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C R I S I S

C R I S I SC R I S I S


CAS 2004 Seminar on Ratemaking

The Medical Malpractice

Insurance Crisis

C R I S I S




This medical malpractice crisis This medical malpractice crisis didn’t occur overnight.didn’t occur overnight.

C R I S I S




This medical malpractice crisis This medical malpractice crisis didn’t occur overnight. didn’t occur overnight.

We’ve been through medical We’ve been through medical malpractice crisis periods before. malpractice crisis periods before.

C R I S I S




This medical malpractice crisis This medical malpractice crisis didn’t occur overnight. didn’t occur overnight.

We’ve been through medical We’ve been through medical malpractice crisis periods before.malpractice crisis periods before.

Although not quite as Although not quite as EXTREME!EXTREME!

Historical Results

Medical Malpractice Industry – Loss + LAE Ratios

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Loss + LAE RatiosLoss + LAE Ratios

1985 : 149.3%

2001 : 131.1%

1989 : 73.2%

Historical Results

Medical Malpractice Industry – Expense Ratios

Loss + LAE Ratios Loss + LAE Ratios Expense +Dividend Expense +Dividend RatiosRatios

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Historical Results

Medical Malpractice Industry – Combined Ratios

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Loss + LAE RatiosLoss + LAE Ratios Expense + Dividend RatiosExpense + Dividend Ratios Combined RatiosCombined Ratios

Historical Results

Medical Malpractice Industry - Combined Ratios

Combined RatiosCombined Ratios

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

1985 : 163.5%

2001 : 153.3%

1989 : 89.1%

Historical Results

Medical Malpractice Industry – Investment Ratios

InvestmentInvestment RatiosRatiosCombined RatiosCombined Ratios

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

1992 : 51.5%

2002 : 12.4%

Historical Results

Medical Malpractice Industry – Operating Ratios

InvestmentInvestment Ratios Ratios Operating RatiosOperating RatiosCombined RatiosCombined Ratios

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

1985 : 126.1% 2001 : 134.3%

Historical Operating Results

Medical Malpractice Industry vs. P/C Industry

InvestmentInvestment RatiosRatiosCombined RatiosCombined Ratios

Medical Malpractice Industry P/C Industry

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Operating RatiosOperating Ratios

C R I S I S



Recap of Issues Leading to the Current Crisis

Intense competition during the 90s Intense competition during the 90s soft marketsoft market

Loss experience worsenedLoss experience worsened

Rising medical inflationRising medical inflation

Investment returns declinedInvestment returns declined

Prior year reserve redundancies Prior year reserve redundancies depleteddepleted

Reinsurance market hardenedReinsurance market hardened

Reduced capacityReduced capacity

States in Crisis - 2003

States in crisis

States show ing problem signs

States show ing no problem signs

Source: American Medical Association

C R I S I S



The Situation in Pennsylvania

CAT Fund (Mcare Fund)CAT Fund (Mcare Fund)Established 1975Established 1975

Originally covered $1 million xs $200,000Originally covered $1 million xs $200,000

Funded on a pay-as-you-go basisFunded on a pay-as-you-go basis

Unfunded liability of $2+ billionUnfunded liability of $2+ billion

Sins of past become burdens of current Sins of past become burdens of current providersproviders

Through recent legislation is being phased Through recent legislation is being phased out by raising underlying limits – fund out by raising underlying limits – fund

now now covers $500,000 xs $500,000.covers $500,000 xs $500,000.

C R I S I S




Malpractice limits of $1.2 million Malpractice limits of $1.2 million (recently changed to $1.0 million) (recently changed to $1.0 million) required to practicerequired to practice

Availability ProblemAvailability ProblemInsolvency of four major carriers between Insolvency of four major carriers between 1990 and 19981990 and 1998

PHICO, PIC, PIE, AHSPICPHICO, PIC, PIE, AHSPIC

Withdrawal of St. PaulWithdrawal of St. Paul

MIIX and Princeton non-renewed PA MIIX and Princeton non-renewed PA physicians in 2002physicians in 2002

C R I S I S




Recent Legislative ChangesRecent Legislative ChangesTort Reforms (Do NOT include limits on non-Tort Reforms (Do NOT include limits on non-economic damages)economic damages)

Insurance ReformsInsurance Reforms

Reduction of required primary limits to $1mReduction of required primary limits to $1m

Phase out of Mcare FundPhase out of Mcare Fund

Mcare abatement for physiciansMcare abatement for physicians

Patient Safety ReformsPatient Safety Reforms

C R I S I S



1996 — Top 20 Writers

Company/Group

1 St. Paul Group2 CNA Insurance Group3 MLMIC — NY4 Medical Protective Company5 Health Care Indemnity Inc.6 Doctors Company Insurance Group7 Illinois State Medical Exchange8 AIG9 MMI Companies Group

10 PIE Mutual Insurance Co.

RankAM BestRating

A+AA-AA-AB+A++AE

Early ‘98

C R I S I S




Company/Group

1 St. Paul Group2 CNA Insurance Group3 MLMIC — NY4 Medical Protective Company5 Health Care Indemnity Inc.6 Doctors Company Insurance Group7 Illinois State Medical Exchange8 AIG9 MMI Companies Group


