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How did our
Professional Liability
Loss Ratio get over 140%?
Prepared For:
Midwestern Actuarial Forum
Fall 2002
Prepared By:
Kevin Conley, FCAS
Actuary
East Lansing, Michigan
September 26, 2002
Snapshot of Medical Malpractice Market

National multi-line companies

National uni-specialty companies

Physician & Surgeon medical malpractice
companies
– Pre-1990 expansionists
– One state companies
– Post-1990 expansionists
APCapital

Began in 1975 as MPMLC
– Michigan only

Acquired KY Co. in 1995 and NM Co. in 1997

First in-house actuary 1996

Expanded into Ohio, Illinois, Florida, Nevada
in mid-to-late 1990’s

IPO in 2000
The Extent of the Problem
It is estimated that, since 1994:

Over 200 times an insurance company has
written over $5 million of medical
malpractice premium in a state at an annual
ultimate loss ratio over 140%

APCapital has done this 7 times in 4 states

Where does the estimate of 200 come from?
The Extent of the Problem
Step 1
Estimate industry ultimate loss ratios by
accident year
Step 2
Estimate loss ratio variance by state by
insurer
Step 3
Determine the number of insurer/state
combinations where written premium > $5M
Step 4
Apply a normal distribution to each accident
year
Industry Med Mal Accident Year
Loss Ratios
Booked vs. Ultimate
140.0%
120.0%
100.0%
80.0%
60.0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Booked LALAE Ratio
Select LALAE Ratio
Sources of Loss Ratio Variance

Process

States
– Competition
– Regulation
– Legal environment
– Typical limits of liability

Company Operations
– Marketing
– Underwriting
– Claims
– Actuarial
Insurers Writing > $5M in Medical Malpractice

258 in 2001

229 in 2000

225 in 1999

St. Paul is counted 32 times in 2001

California had 18 insurers writing > $5M in 2001
Why Did Loss Ratios > 140% Happen?
1. Excess Capital
2. Appetite for Growth in New Markets
3. Change in Underlying Severity Trend
4. Weak Management
5. More Sophisticated Buyers
Why Did Loss Ratios > 140% Happen?
1. Excess Capital



Redundant reserves (e.g., St. Paul)
Calendar year management mentality
In 1990’s, many companies went public:
–
–
–
–
Frontier
ProAssurance
FPIC
SCPIE
– NCRIC
– MIIX
– APCapital
Why Did Loss Ratios > 140% Happen?
2. Appetite for Growth in New Markets

APCapital began expanding outside of
Michigan in 1995

Many peer companies did the same

Enron mentality?

Growth was easiest in large, “troubled”
states, e.g., Florida, Ohio, Pennsylvania,
and Texas
Why Did Loss Ratios > 140% Happen?
3. Change in Underlying Severity Trend

Not as dramatic as often reported

Rhetoric of “runaway juries” and “out-ofcontrol tort system” is overblown

Started in 1996-1997

First discernable about 2000
Change in Underlying Severity
APCapital – State X
% of Closed Claims > $500,000
12/31/1997 Data
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Change in Underlying Severity
APCapital – State X
% of Closed Claims > $500,000
12/31/1999 Data
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Actual
Fitted at 3%
Change in Underlying Severity
APCapital – State X
% of Closed Claims > $500,000
8/31/2002 Data
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
1988
1990
1992
Actual
1994
Fitted at 6%
1996
1998
Change in Underlying Severity
Medical Malpractice Trends

No frequency trend

CPI:

APCapital has used 2.5% to 4.0% in recent years

Competitors now using 3.0% to 7.0%

APCapital now using 4.0% to 7.0%
1985-2001
1991-1999
3.16%
2.55%
Why Did Loss Ratios > 140% Happen?
4. Weak Management

Small companies often have weak
management

Med mal is a “sophisticated” line

Few executives with med mal experience

Doctor-owned, doctor-controlled companies
have had trouble achieving pricing adequacy
or discipline

APCapital has seen this in acquired companies
and books of business
Why Did Loss Ratios > 140% Happen?
5. More Sophisticated Buyers

Physician income growth relatively stagnant

Formation of physician groups

More insurers to choose from
Why Did Loss Ratios > 140% Happen?
How did Actuaries add to the Soft Market?

Optimistic loss development factors

Low-end trend selections

Small profit leads

“Budgeted” expense leads

“Select” less than “Indicated”
Where Do We Stand Now?

Many companies left the market
– Insolvency
– Voluntary choice

Price increases over 2000-2003 period

Some tort reform may happen