Pitfalls in Evaluating Proposed
Tort Reforms
CAS 2005 Ratemaking Seminar
Session Call-2
Gail E. Tverberg, FCAS, MAAA
March 10, 2005
Outline
 Introduction
 Frequently Used Reforms
 Ten Pitfalls
 Conclusion
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Introduction
 Little in actuarial literature regarding tort reforms
 CAS Loss Reserve Seminar Sessions in 1987, 1989
— Gail Tverberg – Tort Reform Impact on Malpractice
Reserves
— Phil Miller – ISO Closed Claim Data Analysis
 1998 CAS Paper by Allen Klein & Jason Israel – ISO
— The Analysis of the Effect of Tort Reform Legislation on
Expected Liability Insurance Losses
 Contingencies – November/December 2003
— Richard Biondi & Arthur Gurevitch – The Evidence Is In:
Noneconomic Damage Caps Help Reduce Malpractice
Insurance Premiums
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Frequently Used Reforms
 Caps on non-economic loss
 Collateral source offsets
 Limitations on joint-and-several liability
 Punitive damage restrictions
 Periodic payments
 Frivolous suit penalties
 Limitations on attorneys’ fees
 Immunity statutes
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Frequently Used Reforms (Continued)
 Changes in pre-judgment interest
 Establishment of pre-trial hearing panels
 Establishment of state-operated funds to handle certain claims
 Changes to the statute of limitation or statute of repose
 Mandatory mediation
 Legislation usually includes multiple provisions
 Evaluate entire package
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Pitfall #1
 Not Adequately Understanding the Proposed Reform
 Obtain copy of legislation
— Read carefully
— Compare to existing statutes
 Talk to someone familiar with practices in state
— Existing statute may have been declared unconstitutional
— Existing statute not enforced
— Reasons for current legislation
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Pitfall #2
 Thinking Economic Loss Is a Uniquely Defined Amount
 Life expectancy of impaired lives
 Adjustment for inflation
 Adjustment for discounting
 Quality of care
 Wage loss of injured individuals not in the labor force
 Wage loss of caregivers
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Pitfall #3
 Expecting Too Much of Closed Claim Data
 Problem of 0s and blanks
 Quality of economic loss data that is provided
 Matching multiple claims
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Florida Closed Claim Database–Excluding
Multiples
Count
Indemnity
($Mil.)
Econ Loss
($Mil.)
Non-Econ
($Mil.)
Econ + Non
Econ. Total
Average
Indemnity
Econ. Loss/
Indemnity
Econ > 0, Non Econ > 0
1,255
$343
$440
$271
$711
$273,192
128%
Econ > 0, Non Econ = 0
325
92
170
0
170
$282,592
185%
Econ = 0, Non Econ > 0
1,774
405
0
353
353
$228,483
0
Econ = 0, Non Econ = 0
1,304
263
0
0
0
$201,717
0
Total
4,658
1,103
610
624
1,234
$236,811
55%
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Pitfall #4
 Misunderstanding the Phase-In Implications of the Reform
 Count awards after certain date
— Affects open claims on past report years
 Suits filed after certain date
— Similar to claims made coverage
 Claims arising from medical injuries after date
— Accident year basis
 Impact of reform can change over time
 Up or down
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Pitfall #5
 Missing Indirect Impacts
 Impact on settlements likely different than awards
 If easier, quicker to file, likely more claims
 If changes in contingency fees, attorneys may be less willing to
accept small claims
 State excess funds may handle claims differently than primary
insurer
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Pitfall #6
 Expecting a State Fund to Behave Like a Private Insurance
Company
 Funding may be pay-as-you-go
 Expenses, profit margins, FIT often lower
 May be more willing to settle
 Employees often less experienced
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Pitfall #7
 Missing Additional Expense Resulting from the Reform
 Pre-Trial Hearing Panels
— Need to present case twice
— Potential for delays
 Patient Compensation Funds
— Additional layer of expenses
 Higher policy limits
— May be indirect result of high ($2 Million) caps
— Changes what is an appropriate settlement
 Features to make program balanced
— Example: Requiring pre-notification of insureds about rate
increase; having rate hearings; and prior approval
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Pitfall #8
 Forgetting the Difference between Anticipated Indemnity Savings
and Expected Change to Current Rates
 Legislators don’t think like actuaries
— Indemnity savings means rate decrease
 Need to consider adequacy of current rates
 Also components of rates other than indemnity
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Pitfall #9
 Failing to Consider Differing Impacts by Policy Limit and by Direct
Insurer vs. Reinsurer
 Policy limits of hospitals ($20 million +) generally much higher
than individual physicians ($1 or $2 million)
 Size of losses varies also
 Legislators often mandate uniform rate adjustments for caps
— Not equitable
 Reinsurer often provides excess of loss coverage
— Rate rollbacks do not affect reinsurer
— Reinsurer gets greatest benefit of cap
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Pitfall #10
 Special Considerations for One Line / One State Insurers and
Self-Insurers
 How optimistic should one line/one state insurer be in estimating
reform benefit?
 If overcharge, can give excess back as dividends
 If undercharge, may be financially impaired
 Companies generally provider-owned
— If excess premiums are collected, funds remain in providerowned company
— One goal of company is to provide a market
 Given these considerations, insurers are often cautious in
recognizing savings from reforms
 Competition a consideration also – encourages recognition of
reform benefit
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Conclusion
 Need to evaluate any proposed reform carefully
 Be aware of 10 pitfalls
 Be careful to explain difference between savings from proposed
reforms and indicated reduction to current rate level
 Pitfalls discussed relate only to actuarial issues
 Other types of studies also have pitfalls
 Example – estimating number of iatrogenic injuries caused by
negligence
 Area for further analysis
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