Insuring Medical Malpractice

, by Sloan, Frank A.; Bovbjerg, Randall A.; Githens, Penny B.

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ISBN: 9780195069594 | 0195069595
Cover: Hardcover
Copyright: 9/26/1991

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The cost of malpractice insurance to physicians has been increasing in recent years, as has the threat to physicians of being sued. This book describes and analyzes the workings of the market for physicians' liability insurance. The authors use their own data and other sources to study questions such as: Is the market for medical malpractice insurance competitive? Has the profitability of medical malpractice insurance been excessive? Why do malpractice insurers demand reinsurance? What effect has insurance regulation had on premiums? And it explores what experience rating is and how it is done.

List of Tables

xvii

List of Figures

xix

List of Boxes

xxi

Introduction

(18)

Background

(1)

Periodic Crises: The 1950s to the 1980s

(6)

The Mid-1970s and Before

(1)

Industry and Legislative Response

(1)

Renewed Crisis in the 1980s

(1)

Trends in Premiums and Claims

(3)

1980s Responses

(1)

Reasons for Public Concern

(2)

Insurance Availability and Price

(1)

Higher Prices for Medical Care and Reduced Access to Care

(1)

Quality of Medical Care

(1)

Chapter Plan

(2)

Conclusion

(1)

Notes

(1)

Appendix: Data Sources

(1)

Survey of Medical Malpractice Insurers

(1)

Survey of Former Medical Malpractice Insurers

(1)

Regulatory Survey of Insurance Departments

(1)

Premium and Claims Data

(2)

Premium Data

(1)

Claims Data

(1)

Data from A. M. Best Company

(1)

Best's Insurance Reports---Property/Casualty

(1)

Best's Casualty Loss Reserve Development

(1)

Best's Reproduction of Convention Statements

(1)

Market Share Data

(1)

Other Data Sources

(1)

Conceptual Framework and Institutional Context

(28)

A Portrait of Insurance Practice

(1)

The Nature of the Insurance Product

(6)

The Risk of Insurance

(1)

Legal Liability as a Risk

(1)

Third-Party Insurance

(1)

Low-Frequency, High-Severity Risk

(1)

Lag Between Premium Inflows and Cash Outflows

(1)

Earnings from Underwriting and Investment

(1)

Diversity of Organizational Forms

(1)

State-Specific Operations

(1)

Individual Coverage

(1)

Insurance Cycles

(1)

Chapter Overview

(1)

Theory of the Insurance Firm: The For-Profit Firm

(8)

Assumptions

(1)

Insurer Price and Output Decisions in Pure Competition

(2)

Underwriting, Investing, and Treatment of Risk

(1)

Underwriting Risk

(1)

Investment Portfolio Risk

(1)

Risk to Owners of the Insurance Company

(3)

Role of Reinsurance

(1)

Relaxing Some of the Assumptions

(1)

Competition

(1)

Single Line of Coverage

(1)

Exogenous Losses and Homogeneous Policyholders

(1)

No Regulation

(1)

Theory of the Insurance Firm: Alternative Organizational Forms

(6)

Rationale for Alternative Organizational Forms

(1)

Incentive Incompatibility

(1)

Conflicts Among Managers, Owner-Risk Bearers, and Policyholders

(1)

Responses to Conflicting Incentives

(1)

Other Differences Among Organizational Forms

(2)

Alternative Ownership Forms

(1)

Stock Companies

(1)

Mutuals

(1)

Reciprocals

(1)

Trusts

(1)

Lloyd's Associations

(1)

Risk Retention Groups

(1)

Joint Underwriting Associations

(1)

Patient Compensation Funds

(1)

Cycles in Premiums, Profits, and Supply

(4)

Recoupment of Loss on Investments

(1)

Competition Among Oligopolists

(1)

Loss Forecast Errors

(1)

Regulatory Lags

(1)

Capacity Constraints

(1)

Conclusion

(1)

Notes

(2)

Regulation and Its Effects

(25)

Regulation and Competition

(1)

Chapter Overview

(1)

A Brief History of Insurance Regulation

(2)

The Early Development of Regulatory Authority

(1)

Early Legal Developments

(1)

State Authority in the Current Era

(1)

Goals, Methods, and Structure of Regulation

(7)

Goals of Regulation

(1)

Solvency

(1)

Reasonalble Rates

(1)

Availability

(1)

