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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

Copyright © 2003 by the American Academy of Actuaries All Rights Reserved 2 2


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

Copyright Š 2003 by the American Academy of Actuaries All Rights Reserved 4 4


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

Copyright © 2003 by the American Academy of Actuaries All Rights Reserved 7 7


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 ??

Copyright © 2003 by the American Academy of Actuaries All Rights Reserved 14 14


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

Presentation_on_medical_malpractice_to_South_Carolina_Committee_2003  

Presentation to House Judiciary Tort Reform Ad Hoc Study Committee of South Carolina James D. Hurley, ACAS, MAAA 1 Copyright © 2003 by the A...

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