Trends in Medical Malpractice Insurance Behind the Chaos

Trends in Medical Malpractice Insurance Behind the Chaos American Academy of Orthopaedic Surgeons Washington, DC April 25, 2003 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance 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 Taxes 1991-2002 ($ Millions) $40,000 $30,000 $20,000 $14,178 $10,870 $19,316 $24,404 $20,598 $21,865 $20,559 2001 was the first year ever with a full year net loss 2002 ROE = 1.0% $36,819 $30,773 $10,000 $0 -$10,000 91 $5,840 $2,903 -$6,970 92 93 94 95 96 97 98 99 00 01 02 Sources: A.M. Best, ISO, Insurance Information Institute. ROE: P/C vs. All Industries 1987–2003F 20% 15% 10% 5% 0% There is an enormous gap between the p/c industry’s rate of return and that of most major industry groups 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03F -5% US P/C Insurers Source: Insurance Information Institute; Fortune All US Industries ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2002 20% 15% There is an enormous gap between the industry’s cost of capital and its rate of return 10% 10.2. pts 2002 5% 0% US P/C insurers have missed their cost of capital by an average 6.9 points since 1991 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 -5% Source: The Geneva Association, Ins. Information Inst. ROE Cost of Capital 14.6 pts Underwriting Gain (Loss) 1975-2002 $10 $0 ($10) $ Billions ($20) ($30) ($40) ($50) ($60) P-C insurers paid $30.5 billion more in claims & expenses than they collected in premiums in 2002 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 Source: A.M. Best, Insurance Information Institute Medical Malpractice Figure 1 Medical Crises across the US AMA: Crises reached in at least 18 states ! AK AL WA ME MT ND MN VT NH OR ID WY SD WI MI PA NY MA CT RI NJ IA NE NV UT OH DC IL CO KS IN WV VA DE MD MO KY NC TN CA AZ HI OK NM AR MS LA AL GA SC TX Crisis states Crisis looming FL PR Source: American Medical Association, March 2003 Medical Malpractice Combined Ratio 170 160 150 140 130 103.7 108.8 Local market collapses HC Providers seeking govt. protection 127.9 133.5 115.7 115.7 108.1 106.9 108.4 107.9 101.6 107.8 110.0 99.7 106.4 106.0 105.8 110 100 90 97.6 105.6 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002E Medical Malpractice Source: AM Best, Conning, Insurance Information Institute All Lines Combined Ratio 107.2 120 115.7 Insurers in 2001 paid out an estimated $1.65 for every $1 they earned in premiums! 129.5 153.3 Increased mutualization 165 Trial lawyers have destroyed commercial viability of med mal. The future holds: Medical Malpractice: Underwriting Losses $ Millions $500 $0 $111.6 $14.4 -$289.3 -$388.0 -$804.9 -$1,135.9 -$1,529.2 -$1,839.0 -$147.8 -$500 -$230.8 -$1,000 -$1,500 -$2,000 -$2,500 -$3,000 -$3,500 90 91 92 -$344.1 Med Mal underwriting losses exploded by $2.7 billion or 938% between 1996 and 2001! -$3,001.8 93 94 95 96 1997 1998 1999 2000 2001 Source: Insurance Information Institute calculations based on data from A.M. Best. Medical Malpractice: Cumulative Underwriting Losses $ Millions $0 -$1,000 -$2,000 -$3,000 -$4,000 -$5,000 -$6,000 -$7,000 -$8,000 -$9,000 -$10,000 -$231 -$379 -$1,515 -$1,859-$1,747-$1,733-$2,022 -$2,410 -$3,215 -$4,744 -$6,583 The cumulative underwriting loss in Med Mal from 1990-2001 totals nearly $10 billion! -$9,585 90 91 92 93 94 95 96 97 98 99 00 01 Source: Insurance Information Institute calculations based on data from A.M. Best. Medical Malpractice: Losses & Expenses Paid vs. Premiums Earned $9 $8 $7 $6 $4.0 $4.2 $8.6 $5.9 $6.7 $7.3 $5.5 $4.9 $5.3 $ Billions Over the period from 1996 through 2001, premium earned rose 16.8% while losses and expenses rose 68.9% $5.2 $4.8 $5.1 $5.1 $5.2 $4.7 $4.5 $4.8 $4.0 $4.1 $5 $4 $3 90 91 $4.1 92 $4.2 $4.6 93 94 95 $4.8 96 97 98 99 00 Earned Premiums Underwriting Loss Source: Computed from A.M. Best data by the Insurance Information Institute $5.6 01 2001 Top Ten Verdicts Value Issue State $3 Billion $1 Billion $480 Million Tobacco Land Contamination Private Airplane Crash California Louisiana Florida $312.8 Million $ 256 Million Nursing Home Police Auto Crash Texas Colorado $116 Million $114.9 Million Intellectual Property Theft Medical Malpractice Virginia New York $108.2 Million $107.8 Million $94.5 Million Inheritance Dispute Medical Malpractice Real Estate Texas New York California Source: LawyersWeekly USA, January 2002. 2002 Top Ten Verdicts Value $28 Billion $2.2 Billion Issue Tobacco (Product Liability) Negligence (Pharmacy Mal) State Florida Missouri $270 Million $225 Million $150 Million Personal Injury (Burn) Product Liability (Rollover) Tobacco (Product Liability) Kentucky Texas Oregon $122 Million Product Liab. (Auto Accident) Virginia $97.2 Million Business Fraud California $95.2 Million $91 Million $80 Million $80 Million Med Mal (Birth Injury) Medical Malpractice Med Mal (Birth Injury) New York New York New York Prod. Liab/Personal Inj. (Auto) Missouri Source: LawyersWeekly USA, January 2003. Medical Malpractice: Tort Cost Growth is Skyrocketing $ Billions $19.4 $22 $20 $18 $16 $14 $12 $10 $6 $2 $0 $7.1 $7.1 $7.0 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 $1.2 $1.5 $1.9 $4 $2.3 $2.9 $3.6 $4.4 $5.4 $8 $6.5 $6.8 $7.2 $7.9 $8.7 $9.4 $10.8 $11.6 $12.4 $13.5 •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! $14.6 $16.2 $17.6 •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! $20.9 Average Jury Award in Medical Malpractice Cases $ Millions $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 94 95 96 97 98 99 00 01 $1.14 $2.02 $1.88 $1.93 $2.92 $3.29 $3.41 $3.90 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. Source: Jury Verdict Research; Insurance Information Institute. Trends in Million Dollar Verdicts* 100% 90% 80% 70% 60% 50% 27% 95-97 98-99 2000-2001 59% 68% 42% 44% 47% 40% 21% 11% 10% 10% 20% 0% Vehicular Liability 4% 10% 4% 6% Personal Negligence 8% Premises Liability 11% 17% Business Negligence Government Medical Negligence Malpractice 21% 30% 25% 36% 43% 54% Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants Products Liability *Verdicts of $1 million or more. Source: Jury Verdict Research; Insurance Information Institute. Health Benefit Costs Rising Sharply 10.1% 11.2% 00 15% Health care inflation is affecting the cost of medical care, no matter what system it is delivered through 8.0% 7.3% 8.1% 10% 2.1% 5% 2.5% 0% -5% 92 93 94 -1.1% 95 96 97 0.2% 98 6.1% 99 01 02E Source: NCCI; William M. Mercer, Insurance Information Institute. 14.7% Investment Gain: Med Mal vs. All Commercial Lines* Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing 35% 30% 25% 20% 15% 12.5% 10% 5% 0% 94 95 96 97 98 99 00 01 27.4% 29.3% 30.2% 30.0% 28.1% 23.5% 27.6% 19.0% 14.3% 14.1% 15.5% 15.6% 13.7% 15.3% 13.1% Commercial Lines Med Mal *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 Medical Malpractice Investment Gain* $ Billions $2.5 $2.1 $2.0 $1.5 $1.0 $0.5 $0.0 90 91 92 93 94 95 96 97 98 99 00 01 $1.5 $1.5 $1.3 $1.8 $1.4 $1.5 Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing $1.5 $1.4 $1.2 $1.1 $1.5 *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 Overview Net Investment Income $45 $36 Investment income in 2002 fell 2.8% due primarily to historically low interest rates Billions (US$) $27 History $18 1997 Peak = $41.5B 2000= $40.7B $9 2001 = $37.7B 2002 = $36.7B $0 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 Source: A.M. Best, Insurance Information Institute Interest Rates: Lower Than They’ve Been in Decades 16% 14% 12% 2. 