L. Capital: NAC Re/Global Capital Re/Mid-Ocean Re
 Fairfax Holdings: Odyssey/TIG/Sphere Drake
 Partner Re: Winterthur/SAFR US
 Gerling Global: Constitution Re
 Trenwick: Chartwell/Lasalle Re
 Folksamerica: USF Re
 Employers Re: Kemper (GE)/Frankona Re
 Berkshire Hathaway: General Re/Cologne Re
 Swiss Re: M&G/Underwriters Re
 Munich Re: American Re
26
New Equity Capital
New Market Entrants
Issuer
Axis Specialty Ltd.
Allied World Assurance Company
Endurance Specialty Insurance Ltd.
Montpelier
Arch Capital
DaVinci Reinsurance Ltd.
Irsh Re
Amount
$
1,600
$
1,600
$
1,200
$
1,000
$
763
$
500
$
356
Total New Market Entrants
$
Domicle
Bermuda
Bermuda
Bermuda
Bermuda
Bermuda
Bermuda
Dublin
Sponsor(s)
Marsh Capital
Chubb/ AIG/ Goldman Sachs
Aon Corp./ Zurich Financial Services
White Mountains
Arch/Walburg/Helman & Jordan
Renaissance Re/ State Farm
Scor Group
7,019
Existing Markets
Issuer
Swiss Re
ACE Limited
XL Capital
IPC Re
St. Paul Companies
Hartford
Amount
$
1,800
$
1,100
$
712
$
547
$
500
$
450
Total Existing Markets
$
5,109
Total New & Existing Markets
$
12,128
27
Input on Renewals
28
Current Issues in Medical Malpractice Insurance
Renewals – General
 Lack of clarity on reinsurers position. Changed wordings, requests
for more information, restructuring of programs, general uncertainty
 Capacity available but at a price
 Negotiations tougher and longer
 Reinsurers taking strong position on pricing
 Must have good information, good loss history, good presentation
with good story
 Back to technical trending and pricing approach
 Everyone is a lead with their own list of “pet” issues
 Late pricing and extended negotiations created bottle-necks
 Greater consideration of alternative options by clients with
predictable loss exposure
29
Current Issues in Medical Malpractice Insurance
2002 Reinsurance Renewals – Specific
 Rate increases, depends on loss history
 More swing plans-high minimum/maximum
 Tighter terms across the board
 Accelerated premium payments
 Annual terms instead of continuous
 Caps on liability
 Focus on “balance” in layers
 Increased use of inner aggregate and loss corridors
30
Current Issues in Medical Malpractice Insurance
2002 Reinsurance Renewals – Specific (continued)
 Limits reduced, no free capacity
 Premium caps
 Reduced scope of line covered
 Excess cessions
increased ILFs
 Reduce/remove profit sharing
 Territorial concerns
 Reduce ceding commission
 Few, if any, multi-year programs
 Increased communication between primary carrier and reinsurers
31
Opportunities for Actuaries
32
Current Issues in Medical Malpractice Insurance
Opportunities for Actuaries
 Actuarial evaluations - now “required” for renewals
 Hospitals
 Large physician groups
 Large long term care entities
 Assistance in evaluating excess/reinsurance proposals
 Captive feasibility studies
 Actuarial evaluations
 Financial forecasts
33
Current Issues In Medical Malpractice
Insurance
Carolyn L. Greene - Willis Re Inc.
John H. Mize - Tillinghast
April 2002
This document was designed for discussion purposes only and is not intended to present
detailed information on our analysis and findings. It is incomplete, and not intended to be
used, without the accompanying oral presentation and discussion.
S:\People\Mizej\Presentations\CAS Mtg 04152002.ppt