iaba annual meeting the new medical malpractice crisis: a historical perspective

IABA Annual Meeti ng

The New Medical Malpracti ce Crisis:A Historical Perspecti ve

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

2

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

3

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

4

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

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

6

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

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

8

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

9

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

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

11

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

12

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

Financial Results (cont.)

14

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

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

Financial Results (cont.)

16

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

Financial Results (cont.)

17

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

Financial Results (cont.)

18

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

)

Financial Results (cont.)

19

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

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

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

)

Questions / Comments

Arthur R. Randolph, II,FCAS, MAAA, CPCU, ARM, ARe

(770) 587-0351arandolph@pinnacleactuaries.com

Visit us at pinnacleactuaries.com

Experience the Pinnacle Difference! 22

Editorial contributor:Kwame A. Davis, FCAS, MAAATowers Watson