Information and Fair Play

(1)

Other Goals

(1)

Methods of Insurance Regulation

(1)

Solvency

(2)

Reasonable Rates

(1)

Availability

(1)

Information and Fair Play

(1)

Structures of Regulation

(1)

Perpectives on Insurance Regulation

(2)

Formal Legal Analysis

(2)

Empirical Research

(1)

Evidence on Insurance Regulation

(9)

Solvency Regulation and Effects on Entry of Insurers

(1)

Evidence from Other Studies

(1)

Evidence from Our Survey of Medical Malpractice Insurers

(4)

Regulation of Prices

(1)

Evidence from Other Studies

(2)

Evidence from Our Survey of Medical Malpractice Insurers

(1)

Differences in Rules for Different Types of Insurer

(1)

Regulatory Responsibilities within Companies

(1)

Conclusion

(1)

Notes

(2)

Market Structure and Conduct

(27)

Conceptual Approach

(2)

Chapter Overview

(1)

Market Structure

(17)

Defining the Relevant Market

(1)

Product and Geographic Market Definition: The Case of Medical Malpractice Insurance

(2)

Exit and Entry

(1)

Evidence on the Top Three Medical Malpractice Insurers per State

(1)

Barriers to Exit

(1)

Evidence from Exiting Companies

(2)

Seller Concentration

(1)

Measuring Concentration

(1)

Concentration in Malpractice Insurance

(2)

Underwriting Standards and Product Definition

(1)

Demand Curves Facing Individual Insurers

(1)

Persistence of Physician Insureds with Their Insurers

(2)

Elasticity of Demand

(3)

Economies or Diseconomies of Scale

(2)

Conduct

(3)

Agreements Not to Compete

(1)

Other Possible Forms of Collusion

(1)

Use of Same Actuaries

(1)

Role of Rating Bureaus

(1)

Role of Medical Societies

(2)

Interdependencies in Premium Setting

(1)

Comparisons Among Ownership Types

(2)

Monitoring Physicians

(1)

Defending Physicians

(1)

Assuring Availability of Coverage

(1)

Conclusions and Implications

(2)

Notes

100

(1)

Reinsurance

101

(22)

Functions of Reinsurance

101

(2)

Reinsurance and Solvency

101

(1)

Reinsurance and Capacity

102

(1)

Technical Assistance from Reinsurers

102

(1)

Dropping a Territory/Line of Business

102

(1)

Empirical Evidence on Motives for Reinsuring

102

(1)

Potential Impacts of Reinsurance on the Primary Market

103

(1)

Chapter Overview

103

(1)

Institutional Context

104

(5)

The Reinsurance Market

104

(1)

Types of Reinsurance

104

(1)

Proportional Reinsurance

105

(1)

Nonproportional Reinsurance

106

(1)

Retention Amounts and Liability Limits

107

(1)

Malpractice Premiums and Reinsurance Cash Flows

108

(1)

Why Primary Insurers Reinsure

109

(8)

Solvency Motive

109

(1)

Large Claims and the Distribution of Losses

109

(3)

Capacity Motive

112

(1)

Policyholders' Surplus and Solvency Regulation

112

(1)

Insurer-Specific Measures of Policyholders' Surplus

113

(1)

Other Financial Indicators of Insolvency Risk

114

(2)

Technical Assistance

116

(1)

Retirement from a Territory or Class of Business

116

(1)

Statistical Analysis of Demand for Reinsurance

117

(1)

Statistical Methods

117

(1)

Results: Solvency and Capacity Motives Confirmed

117

(1)

Influence of Reinsurance on the Market for Malpractice Insurance

118

(3)

Conclusions and Implications

121

(1)

Notes

121

(2)

Loss Reserving and Claims Management

123

(22)

An Insurer's Liabilities

123

(1)

Do Insurers Distort Loss Reserves?

