Transcript No Slide Title

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
Tel: (212) 346-5520  Fax: (212) 732-1916  [email protected]  www.iii.org
Property/Casualty Insurance
Industry Overview
P/C Net Income After Taxes
1991-2002 ($ Millions)
2001 was the first year ever
with a full year net loss
$40,000
$36,819
2002 ROE = 1.0%
$30,773
$30,000
$24,404
$20,598
$19,316
$20,000
$21,865
$20,559
$14,178
$10,870
$10,000
$5,840
$2,903
$0
-$6,970
-$10,000
91
92
93
94
95
96
Sources: A.M. Best, ISO, Insurance Information Institute.
97
98
99
00
01
02
ROE: P/C vs. All Industries
1987–2003F
20%
15%
10%
5%
There is an enormous gap between
the p/c industry’s rate of return and
that of most major industry groups
0%
-5%
87
88
89
90
91
92
93
94
US P/C Insurers
Source: Insurance Information Institute; Fortune
95
96
97
98
99
All US Industries
00
01
02
03F
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
20%
15%
5%
10.2. pts
14.6 pts
10%
US P/C insurers have missed
their cost of capital by an
average 6.9 points since 1991
0%
-5%
1991
1992
1993
1994
1995
1996
1997
Source: The Geneva Association, Ins. Information Inst.
1998
1999
ROE
2000
2001
2002
Cost of Capital
Underwriting Gain (Loss)
1975-2002
$10
$0
$ Billions
($10)
($20)
($30)
($40)
($50)
P-C insurers paid $30.5 billion more in
claims & expenses than they collected in
premiums in 2002
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
($60)
Source: A.M. Best, Insurance Information Institute
Medical Malpractice
Figure 1
Medical Crises across the US
AMA: Crises reached in at least 18 states !
AK
AL
WA
ME
MT
ND
VT
NH
MN
OR
ID
MA
NY
WI
SD
CT
MI
RI
WY
NJ
PA
IA
DC
OH
NE
IL
NV
IN
DE
MD
WV
UT
VA
CO
MO
KS
KY
CA
NC
TN
AZ
OK
NM
SC
AR
HI
MS
AL
GA
LA
TX
Crisis states
Crisis looming
Source: American Medical Association, March 2003
FL
PR
Medical Malpractice
Combined Ratio
170
Local market collapses
150
107.2
115.7
110.0
133.5
107.8
105.6
107.9
101.6
106.0
105.8
99.7
106.4
108.4
97.6
108.1
106.9
100
115.7
127.9
115.7
103.7
108.8
130
Insurers in 2001 paid out an
estimated $1.65 for every $1
they earned in premiums!
129.5
HC Providers seeking govt. protection
140
110
153.3
Increased mutualization
160
120
165
Trial lawyers have destroyed commercial
viability of med mal. The future holds:
90
1991
1992
1993
1994
1995
1996
1997
Medical Malpractice
Source: AM Best, Conning, Insurance Information Institute
1998
1999
2000
2001 2002E
All Lines Combined Ratio
Medical Malpractice:
Underwriting Losses
$ Millions
$500
$111.6 $14.4
$0
-$147.8
-$500 -$230.8
-$289.3 -$388.0
-$344.1
-$1,000
-$804.9
-$1,135.9
-$1,500
-$1,529.2
-$1,839.0
-$2,000
-$2,500
-$3,000
Med Mal underwriting losses exploded by $2.7
billion or 938% between 1996 and 2001!
-$3,001.8
-$3,500
90
91
92
93
94
95
96
1997
1998
Source: Insurance Information Institute calculations based on data from A.M. Best.
1999
2000
2001
Medical Malpractice:
Cumulative Underwriting Losses
$ Millions
$0
-$1,000
-$231 -$379
-$1,515
-$1,859-$1,747-$1,733-$2,022
-$2,410
-$2,000
-$3,000
-$3,215
-$4,000
-$5,000
-$4,744
-$6,000
-$7,000
-$8,000
-$9,000
-$6,583
The cumulative underwriting loss in Med Mal
from 1990-2001 totals nearly $10 billion!
