IABA Annual Meeting The New Medical Malpractice Crisis: A Historical Perspective
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IABA Annual Meeting
The New Medical Malpractice Crisis:A Historical Perspective
August 4, 2012
Arthur R. Randolph, II, FCAS, MAAA, CPCU, ARM, AReSenior Consulting Actuary
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Agenda
MPL Claim Characteristics
Evolution of the MPL Insurance Market
Financial Results
Claims-Made vs. Occurrence Coverage Form
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MPL Claim Characteristics
Long-tailed coverage Low frequency High severity Long reporting lags
Time between claim occurrence and claim reporting Injury may not be discovered for years Statute of limitations
Long settlement lags Time between claim reporting and claim settlement Claim complexity – appropriate case reserves Significant discovery period Physician reputational risk – duty to defend Plaintiffs’ bar and “turtle” court systems
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Evolution of the MPL Insurance Market
Late 1970s Most private insurers exit the market
Availability crisis Response: Emergence of physician-owned insurers
(“bedpan” mutuals) Capacity increases
Initial tort reforms enacted
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Financial Results
5
19761978
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
Historical Combined Ratios*
Combined Ratio
Calendar Year
Com
bin
ed R
atio
*includes policyholder dividendsSource: AM Best
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Evolution of the MPL Insurance Market (cont.)
1980s Significant rate increases (20%+) following prolonged soft
market Affordability crisis
Reduced reinsurance capacity Second round of tort reforms Second wave of “bedpans” enter market – price competition Form changed from “occurrence” to “claims-made” Mid to late decade trends
Declining inflation Loss cost trends subside Frequency declines
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Financial Results (cont.)
7
*includes policyholder dividendsSource: AM Best
19761978
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
Historical Combined Ratios*
Combined Ratio
Calendar Year
Com
bin
ed R
atio
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Claims-Made vs. Occurrence Coverage Form
Advantages of claims-made No “pure” IBNR – benefits ratemaking and reserving Shorter projection horizon Changes in underlying trends are not exacerbated
Disadvantages of claims-made Pricing and reserving of purchased and “free” tail coverage
(DD&R) Reduced investment income
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Evolution of the MPL Insurance Market (cont.)
1990s Loss cost trends remain stable/low during early years
Favorable reserve development Significant investment income Market flooded by new entrants
Increased capacity Downward pressure on pricing
Later part of the decade marked by rising claim trends and inadequate reserves
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Financial Results (cont.)
10
*includes policyholder dividendsSource: AM Best
19761978
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
Historical Combined Ratios*
Combined Ratio
Calendar Year
Com
bin
ed R
atio
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Evolution of the MPL Insurance Market (cont.)
2000 – 2003 Loss cost trends pitch upward – primarily severity
Unfavorable reserve development remain stable/low during early years
St. Paul exited the market – represented 50% of the market share in some states
Large rate increases 2004 – 2006
More appropriate matching of risk to premium New wave of tort reforms – non-economic damage caps Frequency plummets
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Evolution of the MPL Insurance Market (cont.)
2007 – today Reserve releases Frequency flattens out Severity still increasing Darlings of the P&C industry Return of substantive investment income Premium volume decreasing
Rate reductions Physician group acquisitions Shifts from private practice to employment
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Financial Results (cont.)
13
*includes policyholder dividendsSource: AM Best
19761978
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
Historical Combined Ratios*
Combined Ratio
Calendar Year
Com
bin
ed R
atio
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Financial Results (cont.)
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Source: AM Best
Direct Written Premium
2002 2003 2004 2005 2006 2007 2008 2009 2010 20110%
20%
40%
60%
80%
100%
120%
140%
112%104%
93%81%
71%61%
54% 56% 51% 53%
Combined Ratio Components
Loss & LAE Ratio
Calendar Year
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Financial Results (cont.)
15
Source: AM Best
Direct Written Premium
2002 2003 2004 2005 2006 2007 2008 2009 2010 20110%
20%
40%
60%
80%
100%
120%
140%
112%104%
93%81%
71%61%
54% 56% 51% 53%
18%
18%
17%
16%
17%
18%18% 19%
21% 21%
Combined Ratio Components
Loss & LAE Ratio Underwriting Expense Ratio
Calendar Year
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Financial Results (cont.)
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Source: AM Best
Direct Written Premium
2002 2003 2004 2005 2006 2007 2008 2009 2010 20110%
20%
40%
60%
80%
100%
120%
140%
112%104%
93%81%
71%61%
54% 56% 51% 53%
18%
18%
17%
16%
17%
18%18% 19%
21% 21%
2%
0%
0%
1%
2%6%
5% 5% 7% 8%
Combined Ratio Components
Loss & LAE Ratio Underwriting Expense Ratio Policyholder Dividend Ratio
Calendar Year
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Financial Results (cont.)
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Source: AM Best
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
-11.6%
-1.6%
7.2%
12.1%
27.4% 26.2%
19.8%
31.2%
39.2%
33.7%
Net Income as Percent of Earned Premium
Net Income Ratio
Calendar Year
Net
In
com
e R
atio
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Financial Results (cont.)
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Source: AM Best
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$3.39 $3.70
$4.27
$4.87
$5.72
$6.68 $6.83
$8.21 $8.74
$9.01
Surplus
Surplus
Calendar Year
in B
illi
ons
(USD
)
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Financial Results (cont.)
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Source: AM Best
Direct Written Premium
2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.00
0.20
0.40
0.60
0.80
1.00
1.201.09
1.151.11
0.99
0.83
0.670.62
0.480.43
0.40
Written Premium to Surplus
DWP to Surplus NWP to Surplus
Calendar Year
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Financial Results (cont.)
20
Source: AM Best
Direct Written Premium
2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.00
0.20
0.40
0.60
0.80
1.00
1.201.09
1.151.11
0.99
0.83
0.670.62
0.480.43
0.40
0.94 0.94 0.940.89
0.76
0.610.56
0.450.41 0.39
Written Premium to Surplus
DWP to Surplus NWP to Surplus
Calendar Year
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Financial Results (cont.)
21
Source: AM Best
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$3.69
$4.25
$4.73 $4.84 $4.75 $4.47
$4.22 $3.96
$3.79 $3.56
Direct Written Premium
DWP
Calendar Year
in B
illi
ons
(USD
)
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Questions / Comments
Arthur R. Randolph, II,FCAS, MAAA, CPCU, ARM, ARe
(770) [email protected]
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Editorial contributor:Kwame A. Davis, FCAS, MAAATowers Watson