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Trends in Medical Malpractice Insurance Behind the Chaos

Trends in Medical Malpractice Insurance Behind the Chaos. American Academy of Orthopaedic Surgeons Washington, DC April 25, 2003. Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038

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Trends in Medical Malpractice Insurance Behind the Chaos

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  1. Trends in Medical Malpractice InsuranceBehind the Chaos American Academy of Orthopaedic Surgeons Washington, DC April 25, 2003 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org  www.iii.org

  2. Property/Casualty Insurance Industry Overview

  3. P/C Net Income After Taxes1991-2002 ($ Millions) • 2001 was the first year ever with a full year net loss • 2002 ROE = 1.0% Sources: A.M. Best, ISO, Insurance Information Institute.

  4. ROE: P/C vs. All Industries 1987–2003F There is an enormous gap between the p/c industry’s rate of return and that of most major industry groups Source: Insurance Information Institute; Fortune

  5. ROE vs. Cost of Capital: US P/C Insurance:1991 – 2002 There is an enormous gap between the industry’s cost of capital and its rate of return 14.6 pts 10.2. pts US P/C insurers have missed their cost of capital by an average 6.9 points since 1991 Source: The Geneva Association, Ins. Information Inst.

  6. Underwriting Gain (Loss)1975-2002 $ Billions P-C insurers paid $30.5 billion more in claims & expenses than they collected in premiums in 2002 Source: A.M. Best, Insurance Information Institute

  7. Medical Malpractice

  8. WA ME ND NH MN MA OR CT ID MI RI NJ PA IA NE DE IL MD WV VA NC OK AZ HI LA TX Figure 1 Medical Crises across the US AMA: Crises reached in at least 18 states ! AK AL MT VT NY WI SD WY DC OH IN NV UT CO MO KY KS CA TN SC AR NM AL GA MS Crisis states Crisis looming FL PR Source: American Medical Association, March 2003

  9. Medical Malpractice Combined Ratio • Trial lawyers have destroyed commercial viability of med mal. The future holds: • Increased mutualization • Local market collapses • HC Providers seeking govt. protection Insurers in 2001 paid out an estimated $1.65 for every $1 they earned in premiums! Source: AM Best, Conning, Insurance Information Institute

  10. Medical Malpractice: Underwriting Losses Med Mal underwriting losses exploded by $2.7 billion or 938% between 1996 and 2001! Source: Insurance Information Institute calculations based on data from A.M. Best.

  11. Medical Malpractice:Cumulative Underwriting Losses The cumulative underwriting loss in Med Mal from 1990-2001 totals nearly $10 billion! Source: Insurance Information Institute calculations based on data from A.M. Best.

  12. Medical Malpractice: Losses & Expenses Paid vs. Premiums Earned Over the period from 1996 through 2001, premium earned rose 16.8% while losses and expenses rose 68.9% Source: Computed from A.M. Best data by the Insurance Information Institute

  13. 2001 Top Ten Verdicts Source: LawyersWeekly USA, January 2002.

  14. 2002 Top Ten Verdicts 7 of the top 20 awards in 2001/2002 were related to medical liability Total Cost = $3.0 Billion! Source: LawyersWeekly USA, January 2003.

  15. Medical Malpractice: Tort Cost Growth is Skyrocketing • Over the period from 1990 through 2000, medical malpractice tort costs rose 140%, more than double the 60% increase in medical costs generally over the same period! • Over the period from 1975 through 2000, medical malpractice tort costs skyrocketed by 1,642% while medical costs generally rose 449%, nearly 4 times as fast! Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute

  16. Average Jury Award in Medical Malpractice Cases The average med mal jury award more than tripled between 1994 and 2001! These awards (and countless settlements) are the principal factors responsible for today’s chaotic market conditions & higher rates. Source: Jury Verdict Research; Insurance Information Institute.

  17. Trends in Million Dollar Verdicts* Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants *Verdicts of $1 million or more. Source: Jury Verdict Research; Insurance Information Institute.

  18. Health Benefit Costs Rising Sharply Health care inflation is affecting the cost of medical care, no matter what system it is delivered through Source: NCCI; William M. Mercer, Insurance Information Institute.

  19. Investment Gain: Med Mal vs.All Commercial Lines* Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing *As a % of net earned premium. Investment gains consists primarily of interest, dividends and realized capital gains and losses. Source: A.M. Best; Insurance Information Institute estimate

  20. Medical Malpractice Investment Gain* Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing *Imputed from investment gain data as a % of net earned premium. Investment gains consists primarily of interest, dividends and realized capital gains and losses. Source: A.M. Best; Insurance Information Institute estimate

  21. Investment Overview

  22. Net Investment Income Investment income in 2002 fell 2.8% due primarily to historically low interest rates Billions (US$) History 1997 Peak = $41.5B • = $40.7B • = $37.7B • = $36.7B Source: A.M. Best, Insurance Information Institute

  23. Interest Rates: Lower Than They’ve Been in Decades • Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund. • 66% of the industry’s invested assets are in bonds *As of April 21, 2003. Source: Board of Governors, Federal Reserve System; Insurance Information Institute

  24. Total Returns for Large Company Stocks: 1970-2003* • 2002 was 3rd consecutive year of decline for stocks • Will 2003 be the 4th? *As of April 22, 2003. Source: Ibbotson Associates, Insurance Information Institute

  25. P/C Industry Investments,by Type (as of Dec. 31, 2001) Common stock accounts for about 1/5 of invested assets Bond Holdings, by Type Industrial & Misc. 32.5% Special Revenue 30.5% Governments 18.0% States/Terr/Other 15.4% Public Utilities 3.1% Parents/Subs/Affiliates 0.5% Source: A.M. Best, Insurance Information Institute

  26. Property/Casualty Insurance Industry Investment Gain* Investment gains are simply returning to “pre-bubble” levels *Investment gains consists primarily of interest, stock dividends and realized capital gains and losses. Source: Insurance Services Office; Insurance Information Institute.

  27. Solutions

  28. Frequency of $1 Million + Jury Verdicts (Per 1,000 Doctors) CA’s Medical Injury Compensation Reform Act, passed in 1975, has helped to contain jumbo jury awards, keeping med mal premiums affordable and health care available. The frequency of awards for $1 million and up in CA is 32% below the national average. Source: Jury Verdict Research, American Medical Association, Insurance Information Institute.

  29. Median Med Mal Jury Awards1996-2002 ($ 000s) Source: Jury Verdict Research

  30. Loss Cost Changes by Number of Major Reforms by State 1985-1998 Excludes Ohio, Louisiana and Texas States with only one medical liability reform saw loss costs increase by 352% between 1985 and 1998! Source: Pennsylvania Medical Society

  31. Annual Premiums in 2001By Specialty Compared to California $ 000 Average liability premiums for California’s physicians are at least 52% lower than in other states with no caps! Source: Medical Liability Monitor

  32. Few Simple Solutions to a Complex Problem • Blame Game: So-called “consumer” advocates who say the crisis is the result of insurer investment losses or charged too little years ago, besides being generally wrong, are obfuscating the truth and delaying reforms. • Solutions like taxing insurance premiums to fund med mal trusts are gimmicks that don’t solve underlying problem—not even a band aid. • Prior-approval style rate regulation is a bona-fide failure • Virtually universal agreement that MICRA-like caps on non-economic awards work • Many states now adopting such caps now • Doctors: Reign in the the bad apples • Need allowances for high risk specialties/procedures

  33. Insurance Information Institute On-Line WWW.III.ORG If you would like a copy of this presentation, please give me your business card with e-mail address

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