Is it over yet?(Perspectives on the Med Mal Crisis)

Robert J. Walling III, FCAS, MAAA

2006 CAS Spring Meeting

May 9, 2006

From Where’s Perspective

Historical, Cyclical Swings

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Ne

t O

pe

rati

ng

Rati

o

Medical Malpractice All Lines Homeowners Workers Compensation Other Liability Private Passenger AL

Note 5 Year change!

Crisis Symptoms

Insurer adverse reserve developments Insurer operating losses Coverage availability problems Coverage affordability problems

Industry Reserve Development

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Original Held Mature Evaluation

Widespread, but not Uniform

2005 Reserve Developments for Insurers in “Crisis States”

Report Year ProAssurance Doctors Co. ISMIE

Physicians Ins. Mut.

Northwest Phys.

Healthcare Svcs Grp.

State Volunteer

One Year 1996 -2,353 -198 3,050 48 33 0 -2,214Reserve 1997 -1,541 -175 -2,174 54 25 0 1,078Development 1998 1,206 -128 2,952 708 50 -250 4,610

1999 375 -136 7,976 -652 -7 413 6622000 -283 -1,625 465 854 -373 -223 -3,8762001 4,178 -9,970 371 -1,180 203 -2 -2,8542002 -713 642 -1,041 1,284 -833 -526 2,0512003 -14,120 -4,869 -1,912 149 -813 -4,616 5,8682004 -10,544 -23,885 -10,113 -1,724 -191 -2,062 -678

Report Year FPIC MAG Mutual

Med Mutual MD

Med Mutual NC ProMutual

Ct. Medical Ins Co.

Med Assurance MS

One Year 1996 -984 -928 -362 14 -407 -994 -52Reserve 1997 2,849 -393 -147 -280 238 271 379Development 1998 4,528 4,267 -716 6 599 -973 -294

1999 2,631 1,894 -859 -261 574 -3,646 2,1242000 -219 -168 660 582 2,419 -4,144 1882001 6,821 -2,738 -4,426 1,680 494 -3,519 -1,4782002 6,766 5,937 -3,108 -1,201 5,315 -4,762 6,9552003 -6,465 -7,508 -8,912 -551 8,328 -141 3,9572004 -27,098 -10,491 -5,602 -2,328 7,529 -2,120 822

Schedule P Held Loss & DCC Ratios for Insurers in “Crisis States”Report

Year ProAssurance Doctors Co. ISMIEPhysicians Ins. Mut.

Northwest Phys.

Healthcare Svcs Grp.

State Volunteer FPIC MAG Mutual ProMutual

Held Net 1996 93.3% 93.0% 101.8% 93.7% 89.7% 95.8% 89.8% 78.7% 85.5% 76.6% 96.4% 119.6% 100.4% 76.5%Loss & DCC 1997 105.9% 82.2% 107.4% 115.7% 136.2% 95.4% 110.1% 110.9% 86.4% 60.5% 91.1% 131.7% 104.1% 96.7%Ratios 1998 104.8% 92.2% 131.5% 108.9% 129.2% 97.4% 116.4% 109.6% 115.1% 77.6% 64.7% 173.4% 121.2% 126.1%

1999 101.3% 71.6% 137.0% 109.7% 141.5% 158.1% 98.8% 96.2% 111.8% 102.1% 80.6% 119.9% 141.4% 191.2%2000 101.0% 106.4% 115.4% 106.9% 180.9% 122.5% 101.3% 133.6% 116.4% 111.8% 75.2% 158.1% 171.9% 123.5%2001 97.8% 116.5% 128.4% 138.9% 133.5% 7.9% 126.3% 104.6% 128.2% 117.8% 78.6% 153.6% 204.3% 176.5%2002 82.4% 70.9% 121.7% 103.6% 104.3% 123.7% 111.8% 84.0% 98.6% 115.8% 68.8% 149.6% 156.1% 181.0%2003 81.9% 73.6% 91.0% 78.5% 90.2% 84.8% 94.4% 66.8% 84.7% 109.5% 74.6% 132.6% 130.8% 130.4%2004 78.6% 60.7% 79.6% 74.8% 82.4% 62.6% 83.1% 60.2% 85.2% 106.4% 71.1% 96.7% 117.4% 83.9%2005 75.1% 62.0% 88.4% 69.4% 72.3% 76.6% 79.6% 70.6% 83.4% 82.7% 67.1% 87.5% 172.8% 54.9%

Report Year FPIC MAG Mutual

Med Mutual MD

Med Mutual NC ProMutual

Ct. Medical Ins Co.

