Trends in Medical Malpractice Insurance
Behind the Chaos
American Academy of Orthopaedic SurgeonsWashington, DCApril 25, 2003
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
Property/Casualty Insurance Industry Overview
P/C Net Income After Taxes1991-2002 ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865$20,559
-$6,970
$2,903
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02
Sources: A.M. Best, ISO, Insurance Information Institute.
2001 was the first year ever with a full year net loss
2002 ROE = 1.0%
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03F
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2003F
Source: Insurance Information Institute; Fortune
There is an enormous gap between the p/c industry’s rate of return and that of most major industry groups
-5%
0%
5%
10%
15%
20%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
ROE Cost of Capital
ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2002
Source: The Geneva Association, Ins. Information Inst.
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
($60)
($50)
($40)
($30)
($20)
($10)
$0
$10
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Underwriting Gain (Loss)1975-2002
Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
P-C insurers paid $30.5 billion more in claims & expenses than they collected in
premiums in 2002
Medical Malpractice
ME
NH
MA
CT
PA
WVVA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI
MDDE
AL
VT
NY
DC
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
Medical Crises across the US
Crisis states
Crisis looming
AMA: Crises reached in at least 18 states !
PR
AK
Figure 1
Source: American Medical Association, March 2003
103.
7
108.
1
97.6 99
.7 106.
0
107.
9 115.
7
129.
5
133.
5
153.
3
165
108.
8 115.
7
106.
9
108.
4
106.
4
105.
8
101.
6
105.
6
107.
8
110.
0 115.
7
107.
2
127.
9
90
100
110
120
130
140
150
160
170
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002E
Medical Malpractice All Lines Combined Ratio
Medical Malpractice Combined Ratio
Source: AM Best, Conning, Insurance Information Institute
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!
Medical Malpractice: Underwriting Losses
$ Millions
-$230.8-$147.8
-$1,135.9
-$344.1
$111.6 $14.4
-$289.3-$388.0
-$804.9
-$1,529.2-$1,839.0
-$3,001.8-$3,500
-$3,000
-$2,500
-$2,000
-$1,500
-$1,000
-$500
$0
$500
90 91 92 93 94 95 96 1997 1998 1999 2000 2001
Source: Insurance Information Institute calculations based on data from A.M. Best.
Med Mal underwriting losses exploded by $2.7 billion or 938% between 1996 and 2001!
Medical Malpractice:Cumulative Underwriting Losses
$ Millions
-$231 -$379
-$1,515-$1,859-$1,747-$1,733
-$2,022-$2,410
-$3,215
-$4,744
-$6,583
-$9,585-$10,000
-$9,000
-$8,000
-$7,000
-$6,000
-$5,000
-$4,000
-$3,000
-$2,000
-$1,000
$0
90 91 92 93 94 95 96 97 98 99 00 01
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.
Medical Malpractice: Losses & Expenses Paid vs. Premiums Earned
$ Billions
$4.0
$4.0
$4.1 $4
.2
$4.9 $5
.1
$5.2 $5
.5
$5.6
$4.2
$4.1
$5.2
$4.6
$4.5
$5.1 $5
.3
$5.9
$6.7
$7.3
$8.6
$4.7
$4.8
$4.8
$4.8
$3
$4
$5
$6
$7
$8
$9
90 91 92 93 94 95 96 97 98 99 00 01
Earned Premiums Underwriting Loss
Source: Computed from A.M. Best data by the Insurance Information Institute
Over the period from 1996 through 2001, premium earned rose 16.8% while losses and expenses rose 68.9%
2001 Top Ten Verdicts
Source: LawyersWeekly USA, January 2002.
Value Issue State
$3 Billion Tobacco California
$1 Billion Land Contamination Louisiana
$480 Million Private Airplane Crash Florida
$312.8 Million Nursing Home Texas
$ 256 Million Police Auto Crash Colorado
$116 Million Intellectual Property Theft Virginia
$114.9 Million Medical Malpractice New York
$108.2 Million Inheritance Dispute Texas
$107.8 Million Medical Malpractice New York
$94.5 Million Real Estate California
2002 Top Ten Verdicts
Source: LawyersWeekly USA, January 2003.
Value Issue State
$28 Billion Tobacco (Product Liability) Florida
$2.2 Billion Negligence (Pharmacy Mal) Missouri
$270 Million Personal Injury (Burn) Kentucky
$225 Million Product Liability (Rollover) Texas
$150 Million Tobacco (Product Liability) Oregon
$122 Million Product Liab. (Auto Accident) Virginia
$97.2 Million Business Fraud California
$95.2 Million Med Mal (Birth Injury) New York
$91 Million Medical Malpractice New York
$80 Million Med Mal (Birth Injury) New York
$80 Million Prod. Liab/Personal Inj. (Auto) Missouri
Medical Malpractice: Tort Cost Growth is Skyrocketing
$ Billions
$1.2
$1.5
$1.9
$2.3
$5.4 $6
.5 $7.1
$7.0
$6.8
$7.1
$7.2 $7
.9 $8.7 $9
.4 $10.
