C 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
CAS 2004 Seminar on Ratemaking
The Medical Malpractice
Insurance Crisis
C 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
CAS 2004 Seminar on Ratemaking
This medical malpractice crisis This medical malpractice crisis didn’t occur overnight.didn’t occur overnight.
C 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
CAS 2004 Seminar on Ratemaking
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
C R I S I SC R I S I S
C R I S I SC R I S I S
CAS 2004 Seminar on Ratemaking
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
C R I S I SC R I S I S
C R I S I SC 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
C R I S I SC R I S I S
C R I S I SC 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
C R I S I SC R I S I S
C R I S I SC R I S I S
The Situation in Pennsylvania
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
C R I S I SC R I S I S
C R I S I SC R I S I S
The Situation in Pennsylvania
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
C R I S I SC R I S I S
C R I S I SC 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
C R I S I SC R I S I S
C R I S I SC 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
GONE FROM THE MARKET
C 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
MLMIC — NY
1996 — Top 20 Writers
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
10 PIE Mutual Insurance Co.
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
C R I S I SC R I S I S
C R I S I SC R I S I S
1996 — Top 20 Writers
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
C R I S I SC R I S I S
C R I S I SC R I S I S
1996 — Top 20 Writers
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
GONE FROM THE MARKET
C 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
1996 — Top 20 Writers
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
Princeton Insurance Companies B-
ProAssurance A-
SCPIE B
DOWNGRADED
C 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
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
C R I S I SC R I S I S
C R I S I SC 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
C R I S I SC R I S I S
C R I S I SC R I S I S
MEDICAL MUTUAL Liability Insurance Society of Maryland
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
C R I S I SC R I S I S
C R I S I SC 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
C R I S I SC R I S I S
C R I S I SC 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
Birth-related damages, CP
5-month-old, brain injury, CP
Birth-related damage, profound retardation
73YOM, quadriplegia
Birth-related damages, CP
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
C R I S I SC R I S I S
C R I S I SC 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.
MEDICAL MUTUAL Liability Insurance Society of Maryland
C 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
% 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
C R I S I SC R I S I S
C R I S I SC 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
C R I S I SC 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