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. 66% of the industry’s invested assets are in bonds 10% 8% 6% 4% 2% 0% *As of April 21, 2003. Source: Board of Governors, Federal Reserve System; Insurance Information Institute 3-Month T-Bill 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1-Yr. T-Bill 1990 1991 1992 1993 10-Year T-Note 2002 2003 * 1994 1995 1996 1997 1998 1999 2000 2001 Total Returns for Large Company Stocks: 1970-2003* 40% 30% 20% 10% 0% -10% -20% 1970 1972 1974 1976 1978 1980 1982 2002 was 3rd consecutive year of decline for stocks Will 2003 be the 4th? 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 -30% *As of April 22, 2003. Source: Ibbotson Associates, Insurance Information Institute P/C Industry Investments, by Type (as of Dec. 31, 2001) Common Stock 21% Other 5% Cash & ST Secs. 6% Real Est. & Mortgages 1% Preferred Stock 1% Source: A.M. Best, Insurance Information Institute Common stock accounts for about 1/5 of invested assets Bond Holdings, by Type Industrial & Misc. Special Revenue Governments States/Terr/Other Public Utilities 32.5% 30.5% 18.0% 15.4% 3.1% Parents/Subs/Affiliates 0.5% Bonds 66% Property/Casualty Insurance Industry Investment Gain* $ Billions $60 $52.3 $50 $42.8 $40 $30 $20 $10 $0 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. $57.9 $51.9 $47.2 $35.4 $56.9 $44.4 $36.6 Investment gains are simply returning to “pre-bubble” levels Solutions Frequency of $1 Million + Jury Verdicts (Per 1,000 Doctors) 4.0 3.5 3.10 3.71 3.0 2.5 2.0 1.5 1.0 0.5 0.0 NY NJ OH 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. 2.40 2.14 1.93 1.31 The frequency of awards for $1 million and up in CA is 32% below the national average. FL US Avg. CA Source: Jury Verdict Research, American Medical Association, Insurance Information Institute. Median Med Mal Jury Awards 1996-2002 ($ 000s) $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 $1,000,000 $806,750 $840,000 $725,000 FL Source: Jury Verdict Research NY PA TX CA $402,500 Loss Cost Changes by Number of Major Reforms by State 1985-1998 Excludes Ohio, Louisiana and Texas 1 352.0% 281.7% 240.1% 218.0% 207.0% 191.1% 150% 200% 250% 300% Number of Reforms 2 3 4 5 6 100% States with only one medical liability reform saw loss costs increase by 352% between 1985 and 1998! 350% 400% Source: Pennsylvania Medical Society Annual Premiums in 2001 By Specialty Compared to California $ 000 $173,000 $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Ob/gyn Surgeon Internist Average liability premiums for California’s physicians are at least 52% lower than in other states with no caps! $60,000 $48,000 $111,000 $106,000 $39,000 $81,000 $29,000 $100,000 $22,000 $28,000 Florida Michigan Illinois California Source: Medical Liability Monitor $10,000 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 apples  Need allowances for high risk specialties/procedures Insurance Information Institute On-Line If you would like a copy of this presentation, please give me your business card with e-mail address