A report about medical malpractice insurance recently publishedby a former regulator prompted some readers–including Connecticut'sattorney general–to conclude that insurers are plain greedy, butothers saw it as evidence of rational behavior.

"Insurance company greed can be hazardous to our health,"Connecticut Attorney General Richard Blumenthal charged, reactingto the report commissioned by the New York-based Center for Justice& Democracy.

The title of the report, authored by Former Missouri InsuranceCommissioner Jay Angoff–"Falling Claims and Rising Premiums In TheMedical Malpractice Insurance Industry"–reveals its mainconclusion: that insurers have benefited from a drop in claims,while overcharging doctors and hospitals.

Mark Allaben, a fellow of the Alexandria, Va.-based CasualtyActuarial Society, with expertise in the med mal line, has noquarrel with the report's figures.

"There isn't anything here that's wrong," he said. "It is truethat written premiums are going up, earned premiums are going up,and loss ratios are going down. That's what you expect [when]you've had significant price changes [and] some reforms. But todraw the conclusion that doctors are being overcharged ordisadvantaged is too simplistic. I don't think that's supported bythe information."

In his report, Mr. Angoff sets forth three mainobservations:

o Over the last five years, med mal premiums for 15 largeinsurers, as a group, more than doubled, while claim payoutsremained essentially flat.

o For many of these insurers, incurred losses (paid losses plusreserve changes) also decreased.

o Malpractice insurers accumulated large amounts of surplus inthe last three years.

"Insurance companies say lots of things [in] lobbying battlesand we take them with a grain of salt," said Mr. Angoff, now alawyer with Roger Brown & Associates in Jefferson City, duringa media conference call. However, he added, "what we look atseriously is data in annual statements that companies file underoath," noting that this data formed the basis of his report.

For the 15 large insurers, med mal premiums rose more than 120percent in the last five years–"exactly what we would expect," hesaid. But surprisingly, "in real [inflation-adjusted] terms, claimpayments went down." Payments grew 5.7 percent, according to thefilings, but the general inflation rate is 13 percent–and medicalinflation is higher, he explained.

"This is wacky," he said, flipping through the report andreading off figures for individual insurers.

Mr. Allaben believes that short-term paid loss trends aren'tappropriate to analyze the med mal line. He noted that the lagbetween the time a policy is triggered for coverage and a claim ispaid can easily exceed five years.

"In some cases, it takes a year or two for a person to figureout there was a procedure that caused [his or her] injury," hesaid, and for an injured minor, the statute of limitations won'tstart running until the minor reaches maturity.

Anticipating industry criticism of the paid-loss analysis, Mr.Angoff highlighted a table in the report showing that 14 of the 15insurers also had declining incurred losses in 2004, describingincurred losses as insurers' "own projections of what they'll payout in the future." These losses fell 21.1 percent overall,compared to a 9.3 percent jump in earned premiums, he said.

(Editor's Note: The exception was The Doctor's Company, with a 5percent jump in incurred losses. New York-based MLMIC also countersthe trend with incurred losses rising 10 percent in 2004, accordingto statistics compiled by NU. MLMIC was not included in Mr.Angoff's report because reported surplus–a key component of hisanalysis–was not available for MLMIC.)

Attorney General Blumenthal reacted. "We're dealing here withhurricane-force trends that cannot be explained away by quibbles orpercentage points. This report has enormous potential to completelyrecast the divisive debate that has characterized this issue in thepast"–a debate pitting lawyers against doctors and characterizing"insurers as innocent bystanders," he said.

Looking at the same figures, Mr. Allaben concluded that the 15insurers, as a group, only made money in one out of the last fiveyears–2004–when the loss ratio was 51.4, according to averagescomputed by Mr. Angoff.

Noting that combined ratios, not loss ratios, actually measurewhether or not insurers profit from underwriting, he said Mr.Angoff's loss ratios don't include loss adjustment expense andunderwriting expense ratio components of the combined ratio, whichcould easily add 40 points.

In 2001, the loss ratio by itself was 100, according to thereport, indicating that the insurers lost at least 40 cents forevery premium dollar, he noted. "Insurance companies are rationaleconomic entities. They raised prices and looked for ways to reducelosses. The end result was that loss ratios went down. This isexpected," he said.

In fact, according to an NU analysis published in the July 4/11edition, LAE and underwriting expenses added 55 points rather than40 points, on average, for all writers of malpractice over the lastfive years–and industrywide med mal combined ratios fell from ahigh of nearly 153 in 2001 to 109 in 2004.

Apprised of the 109 figure, Mr. Allaben said while it doesn'treveal an underwriting profit, insurers probably made money whenyou include investment income. "That's a good thing," he added,"because what that does is it stabilizes the market. You won't havecompanies withdrawing. You won't have, once again, significantprice increases."

Mr. Blumenthal sees a different picture. "The numbers underscorethe need for tougher oversight to prevent and punish profiteering,"he said, noting that he'd written to Connecticut's commissioner andthe president of the National Association of InsuranceCommissioners.

Mr. Angoff said that at least four types of ratemaking reformsare needed:

o States must enact standards for actuaries to follow indetermining rates.

o Insurance commissioners must give prior approval for rateincreases.

o Commissioners must have authority to order refunds to doctorspaying excessive rates.

o Commissioners should be able to consider the level of aninsurer's surplus when deciding whether to approve a rate hike.

He said actuaries currently have overly broad discretion. Theycan "project future losses that have absolutely no rational tie towhat's actually happened in the past," he said. "That's thefundamental reason why rates are so high."

"He's correct that that's not a state-by-state issue," Mr.Allaben said. However, there is an Actuarial Standards Board thatsets guidelines nationally. Actuaries are also governed by aprofessional code, and a board of discipline exists that allowsregulators and the general public to seek remedies againstactuaries doing unprofessional work, he said.

In addition, "insurance departments have broad powers. They cancompel insurers to defend rates," which must not be excessive,inadequate or unfairly discriminatory, he said.

Quotebox:

"Insurance company greed can be hazardous to our health…Thenumbers underscore the need for tougher oversight to prevent andpunish profiteering."

Connecticut AG Richard Blumenthal

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Data Insights: Reserves

Where Did The Losses Go?

Whether you're looking at figures in Jay Agnoff's recent report,or data presented in a recent issue of NU, the trend isclear–medical malpractice losses fell precipitously in 2004.

According to Mr. Angoff's report on 15 large insurers, incurredlosses dropped 21 percent, while earned premiums grew 9.3 percent.NU's analysis, compiled from NAIC data available through NationalUnderwriter Insurance Data Services/Highline Data, shows lossesfell 29 percent and earned premiums fell slightly (2 percent.)

Neither Mr. Angoff, an ex-regulator, nor Mark Allaben, acasualty actuary, believe the drop is explained by tort reform.

Mr. Angoff admitted that he had not done a state-by-stateanalysis, "but the results are so significant that I wouldn't thinkthey could have much of an impact."

"The industry doesn't like to hear this, but the reason for thedrop in incurred losses is that [insurers'] projections are justnot supported. Paid claims aren't going up," Mr. Angoff told NU inan interview, noting that the 2004 drop reflects thisrealization.

"The two things probably impacting current results are pricechanges that have happened and the lack of adverse reservedevelopment in 2004," Mr. Allaben said.

According to data reviewed by NU, reserves changes explain alot. Med mal calendar-year incurred losses fell roughly $2 billionindustrywide in 2004. During calendar-year 2003, adversedevelopment (for accident-years 2002 and prior) was also $2billion. In calendar-year 2004, industrywide figures show favorabledevelopment (for accident-years 2003 and prior) of roughly $80million.