RankAM BestRating

A+AA-AA-AB+A++AE

Early ‘98

GONE FROM THE MARKET

C R I S I S



MLMIC — NY


Company/Group

1 St. Paul Group2 CNA Insurance Group34 Medical Protective Company5 Health Care Indemnity Inc.6 Doctors Company Insurance Group7 Illinois State Medical Exchange8 AIG9 MMI Companies Group


RankAM BestRating

AA-AA-AB+A++

Early ‘98

DOWNGRADED

MLMIC — NY BMedical Protective Company A (neg)

Doctors Company Insurance Group A-

C R I S I S




Company/Group

11 Physicians Reciprocal Group12 Princeton Insurance Companies13 MIIX Group14 Frontier Insurance Group15 Norcal Mutual Insurance Company16 ProAssurance17 PHICO Ins. Co.18 SCPIE19 ProMutual 20 Farmers Insurance Group

RankAM BestRating

NR-4A-AA-AAA-AA-A-

Early ‘98

C R I S I S




Company/Group


RankAM BestRating

NR-4A-AA-AAA-AA-A-

Early ‘98

GONE FROM THE MARKET

C R I S I S




Company/Group


RankAM BestRating

NR-4A-AA-AAA-AA-A-

Early ‘98

Princeton Insurance Companies B-

ProAssurance A-

SCPIE B

DOWNGRADED

C R I S I S



MEDICAL MUTUAL Liability Insurance Society of Maryland

Medical Mutual Payout

Year

20032002200120001999199819971996199519941993

Indemnity(In millions)

ALAE(In millions)

$ 39.6 $ 16.3$ 33.9 $ 15.6$ 32.7 $ 14.6

12 – 31

$ 32.4 $ 15.9$ 33.5 $ 15.2$ 37.9 $ 15.3$ 25.9 $ 13.3$ 28.2 $ 12.2$ 35.7 $ 13.8$ 24.7 $ 14.1

$ 75.7 $ 17.6

C R I S I S



100000

200000

300000

400000

1998 1999 2000 2001 2002 2003

Calendar Years

223,228255,325

233,605

266,634 271,518

386,042

Medical Mutual Liability Insurance Society of MarylandAverage Indemnity Paid per Claims Closed with Indemnity

C R I S I S




1998–2001 28,268 69 $54.6 Million

1994–1997 27,235 44 $31.7 Million

% Change: 4% 57% 72%

ReportYear

PhysicianExposures

Numberof Claims

Dollar AmountPaid

(INCREASE) (INCREASE)

Closed Claims of $400,000 or More.

NOTE: 4 Report Years at End of 5 Years

(INCREASE)

C R I S I S



Percent* of Paid Claims with Indemnity Payment >=$1M

0.64%1.47%

2.70%3.32%

3.78%4.33%4.90%

5.96%

7.16%

8.15%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

1985 1995 1997 1999 2001

PIAA*As a percentage of Paid Claims with Indemnity Payment, Data as of 2/15/04

C R I S I S



Selection of Recent Cases with High Economic Damages

INJURY

ALLEGEDECONOMICDAMAGES

37YOM alleging total disability due to headaches

Birth-related damages, CP

Birth-related damages, brain injury


5-month-old, brain injury, CP

Birth-related damage, profound retardation

73YOM, quadriplegia


38YOF, reflex sympathetic dystrophy

$ 15.4 Million

$ 15.75 Million

$ 19.4 Million

$ 22.4 Million

$ 33.6 Million

$ 17.4 Million

$ 5.0 Million

$ 10.2 Million

$ 3.9 Million

C R I S I S



““Among the malpractice claims we Among the malpractice claims we studied, the severity of the patient’s studied, the severity of the patient’s disability, not the occurrence of an disability, not the occurrence of an adverse event or an adverse event adverse event or an adverse event due to negligence, was predictive of due to negligence, was predictive of payment to the plaintiff.”payment to the plaintiff.”

Source: “Relation between Negligent Adverse Events Source: “Relation between Negligent Adverse Events and the Outcomes of Medical Malpractice Litigation,” by and the Outcomes of Medical Malpractice Litigation,” by T.A. Brennan, C.M. Sox, and H.R. Burstin; T.A. Brennan, C.M. Sox, and H.R. Burstin; New England New England Journal of MedicineJournal of Medicine, 12/26/96., 12/26/96.


C R I S I S



% of Claims Closed with Paid Indemnity

Projected Ultimate % Paid

ReportYear

ProjectedUltimate

Averageof Range Increase

2001

2000

1999

1998

1997

1996

1995

1994

32%

25%

26%

25%

22%

23%

23%

20%

27.0% +22.7%

22.0%

C R I S I S



Summary-Insurance Company Perspective

Capacity has left the market; Capacity has left the market; Capital is stressed for those left Capital is stressed for those left standingstanding

Severity is the driving forceSeverity is the driving force

Companies cannot afford to Companies cannot afford to underprice, but uncertainty underprice, but uncertainty prevailsprevails

Continued need for tort reformsContinued need for tort reforms

Continued external pressures to Continued external pressures to slow down rate increasesslow down rate increases

C R I S I S




The Medical Malpractice

Insurance Crisis

c r i s i sc r i s i s c r i s i sc r i s i s c r i s i sc r i s i s c r i s i sc r i s i s c r i s...

Documents

s soft market loss experience

pc industry investment

ratemaking slide

underlying limits fund

recent legislation

burdens of current providers

paul miix

ahspic withdrawal of