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Casualty Loss Reserve Seminar
Current Issues and Trends in Medical Malpractice
Edward Wrobel
Gail Tverberg
September 12, 2006
This document is incomplete without the accompanying discussion; it is confidential
and intended solely for the information and benefit of the immediate recipient hereof.
Overview
 Observations on financial results – Edward Wrobel
 Malpractice tort reforms and their impact on loss data
– Gail Tverberg
 Significant risk and uncertainty in medical malpractice
loss reserving – Bill Burns
 Observations and trends – Edward Wrobel
 Closing/questions
2
Observations on Financial Results
Edward Wrobel
Observations on Financial Results
180%
160%
140%
120%
100%
80%
60%
40%
20%
20
03
20
00
19
97
19
94
19
91
19
88
19
85
19
82
19
79
19
76
0%
Combined
Source: A.M. Best’s Aggregates and Averages
4
Observations on Financial Results
180%
160%
140%
120%
100%
80%
60%
40%
20%
Combined
20
03
20
00
19
97
19
94
19
91
19
88
19
85
19
82
19
79
19
76
0%
Investment Gain
Source: A.M. Best’s Aggregates and Averages
5
Observations on Financial Results
180%
160%
140%
120%
100%
80%
60%
40%
20%
Combined
Investment Gain
20
03
20
00
19
97
19
94
19
91
19
88
19
85
19
82
19
79
19
76
0%
Operating
Source: A.M. Best’s Aggregates and Averages
6
Observations on Financial Results
Medical Malpractice - Occurrence & Claims-Made
Direct
14.0
160.0
140.0
12.0
100.0
8.0
80.0
6.0
Loss Ratio
Premiums Earned (billions)
120.0
10.0
60.0
4.0
40.0
2.0
20.0
0.0
0.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Coverage Year
Source: A.M. Best’s Aggregates and Averages
Premiums Earned
Loss Ratio
7
Observations on Financial Results
Medical Malpractice - Occurrence & Claims-Made
Ceded
4.5
200.0
4.0
180.0
160.0
140.0
3.0
120.0
2.5
100.0
2.0
80.0
Loss Ratio
Premiums Earned (billions)
3.5
1.5
60.0
1.0
40.0
0.5
20.0
0.0
0.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Coverage Year
Premiums Earned
Loss Ratio
Source: A.M. Best’s Aggregates and Averages
8
Observations on Financial Results
9.0
160.0
8.0
140.0
7.0
120.0
6.0
100.0
5.0
80.0
4.0
Loss Ratio
Premiums Earned (millions)
Medical Malpractice - Occurrence & Claims-Made
Net
60.0
3.0
40.0
2.0
20.0
1.0
0.0
0.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Coverage Year
Premiums Earned
Loss Ratio
Source: A.M. Best’s Aggregates and Averages
9
Observations on Financial Results
Medical Malpractice - Occurrence & Claims-Made
Loss Ratios
200.0
180.0
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Coverage Year
Direct
Ceded
Net
Source: A.M. Best’s Aggregates and Averages
10
Net Loss & DCC Schedule P - Part 2
Occurrence and Claims Made
Ultimate Loss at Different Valuation Points
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Coverage Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: A.M. Best
11
Observations on Financial Results
 Financial results impacted by...
 1990s
— modest loss trends
— favorable reserve development
— relatively high investment returns
— expansion
— slippage in pricing
 2000s
— loss trends pick up
— unfavorable reserve development
— investment returns decline
— rates adjusted
12
Malpractice Tort Reforms and Their
Impact on Loss Data
Gail E. Tverberg
Overview
 State Reforms by Year
 Federal Reforms
 Impacts of Tort Reforms on Loss Data
 Industry Calendar Year Data
14
State Reforms by Year - 2003
 Tort reforms in several large states
 Florida: $500K physician / $750K hospital
non-economic damage (NED) cap
 Idaho: $250K NED cap
 Ohio: Variable NED cap to $1M; collateral source
offset
 Oklahoma: $300K NED cap for obstetrics
 Texas: $250K NED cap; mandatory periodic
payments; joint and several liability changes
 West Virginia: $250K - $500K NED cap
15
State Reforms by Year - 2004
 Tort reforms in several smaller states, and
enhancements to previous reforms in larger states
 Florida: Cap on attorney fees
 Massachusetts: Reduction in pre-judgment interest
 Mississippi: $500K NED cap
 Nevada: Enhancements to $350K NED cap;
attorney fee cap; periodic payments
 Ohio: Reduction in pre-judgment interest; NED cap
lowered to $250K - $500K
 Oklahoma: $350K NED cap enhancements;
changes to joint and several liability
16
State Reforms by Year - 2005
 More tort reforms – not as significant as in 2003
 Alaska: $250K - $400K NED cap
 Connecticut: Weak package, including small reduction in
prejudgment interest
 Georgia: $350K NED cap; joint and several liability changes;
venue changes
 Illinois: $500K physician, $1M hospital NED cap
 Missouri: $350K NED cap; joint and several liability changes;
collateral source; venue
 South Carolina: $350K NED cap; joint and several liability
changes
 Many states: Evidence of apology not admissible in court
17
State Reforms by Year – 2005 (cont’d.)
