Tort reform keeping claims frequency down; surplus up, but severity still an issue
Tort reform efforts seem to be working, frequency of claims for medical liability is going down, surplus is up and reinsurance capital is available — and, yes, it is a soft market. Those comments reflect the consensus of medical professional liability professionals participating in a panel discussion in mid-March in Chicago about the state of the industry.
The Professional Liability Underwriters Society hosted the discussion on current trends facing the industry and concluded that there wasn’t a “crisis mood” in spite of the soft market. Losses are trending down they agreed as the frequency of claims reduced dramatically. Frequency numbers are also down by 10 to 20 percent in any given state while some states are experiencing up to 75 percent reductions in premium the panel concurred.
Frequency in Losses
Robert D. Francis, chief operating officer of The Doctors Company, said that frequency actually has been declining for at least 10 years according to his company’s data. The decline became precipitous in about mid-year 2004, and dropped down to its present levels which are as much as 40 percent lower on average than they were prior to that time, Francis said.
“Tort reform, public consciousness and awareness, trial lawyers’ attitudes are all factors and are all transient,” Francis said, but those factors are not by any means permanent and could change. “So that begs the question will frequency go back up to prior levels?” he asked. “I know that in the mid- to late ’80s when there were tort reform battles, companies were engaging in lots of losses, posting very high combined ratios, (and) following that was a decline in frequency in about 1991 and 1992,” Francis said. He added that there is no way to gauge if history will repeat itself.
Other medical liability experts agreed tort reform played a significant role in lowering frequency of claims in the past but noted that other factors may have had more of an effect on claims frequency.
“If we knew the answers to why frequency of claims changes, we wouldn’t really need forums like this,” said Janet R. Fort, vice president of AIG Healthcare. “However, I think most people will put their finger on tort reform efforts as part of the reason frequency has been reduced.”
States such as Texas, Michigan, and to some degree Ohio have enacted tort reform laws in recent years and in those states, plaintiff attorneys are less likely to take cases unless there’s an egregious injury and a cause they can pinpoint, Fort said. “It’s much more expensive for them (plaintiff attorneys) to take on these cases,” she said, noting this trend probably adds to the speculation about tort reform really having an effect on the market.
Fort added that there may be other “softer” reasons to explain why the frequency of claims is on a downward spiral, including heightened media attention on physicians and hospitals in 2002 and 2003. That increased publicity could have played a role in making consumers as well as professional staff more aware of safety concerns, she said.
“And so maybe the pendulum has swung a little bit and the patients themselves are thinking better about their health care providers and taking seriously some safety aspects. We can’t ignore patient safety initiatives that are taking place in hospitals and clinics and to add to that, there’s talk that Medicare, of course, is not reimbursing for re-do of errors,” Fort said.
Severity Status Quo
Medical liability claim frequency is down, but where severity numbers are depends on who is doing the talking.
“While frequency of claims continues to go down, the severity has remained constant or grown somewhat,” said Donald W. Bahr, senior vice president, Max Bermuda Ltd.
Severity trends continue to grow. Settlement values and claims are rising upward from 6 to 10 percent a year depending on the venue, Bahr said.
While medical liability claims severity continues to trend upward, the rate of growth remains manageable, at least in the current market, said The Doctor Company’s Francis. “Frequency is flat. Yet severity is trending upward but at a manageable level right now.”
AIG’s Fort added that the frequency of eight-figure claims and mega verdicts compared to three or four years ago have declined. “The reason for that is that in-house claims administrators for large facilities are getting better at identifying certain claims and controlling them … not letting those go to trial,” she said.
Reinsurers in Order
Despite soft market conditions affecting the medical liability market, reinsurers appear to be in good order, says Max Bermuda’s Bahr.
“I don’t see a feeding frenzy out there of any kind to suddenly cut rates and expand coverage. At this point I would categorize the reinsurance market as orderly,” Bahr said. “There are some improvements in prices, some improvements in coverage. However there is not a long list of reinsurance markets in the world who I would classify as willing and able to put out a good lead quote.”
Surplus numbers for medical liability insurance companies continue to improve, according to the experts.
“2002 was probably the low watermark as far as surplus for companies,” said James D. Hurley, consulting actuary for Tillinghast. “There was a minus 15 percent change in surplus. In 2003 those results turned around and by 2004 surplus grew by 5 percent.”
Hurley explained despite the fact that companies were losing money, they were able to shore up funds from the outside to increase surplus. The funds were not internally generated, but were from preferred trusts and other vehicles, he noted.
In 2005, there was an 8 percent growth in surplus. In 2006, a 15 percent growth and by 2007 the industry showed an 18 percent growth, according to Hurley.
“Obviously those financial results have turned, profits are being generated and surplus, as a consequence, is growing,” Hurley said.
The 2008 PLUS Medical Professional Liability Symposium was held on March 11-12. Visit www.plusweb.org for more 2008 conference locations and dates.
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