Med Assurance MS

Held Net 1996 78.7% 85.5% 76.6% 96.4% 119.6% 100.4% 76.5%Loss & DCC 1997 110.9% 86.4% 60.5% 91.1% 131.7% 104.1% 96.7%Ratios 1998 109.6% 115.1% 77.6% 64.7% 173.4% 121.2% 126.1%

1999 96.2% 111.8% 102.1% 80.6% 119.9% 141.4% 191.2%2000 133.6% 116.4% 111.8% 75.2% 158.1% 171.9% 123.5%2001 104.6% 128.2% 117.8% 78.6% 153.6% 204.3% 176.5%2002 84.0% 98.6% 115.8% 68.8% 149.6% 156.1% 181.0%2003 66.8% 84.7% 109.5% 74.6% 132.6% 130.8% 130.4%2004 60.2% 85.2% 106.4% 71.1% 96.7% 117.4% 83.9%2005 70.6% 83.4% 82.7% 67.1% 87.5% 172.8% 54.9%

Schedule P Held Loss & DCC Ratios for Insurers in “Crisis States”

50.0%

75.0%

100.0%

125.0%

150.0%

175.0%

200.0%

1999 2000 2001 2002 2003 2004 2005

ProAssurance ISMIE Physicians Ins. Mut. Northwest Phys. State Volunteer

FPIC MAG Mutual Med Mutual MD ProMutual Med Assurance of MS

Market Concentrations

Measured using HHI (Herfindahl-Hirschman Index) Sum the square of the market share of each firm in a market The index can range from 0 to 10,000 0 = Perfect competition 10,000 = Perfect Monopoly U.S. Department of Justice considers a result of

less than 1,000 to be a competitive marketplace 1,000-1,800 to be a moderately concentrated marketplace 1,800 or greater to be a highly concentrated marketplace

Used by some regulators to determine rate regulation

Market Concentrations in “Crisis States”1999 2000 2001 2002 2003 2004 Annual

HHI HHI HHI HHI HHI HHI Exponential ChangeState Index Index Index Index Index Index Trend 2003-04

AR 3,132 3,413 2,807 1,752 2,446 2,316 -11.0% -5.3%CT 2,241 2,020 1,829 1,491 1,479 1,636 -10.7% 10.6%FL 986 882 891 1,013 1,110 1,318 3.8% 18.8%GA 2,036 1,833 2,110 1,684 2,094 2,149 -0.3% 2.6%IL 2,860 2,226 2,705 2,507 3,321 3,409 4.3% 2.6%KY 1,615 1,403 1,275 1,004 1,357 1,255 -6.6% -7.5%MA 5,519 5,579 4,689 3,670 3,474 2,874 -12.6% -17.3%MS 2,271 2,430 2,150 1,786 2,837 2,887 1.4% 1.8%MO 1,138 974 882 822 1,070 992 -2.9% -7.2%NV 2,100 2,103 1,815 945 891 1,406 -22.2% 57.8%NJ 4,321 4,156 3,089 3,797 2,491 2,188 -11.2% -12.1%NY 3,443 3,472 3,184 3,557 3,143 2,754 -1.6% -12.4%NC 2,022 2,111 1,391 1,350 1,337 1,427 -12.0% 6.7%OH 1,407 1,381 1,116 1,310 1,297 1,317 -2.1% 1.5%OR 1,599 1,872 1,722 1,803 1,817 1,923 2.2% 5.9%PA 1,568 1,730 1,253 1,114 1,374 750 -6.8% -45.4%RI 2,705 2,826 2,414 2,468 3,006 2,824 0.8% -6.0%TN 3,254 3,075 2,464 2,446 2,379 2,926 -8.2% 23.0%WA 3,767 3,955 3,285 2,399 2,408 2,012 -13.0% -16.4%WV 3,099 2,875 2,788 1,797 1,127 1,169 -22.1% 3.7%WY 3,264 3,518 3,596 3,054 3,377 2,502 -0.7% -25.9%