 Other 2005 changes
 New Jersey: Mandatory offer of $5,000 deductible;
premium subsidy; reporting requirements
 Pennsylvania: Joint and several liability reforms
overturned
 Wisconsin: $350K NED cap overturned
18
State Reforms by Year - 2006
 Very few reforms in 2006
 Florida: Joint and Several Liability Reform
 Wisconsin: $750K NED cap (to replace $350K cap
struck down in 2005)
19
Federal Tort Reform
 Federal NED cap legislation introduced each year
 2006 legislation patterned after Texas legislation
 Filibuster threatened
 Failed to get 60 votes needed to invoke cloture
20
Impact of Tort Reforms on Loss Data
 Legislation states when a given reform is effective
 Injuries after xx/xx/xxxx
 Accident year basis
 Often used on non-economic damage caps or
changes in statute of limitations
 Suits filed after xx/xx/xxxx
 Similar to report year basis
 For example, may be used on change in
prejudgment interest rate, or change in periodic
payment requirement
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Impact of Tort Reforms on Loss Data
(cont’d.)
 Claims paid after xx/xx/xxxx
 Rarely see this for true tort reforms – more often, for
other changes
 Example – collect closed claim data after given
date; new disciplinary procedures for physicians
after a given date
 Legislation is generally a package of reforms
 Different parts may have different reform effective
dates
22
Impact of Tort Reforms on Loss Data
(cont’d.)
 Actual impact on loss data seems to differ from theoretical
 Indirect impacts as well as direct
 Typical impacts
 Large jump in claims reported and claims paid
— Occurs shortly after legislation is passed, before it
becomes effective
— Purpose: avoid the new law
 Drop in claims reported after effective date
— Empty pipeline
— Wait to see how new legislation will work out
 May bounce back
23
Impact of Tort Reforms on Loss Data
(cont’d.)
 True reforms
 Will have a long-term effect
 May reduce annual trend rate
 May need to be tested in court to be fully effective
 Indirect impact on jurors
 May result from hearing about need for legislation
 Thus, possible to have some effect in states without
reforms
24
Change in National Practitioner Databank
Payments
States with 2003 Tort Reforms Compared to Other States (in millions)
Average Annual Payments
2000 to 2003
2004 to 2005
% Change
$317.2
$264.3
-17%
6.8
8.4
23%
180.9
132.3
-27%
34.3
40.3
17%
245.7
219.1
-11%
38.8
18.3
-53%
Subtotal
$823.8
$682.7
-17%
US Total
$4,188.2
$4,164.1
-1%
US Total ex 2003
$3,364.3
$3,481.4
3%
States with Reforms
Florida
Idaho
Ohio
Oklahoma
Texas
West Virginia
Reform States
25
Florida – AM Best Page 14 Data ($ millions)
$ Millions
1,000
900
800
700
600
500
400
300
200
100
0
2000
2001
Written Premium
2002
Paid Loss
2003
2004
Incurred Loss
2005
Paid ALAE
26
Texas – AM Best Page 14 Data ($ millions)
700
600
$ Millions
500
400
300
200
100
0
2000
2001
Written Premium
2002
Paid Loss
2003
2004
Incurred Loss
2005
Paid ALAE
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Observations on Trends
Edward Wrobel
Observations on Trends
 Frequency
 Generally flat to down
 Exposure base considerations?
 Severity
 Following surge in late 1990s/early 2000s, leveling
off?
 Heavily influenced by jurisdiction
 Some tort-reform driven, some not
 Other factors?
 Impact on reserving
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Medical Malpractice
P&S Pure Premium
$200,000 Limits
40
+31%
(% Change)
30
20
+18%
+16%
+15%
+12%
10
0
1
2
3
4
5
Time
Source: 1990 St. Paul Filing
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Medical Malpractice
St. Paul Countrywide
P&S Pure Premium
$200,000 Limits
40
+31%
(% Change)
30
20
+18%
+16%
+15%
+12%
10
+7%
+6%
+3%
+1%
0
1981
1982
Source: 1990 St. Paul Filing
1983
1984
1985
1986
1987
1988
1989
Year
31
St. Paul-Hospitals
Frequency
0.021
0.02
0.019
0.018
0.017
0.016
0.015
0.014
0.013
0.012
0.011
0.01
0.009
0.008
1979
1980
1981
1982
1983
1984
Actual
1985
1986
1987
1988
Fit
32
St. Paul-Hospitals
Severity
18
17
16
(thousands)
15
14
13
12
11
10
9
8
7
6
1979
1980
1981
1982
1983
Actual
1984
1985
1986
1987
1988
Fit
33
St. Paul-Hospitals
Pure Premium
300
280
260
240
220
200
180
160
140
120
100
80
60
40
1979
1980
1981
1982
1983
1984
Actual
1985
1986
1987
1988
Fit
34
Questions?