-$10,000
-$9,585
90
91
92
93
94
95
96
97
98
Source: Insurance Information Institute calculations based on data from A.M. Best.
99
00
01
Medical Malpractice: Losses & Expenses
Paid vs. Premiums Earned
97
98
99
$7.3
$5.6
$5.2
96
$5.5
$6.7
$5.1
$5.9
$4.9
$5.3
92
$4.8
$5.1
91
$4.8
$4.1
90
$4.8
$4.0
$4.1
$4
$4.0
$4.2
$5
$5.2
$6
$4.7
$4.5
$7
Over the period from 1996 through
2001, premium earned rose 16.8%
while losses and expenses rose 68.9%
$4.2
$4.6
$8
$8.6
$ Billions
$9
00
01
$3
93
94
95
Earned Premiums
Underwriting Loss
Source: Computed from A.M. Best data by the Insurance Information Institute
2001 Top Ten Verdicts
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
Source: LawyersWeekly USA, January 2002.
2002 Top Ten Verdicts
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
Source: LawyersWeekly USA, January 2003.
Medical Malpractice:
Tort Cost Growth is Skyrocketing
$2.3
$1.9
$2
$1.5
$4
$1.2
$4.4
$6
$2.9
$3.6
$8.7
$7.9
$7.2
$7.1
$6.8
$7.0
$6.5
$8
$5.4
$10
$7.1
$12
$16.2
$14.6
$13.5
$14
$12.4
$16
•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!
$11.6
$18
$10.8
$20.9
$19.4
$20
$9.4
$22
•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!
$17.6
$ Billions
$0
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
Average Jury Award in
Medical Malpractice Cases
$ Millions
$3.90
$4.0
$3.5
$2.92
$3.0
$2.5
$2.0
$1.5
$2.02
$1.88
$1.93
95
96
97
$1.14
$1.0
$0.5
$3.29
$3.41
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.
$0.0
94
98
Source: Jury Verdict Research; Insurance Information Institute.
99
00
01
Trends in Million Dollar Verdicts*
100%
11%
8%
10%
11%
6%
4%
10%
4%
68%
42%
36%
25%
21%
20%
10%
30%
17%
40%
27%
50%
21%
60%
44%
70%
54%
Very sharp jumps in multi-million
dollar awards in recent years across
virtually all types of defendants
43%
80%
47%
95-97
59%
2000-2001
98-99
90%
0%
Vehicular
Liability
Personal
Negligence
Premises
Liability
Business
Negligence
Medical
Government
Negligence Malpractice
*Verdicts of $1 million or more.
Source: Jury Verdict Research; Insurance Information Institute.
Products
Liability
96
11.2%
8.1%
6.1%
95
0.2%
2.5%
5%
2.1%
10%
8.0%
10.1%
15%
7.3%
Health care inflation is affecting the
cost of medical care, no matter what
system it is delivered through
14.7%
Health Benefit Costs Rising Sharply
-1.1%
0%
-5%
92
93
94
97
98
Source: NCCI; William M. Mercer, Insurance Information Institute.
99
00
01
02E
Investment Gain: Med Mal vs.
All Commercial Lines*
Investment returns have shrunk, but are still important. “Heavy
Lifting” must be done through underwriting & pricing
35%
30%
27.4%
29.3%
30.2%
30.0%
28.1%
27.6%
23.5%
25%
19.0%
20%
15% 12.5%
14.3%
14.1%
95
96
15.5%
15.6%
13.7%
15.3%
13.1%
10%
5%
0%
94
Commercial Lines
97
98
99
00
01
Med Mal
*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
Medical Malpractice Investment Gain*
Investment returns have
shrunk, but are still
important. “Heavy Lifting”
must be done through
underwriting & pricing
$ Billions
$2.5
$2.1
$2.0
$1.5
$1.8
$1.5
$1.5
$1.3
$1.4
$1.5
$1.5
$1.5
$1.4
$1.2
$1.1
$1.0
$0.5
$0.0
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 Overview
Net Investment Income
$45
Billions
(US$)
$36
Investment income in 2002
fell 2.8% due primarily to
historically low interest rates
$27
History
1997 Peak = $41.5B
$18
2000= $40.7B
2001 = $37.7B
$9
2002 = $36.7B
$0
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
Source: A.M. Best, Insurance Information Institute
Interest Rates: Lower Than
They’ve Been in Decades
16%
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.
