Medical Malpractice
Presentation to House Judiciary Tort Reform Ad Hoc Study Committee of South Carolina Jim Hurley, ACAS, MAAA Chairperson Medical Malpractice Subcommittee
October 30, 2003
James D. Hurley, ACAS,
Copyright Š 2003 by the American Academy of Actuaries All Rights Reserved MAAA 1 1
Medical Malpractice
Purpose — To Discuss
Overview of financial results Ratemaking Tort reform
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Medical Malpractice
Insurance Industry — A.M. Best
Combined ratio: 130%Æ 153%Æ 141% (est) Operating ratio: 106%Æ 134%Æ 128%
Industry Has Changed
Significantly populated by “specialty” insurers Many provider-owned/operated Copyright © 2003 by the American Academy of Actuaries All Rights Reserved 3 3
Medical Malpractice 180% 160% 140% 120% 100% 80% 60% 40% 20%
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
0%
Combined
Investment Gain
Operating
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Medical Malpractice
Recent Financial Results (29 companies)
Drivers How did it happen?
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Medical Malpractice Calendar Year Operating Results Turn Negative 30% 20% % of Premium
10% 0% -10% -20% 1995
1996
1997
1998
1999
2000
2001
2002
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Medical Malpractice
Driver #1 - Combined Ratio
% of Premium
160% 140% 120% 100% 80% 1995
1996
1997
1998
1999
2000
2001
2002
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Medical Malpractice Driver #2 - Investment Income Declines 50% % of Premium
40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 Copyright © 2003 by the American Academy of Actuaries All Rights Reserved 8 8
Medical Malpractice Capacity - Surplus Change Turns Negative
% of Surplus
20% 15% 10% 5% 0% -5% -10% -15% 1995 1996 1997 1998 1999 2000 2001 2002
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Medical Malpractice
How…?
Flat rates during the 1990s Low loss cost trends Favorable reserve development (see graph next page) Spread in bond yields vs. inflation, equities Compete/expand (mid 90s) Trends pick up (late 90s) Reserve development turns negative (2000+) (see graph next page) Bond yields/equities fall Reinsurance Copyright © 2003 by the American Academy of Actuaries All Rights Reserved 10 10
Medical Malpractice „ 0.10
Reserve development from favorable to unfavorable
0.05
% of Premium
0.00 -0.05 -0.10 -0.15 -0.20 -0.25 -0.30 -0.35 1995
1996
1997
1998
1999
2000
2001
2002
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Medical Malpractice
What About Rates?
Loss driven Prospective No recoupment Impact of investment income
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Medical Malpractice
Tort Reform — Academy 1996 Study
Coordinated package Keys: Non-economic cap (low enough) and mandatory collateral source Caveats • immediate rate reduction • mitigate rate increases • make loss environment more predictable • poor reforms could cause increases Copyright © 2003 by the American Academy of Actuaries All Rights Reserved 13 13
Medical Malpractice
Questions ??
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American Academy of Actuaries „
The American Academy of Actuaries is the public policy organization for actuaries of all specialties within the United States. In addition to setting qualification standards and standards of actuarial practice, a major purpose of the Academy is to act as the public information organization for the profession. The Academy is nonpartisan and assists the public policy process through the presentation of clear actuarial analysis. The Academy regularly prepares testimony for Congress, provides information to federal and state elected officials, regulators and congressional staff, comments on proposed federal and state regulations and legislation, and works closely with state officials on issues related to insurance. The Academy also develops and upholds actuarial standards of conduct, qualifications and practice, and the Code of Professional Conduct for all actuaries practicing in the United States. Copyright Š 2003 by the American Academy of Actuaries All Rights Reserved 15 15