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Understanding the Medical Malpractice Crisis and Insurance Market Evolution

Gain insights into the historical perspective of the medical malpractice crisis, evolution of insurance market, financial results, and claims-made vs. occurrence coverage forms. Explore key trends and shifts in the MPL market.

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Understanding the Medical Malpractice Crisis and Insurance Market Evolution

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  1. IABA Annual MeetingThe New Medical Malpractice Crisis:A Historical Perspective August 4, 2012 Arthur R. Randolph, II, FCAS, MAAA, CPCU, ARM, ARe Senior Consulting Actuary Experience the Pinnacle Difference!

  2. Agenda • MPL Claim Characteristics • Evolution of the MPL Insurance Market • Financial Results • Claims-Made vs. Occurrence Coverage Form

  3. 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

  4. 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

  5. Financial Results *includes policyholder dividends Source: AM Best

  6. 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

  7. Financial Results (cont.) *includes policyholder dividends Source: AM Best

  8. 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

  9. 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

  10. Financial Results (cont.) *includes policyholder dividends Source: AM Best

  11. 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

  12. 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

  13. Financial Results (cont.) *includes policyholder dividends Source: AM Best

  14. Financial Results (cont.) Source: AM Best

  15. Financial Results (cont.) Source: AM Best

  16. Financial Results (cont.) Source: AM Best

  17. Financial Results (cont.) Source: AM Best

  18. Financial Results (cont.) Source: AM Best

  19. Financial Results (cont.) Source: AM Best

  20. Financial Results (cont.) Source: AM Best

  21. Financial Results (cont.) Source: AM Best

  22. Visit us at pinnacleactuaries.com Questions / Comments Arthur R. Randolph, II,FCAS, MAAA, CPCU, ARM, ARe (770) 587-0351 arandolph@pinnacleactuaries.com Editorial contributor: Kwame A. Davis,FCAS, MAAA Towers Watson Experience the Pinnacle Difference!

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