66% of the industry’s invested assets are in bonds
14%
12%
2.
10%
8%
6%
4%
2%
3-Month T-Bill
1-Yr. T-Bill
10-Year T-Note
*As of April 21, 2003.
Source: Board of Governors, Federal Reserve System; Insurance Information Institute
2002
2003
*
2000
2001
1998
1999
1996
1997
1994
1995
1992
1993
1990
1991
1988
1989
1986
1987
1984
1985
1982
1983
1980
1981
0%
Total Returns for Large Company
Stocks: 1970-2003*
40%
30%
20%
10%
*As of April 22, 2003.
Source: Ibbotson Associates, Insurance Information Institute
2002
2000
1998
1994
1992
1990
1988
1986
1984
1982
1980
1978
-30%
1976
Will 2003 be the 4th?
1974
-20%
1972
2002 was 3rd consecutive
year of decline for stocks
1970
-10%
1996
0%
P/C Industry Investments,
by Type (as of Dec. 31, 2001)
Common
stock accounts
for about 1/5
of invested
assets
Common Stock
21%
Other
5%
Cash & ST Secs.
6%
Bond Holdings, by Type
Industrial & Misc.
32.5%
Special Revenue
30.5%
Governments
18.0%
States/Terr/Other
15.4%
Public Utilities
Real Est. &
Mortgages
1%
Preferred Stock
1%
Source: A.M. Best, Insurance Information Institute
3.1%
Parents/Subs/Affiliates 0.5%
Bonds
66%
Property/Casualty Insurance
Industry Investment Gain*
$ Billions
$57.9
$60
$52.3
$56.9
$51.9
$47.2
$50
$44.4
$42.8
$40
$36.6
$35.4
$30
Investment gains are simply
returning to “pre-bubble” levels
$20
$10
$0
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.
Solutions
Frequency of $1 Million + Jury Verdicts
(Per 1,000 Doctors)
4.0
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.
3.71
3.5
3.10
3.0
2.40
2.5
2.14
1.93
2.0
1.5
1.31
1.0
0.5
The frequency of awards for $1 million and
up in CA is 32% below the national average.
0.0
NY
NJ
OH
FL
US Avg.
CA
Source: Jury Verdict Research, American Medical Association, Insurance Information Institute.
Median Med Mal Jury Awards
1996-2002
FL
Source: Jury Verdict Research
NY
PA
TX
$402,500
$725,000
$840,000
$1,000,000
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
$806,750
($ 000s)
CA
Loss Cost Changes by Number of
Major Reforms by State 1985-1998
Excludes Ohio, Louisiana and Texas
Number of Reforms
1
352.0%
2
3
4
5
6
100%
281.7%
States with only
one medical
liability reform
saw loss costs
increase by
352% between
1985 and 1998!
240.1%
218.0%
207.0%
191.1%
150%
200%
Source: Pennsylvania Medical Society
250%
300%
350%
400%
Florida
Source: Medical Liability Monitor
Illinois
California
$10,000
$28,000
$48,000
$22,000
Average liability premiums for
California’s physicians are at
least 52% lower than in other
states with no caps!
$60,000
$29,000
Michigan
Internist
$100,000
$106,000
Surgeon
$81,000
Ob/gyn
$39,000
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
$111,000
$ 000
$173,000
Annual Premiums in 2001
By Specialty Compared to California
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
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