A report about medical malpractice insurance recently published by a former regulator prompted some readers–including Connecticut's attorney general–to conclude that insurers are plain greedy, but others saw it as evidence of rational behavior.

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

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

Mark Allaben, a fellow of the Alexandria, Va.-based Casualty Actuarial Society, with expertise in the med mal line, has no quarrel with the report's figures.

"There isn't anything here that's wrong," he said. "It is true that 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 to draw the conclusion that doctors are being overcharged or disadvantaged is too simplistic. I don't think that's supported by the information."

In his report, Mr. Angoff sets forth three main observations:

o Over the last five years, med mal premiums for 15 large insurers, as a group, more than doubled, while claim payouts remained essentially flat.

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

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

"Insurance companies say lots of things [in] lobbying battles and we take them with a grain of salt," said Mr. Angoff, now a lawyer with Roger Brown & Associates in Jefferson City, during a media conference call. However, he added, "what we look at seriously is data in annual statements that companies file under oath," noting that this data formed the basis of his report.

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

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

Mr. Allaben believes that short-term paid loss trends aren't appropriate to analyze the med mal line. He noted that the lag between the time a policy is triggered for coverage and a claim is paid can easily exceed five years.

"In some cases, it takes a year or two for a person to figure out there was a procedure that caused [his or her] injury," he said, and for an injured minor, the statute of limitations won't start 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 15 insurers also had declining incurred losses in 2004, describing incurred losses as insurers' "own projections of what they'll pay out 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 5 percent jump in incurred losses. New York-based MLMIC also counters the trend with incurred losses rising 10 percent in 2004, according to statistics compiled by NU. MLMIC was not included in Mr. Angoff's report because reported surplus–a key component of his analysis–was not available for MLMIC.)

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

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

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

In 2001, the loss ratio by itself was 100, according to the report, indicating that the insurers lost at least 40 cents for every premium dollar, he noted. "Insurance companies are rational economic entities. They raised prices and looked for ways to reduce losses. The end result was that loss ratios went down. This is expected," he said.

In fact, according to an NU analysis published in the July 4/11 edition, LAE and underwriting expenses added 55 points rather than 40 points, on average, for all writers of malpractice over the last five years–and industrywide med mal combined ratios fell from a high of nearly 153 in 2001 to 109 in 2004.

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

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

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

o States must enact standards for actuaries to follow in determining rates.

o Insurance commissioners must give prior approval for rate increases.

o Commissioners must have authority to order refunds to doctors paying excessive rates.

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

He said actuaries currently have overly broad discretion. They can "project future losses that have absolutely no rational tie to what's actually happened in the past," he said. "That's the fundamental 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 that sets guidelines nationally. Actuaries are also governed by a professional code, and a board of discipline exists that allows regulators and the general public to seek remedies against actuaries doing unprofessional work, he said.

In addition, "insurance departments have broad powers. They can compel 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…The numbers underscore the need for tougher oversight to prevent and punish profiteering."

Connecticut AG Richard Blumenthal

Flag:

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 is clear–medical malpractice losses fell precipitously in 2004.

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

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

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

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

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

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

Special Reports /

Med Mal Rate Hikes: Greed Or Rationality?

Related Stories

Recommended For You