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 bobh@iii.org 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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