Data Sources: 2004 Direct Written Premium: A.M. Best Page 15 data.

A Call for Efficiency

A Call for Greater Efficiency

Thecurrent

system iswoefully

inefficient

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Medical Malpractice Group A & H Private PassengerAuto Liability

WorkersCompensation

Line of Business

Per

cent

age

of In

sure

r E

xpen

ses

Losses ( Claimants' Share) Losses ( Attorneys' Share) ALAEULAE Commissions Taxes, Licenses & Fees Other Acquisition Expense General Expenses

VA BRNICP Efficiency

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Supplier Goods and Services

Staff Salary

Patient Legal Costs

Other Patient Benefits

Patient Insurance Costs

Housing & Assistive Technology

Prescriptions & Medical Equipment

Hospital & Medical Services

Transportation

Home Nursing

PatientBenefits

Tort Reforms Impact on Efficiency Damage caps by themselves do not improve

system efficiency Other elements of MICRA should help Some newer reforms may help too

Attorney fee caps Birth Related Neurological Injury Funds (NICA) Prelitigation screening “I’m Sorry’ laws

I’m Sorry Laws Physicians want more communication Patients feel physicians are “hiding something” In most states, expressions of regret or empathy are

admissible as evidence Lexington, KY VA Hospital “I’m Sorry” laws,

Enacted in CA, CO, FL, MA, OR, TN, TX, WA AZ, ME and others are considering Providers/staff can say “I’m sorry this happened to you” CO only, “I’m sorry I did this”

without admissibility

I’m Sorry Laws Insurers are:

Training providers on how to apologize (mandatory) Coordinating with claims

Initial results are significant Reduced severities Reduced loss adjustment expense Reduced attorney involvement

(CO: 2 lawsuits in 433 claims) Improved patient satisfaction In many cases, much improved efficiency

Impact of “I’m Sorry” Laws Focus on claims <$35,000 Company’s can match apology with aggressive

claims settlement strategy (e.g. COPIC) Increase efficiency at all costs (including higher

pure loss severity) Reduces ALAE on small claims 35-65%

(3.5%-6.0% cost reduction overall) Actually increases small claimant net damages

YearState Enacted Bill Notes

AZ 2005 SB 1036 Acts of Apology and Responsibility

CA 2001 Acts of Sympathy

CO 2003 HB 1232 Acts of Apology, Sympathy and Fault

FL 2004 90.4026 Acts of Sympathy

GA 2005 Acts of Apology and Regret

IL 2005 HB 4847Acts of Apology and Explanation, with 72 Hour Time Limit

IA2006

PendingHB 2716 Acts of Apology and Sympathy

MA 1986/2005 Acts of Apology and Regret

MI2006

PendingHB 4259 Acts of Apology and Sympathy

MT 2005 HB 24 Acts of Apology and Sympathy

NC 2004 HB 669Acts of Apology. Allows offers to undertake corrective or remedial treatment or actions, and gratuitous acts

OH 2004 HB 215 Acts of Apology and Sympathy

OK 2004 HB 2661 Acts of Apology and Sympathy

OR 2003 HB 3361 Acts of Apology and Regret

TN 2003 Acts of Sympathy

TX 1999 Acts of Sympathy

VA 2005 Acts of Sympathy

VT

WA 2004 SB 6645 Acts of Apology

WY 2004HB 1004 / SB

Acts of Apology and Explanation

Case Law provides immunity for apologies

Survey of “I’m Sorry” Laws by State