8
$11
.6
$12.
4
$13.
5
$14.
6 $16.
2
$17.
6 $19.
4 $20.
9
$2.9
$3.6 $4
.4
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
$22
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00
Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute
•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!
Average Jury Award in Medical Malpractice Cases
$ Millions
$1.14
$2.02 $1.88 $1.93
$3.90
$2.92$3.29 $3.41
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
94 95 96 97 98 99 00 01
Source: Jury Verdict Research; Insurance Information Institute.
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.
Trends in Million Dollar Verdicts*
4%
10%
8%
21%
21%
36% 42
%
4%
11%
11%
27%
25%
43%
59%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VehicularLiability
PersonalNegligence
PremisesLiability
BusinessNegligence
GovernmentNegligence
MedicalMalpractice
ProductsLiability
95-97 98-99 2000-2001
*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.
Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants
10.1
%
8.0%
-1.1
%
2.1% 2.5%
0.2%
6.1% 7.
3% 8.1%
11.2
%
14.7
%
-5%
0%
5%
10%
15%
92 93 94 95 96 97 98 99 00 01 02E
Health Benefit Costs Rising Sharply
Source: NCCI; William M. Mercer, Insurance Information Institute.
Health care inflation is affecting the cost of medical care, no matter
what system it is delivered through
Investment Gain: Med Mal vs.All Commercial Lines*
*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
12.5%14.3% 14.1% 15.5% 15.6%
13.7%15.3%
13.1%
27.4%29.3% 30.2% 30.0%
28.1%
23.5%
27.6%
19.0%
0%
5%
10%
15%
20%
25%
30%
35%
94 95 96 97 98 99 00 01
Commercial Lines Med Mal
Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing
Medical Malpractice Investment Gain*
$ Billions
$1.5 $1.5
$2.1
$1.8
$1.5 $1.4$1.2
$1.5
$1.1
$1.3 $1.4 $1.5
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
90 91 92 93 94 95 96 97 98 99 00 01
*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
Investment returns have shrunk, but are still
important. “Heavy Lifting” must be done through
underwriting & pricing
Investment Overview
$0
$9
$18
$27
$36
$45
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Net Investment Income
History
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002 = $36.7B
Bil
lion
s
(US
$)
Investment income in 2002 fell 2.8% due primarily to historically low interest rates
Source: A.M. Best, Insurance Information Institute
0%
2%
4%
6%
8%
10%
12%
14%
16%
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
Interest Rates: Lower Than They’ve Been in Decades
*As of April 21, 2003.Source: Board of Governors, Federal Reserve System; Insurance Information Institute
1. 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.
2. 66% of the industry’s invested assets are in bonds
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
*As of April 22, 2003.Source: Ibbotson Associates, Insurance Information Institute
Total Returns for Large Company Stocks: 1970-2003*
2002 was 3rd consecutive year of decline for stocks
Will 2003 be the 4th?
P/C Industry Investments,by Type (as of Dec. 31, 2001)
Other5%
Bonds66%
Real Est. & Mortgages
1%
Common Stock21%
Cash & ST Secs.6%
Preferred Stock1%
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
Common stock accounts for about 1/5 of invested
assets
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.6
$57.9
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02
*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.Source: Insurance Services Office; Insurance Information Institute.
Investment gains are simply returning to “pre-bubble” levels
Solutions
Frequency of $1 Million + Jury Verdicts (Per 1,000 Doctors)
3.71
3.10
2.40
2.141.93
1.31
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
NY NJ OH FL US Avg. CA
Source: Jury Verdict Research, American Medical Association, Insurance Information Institute.
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.
Median Med Mal Jury Awards1996-2002
$806
,750
$1,0
00,0
00
$840
,000
$725
,000
$402
,500
$0$100$200
$300$400$500$600$700
$800$900
$1,000
FL NY PA TX CA
Source: Jury Verdict Research
($ 000s)
Loss Cost Changes by Number of Major Reforms by State 1985-1998
191.1%
207.0%
218.0%
240.1%
281.7%
352.0%
100% 150% 200% 250% 300% 350% 400%
6
5
4
3
2
1
Nu
mb
er o
f R
efo
rms
Source: Pennsylvania Medical Society
Excludes Ohio, Louisiana and Texas
States with only one medical
liability reform saw loss costs increase by
352% between 1985 and 1998!
Annual Premiums in 2001By Specialty Compared to California
$173
,000
$111
,000
$39,
000
$106
,000
$81,
000
$29,
000
$100
,000
$60,
000
$22,
000 $4
8,00
0
$28,
000
$10,
000
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
Florida M ichigan Illinois California
Ob/gyn Surgeon Internist
Source: Medical Liability Monitor
$ 000
Average liability premiums for California’s physicians
are at least 52% lower than in other states with no caps!
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 applesNeed allowances for high risk specialties/procedures
Insurance Information Institute On-Line
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