Medical Malpractice Insurance Market Stable But Faces Challenges Ahead

Recent trends have had an overall stabilizing impact on the medical malpractice market, but several emerging issues may present challenges for insurers and actuaries, attendees at the Casualty Loss Reserve Seminar were told.

Christian Coleianne, associate director and actuary, Aon Risk Consultants, Inc., said the environment in hospital professional liability right now seems relatively stable. Citing findings from Aon’s 2008 Hospital Professional Liability Benchmarking Survey, Coleianne noted that the frequency of claims continues to be “non-increasing” or flat, while the severity of claims (at the $2 million occurrence limit) is increasing moderately at a 3 percent annual rate.

However, Coleianne identified several emerging issues of interest, including “never events,” overall medical inflation, changes to liability laws, and Federal healthcare reform. “Never events” describe a list of 28 hospital-acquired conditions that are preventable and should never occur.

According to Aon’s findings, four hospital-acquired conditions — pressure ulcer, injury, object left in surgery, and infection — account for 12.2 percent of total hospital professional liability costs. One out of every six hospital professional liability claims is also due to these four hospital acquired conditions.

Coleianne explained that since October 2008, the Centers for Medicare and Medicaid Services (CMS) will no longer reimburse for 10 specific hospital-acquired conditions.

“CMS has ruled that these ‘never events’ are all preventable. So preventable in fact, that they should never happen and therefore will not be reimbursed. As a result, ‘never events’ may lead to strict liability and some attorneys may look at this as an opportunity,” he said.

Changes in the tort reform arena are another emerging issue with the potential to impact medical liability costs, Coleianne noted. “In the area of federal healthcare reform, it appears that President Obama may be willing to consider tort limits. We will have to wait and see where that ends up,” he said.

Kevin Atinsky, chief actuary, Medical Mutual Insurance Co. of Maine, said the future financial results of the medical professional liability market are largely pinned on reserve adequacy and sustainability of claims frequency. An analysis of year-end data from 49 member companies of the Physician Insurers Association of America (PIAA), published in The Physician Insurer, showed that in terms of underwriting results, 2008 was one of the best years ever.

“Favorable reserve development was a key contributor to record underwriting results in 2008. Reserve releases for the year totaled $1.2 billion. This is probably as good as it gets and highlights the importance of assessing reserve position,” Atinsky noted.

Looking ahead, 2009 will reveal important indicators as to the future results in areas of reserve adequacy, claims frequency and investment outlook. “Forces are skewed more towards deterioration, and thus, tilting away from further improvement,” he said.

According to Ed Shadman, principal and actuary, Complete Actuarial Solutions Co., there are unique reserving and opinion challenges associated with captive insurers and risk retention group (RRGs) that write medical professional liability coverage. Currently there are roughly 250 active RRGs and approximately half of these are related to healthcare or physician groups, while the use of captives for medical malpractice remains common.

Captives and RRGs are often allowed to carry letters of credit, surplus notes, and other types of assets not allowed for traditional insurance companies. “Actuaries have to look into that. Assets such as Letters of Credit that do not generate investment income can become an issue in combination with discounting,” he said.

Other reserving challenges arise from the fact that unlike regular insurance companies, captives and RRGs tend to be used to cover one line of business, a very specific group of similar insureds and often a relatively small group of insureds with no spread of risk across regions or lines of business.

“Medical malpractice is a highly volatile line of business with great variability in size of losses. When the one line of business an RRG or captive is writing turns out to be very volatile, it can lead to credibility issues in the reserving process,” Shadman said.

All of these factors can lead to a much larger range of reasonable estimates. This, along with lower minimum capital requirements, can lead to audit issues depending on the audit firm’s range of reasonable estimates.

Source: The Casualty Actuarial Society