124

(1)

Other Reasons for Interest in Loss Reserving

125

(1)

The Long Tail of Loss Development and Reserving Errors

125

(1)

Loss Reserves and Discounting

126

(1)

Potential Gains from Selling Several Types of Insurance

127

(1)

Chapter Overview

127

(1)

Malpractice Insurers' Loss-Reserving and Claims Management Practices

128

(3)

Opening a Claim

128

(1)

Establishing the Value of a Claim

129

(2)

Discounting Future Losses

131

(1)

Systematic Over- or Underreserving

131

(7)

Trends in Reserving Error

133

(5)

Loss Reserve ``Smoothing''

138

(4)

Explaining Errors

140

(2)

Further Discussion and Conclusions

142

(1)

Notes

143

(2)

Development of Premiums for Malpractice Insurance

145

(20)

Stages in the Rate-Making Process

145

(1)

Chapter Overview

146

(1)

Actuarial Methods

146

(9)

Data Bases and Credibility

148

(1)

What Data to Include

148

(2)

How to Array the Data

150

(1)

Developing the Historical Experience of Claims

151

(1)

Trending Claims Experience into the Future

152

(1)

Final Calculation of the Recommended Premium

153

(1)

Base Premiums

153

(1)

Setting Other Premium Rates

154

(1)

Actuarial Technique in Perspective

155

(1)

Empirical Evidence on Pricing Practices from the Survey of Medical Malpractice Insurers

155

(5)

The Importance of Actuaries

155

(2)

Companies' Revisions to Actuarial Recommendations

157

(1)

Further Discussion

158

(2)

Determinants of Medical Malpractice Insurance Premiums: Regression Analysis

160

(2)

Conclusion

162

(1)

Notes

162

(3)

Risk Classification

165

(18)

Physicians and Risk

166

(2)

The Risk of Loss

166

(1)

Classifying Risks

166

(1)

The Case for Experience Rating

167

(1)

Nonexperience-Based Risk Classification

168

(1)

Choices in the Design of an Experience Rating Plan

169

(2)

Experience Rating Unit

169

(1)

Prospective versus Retrospective Rating

170

(1)

Basis for Experience Rating

170

(1)

Calculation of Experience

170

(1)

Role of Peer Review

170

(1)

Relationship of Experience Rating to Other Policies

170

(1)

Mandatory versus Voluntary Program

171

(1)

Case Studies of Experience Rating

171

(5)

New York's Mandatory Program with Peer Review

171

(1)

Massachusetts' Experience Rating Plan

172

(1)

Pennsylvania Medical Society Liability Insurance Company's (PMSLIC) Three-Tier System

173

(1)

PIE Mutual's Quality Rating Program

174

(1)

Princeton Insurance Company's Surcharge Program

174

(1)

State Volunteer Mutual Insurance Company's Retrospective Dividend Plan

174

(1)

The St. Paul's Surcharge Plan for Physicians and Surgeons in Georgia

175

(1)

Medical Protective's Surcharge Program

175

(1)

The Doctors' Inter-Insurance Exchange

176

(1)

Extent of Experience Rating in Medical Malpractice: Evidence from the Survey of Medical Malpractice Insurers

176

(2)

Discussion

178

(3)

Notes

181

(2)

Profitability in Malpractice Coverage: Excessive or Normal?

183

(23)

Accusations and Assessments

183

(1)

Chapter Overview

184

(1)

Profit Performance By Standard Measures

185

(10)

Rates of Return on Policyholders' Surplus

185

(3)

Rates of Return on Assets

188

(1)

Asset Composition

188

(1)

Critiques of Returns Based on Surplus and Assets

189

(2)

Rates of Return on Equity

191

(2)

Using Discounted Cash Flow to Estimate Profitability

193

(2)

Fair Malpractice Insurance Premiums

195

(8)

Two Methods for Computing Fair Premiums

195

(1)

Capital Asset Pricing Model (CAPM)

195

(2)

Empirical Implementation of the CAPM

197

(2)

Discounted Cash Flow (DCF) Model

199

(1)

Results: Comparing Fair Premiums with Actual Premiums

200

(3)

Further Discussion and Conclusion

203

(1)

Notes

204

(2)

Conclusion: Summing Up and Looking Forward

206

(13)

Salient Findings about Physicians' Malpractice Insurance

206

(6)

Competitiveness of the ``Industry''

206

(1)

Availability of Coverage

207

(1)

Insurer Solvency

207

(1)

Prices and Profits

208

(2)

Claims Settlement and Other Expense Levels

210

(1)

Insurance Management of Investable Funds

210

(1)

Insurance Cycles

211

(1)

Risk Spreading versus Deterrence

211

(1)

Policy Implications

212

(2)

Insurance Regulation

213

(1)

Antitrust Law

213

(1)

Tort Reform

214

(1)

The Future of the Industry

214

(4)

Incremental Change

215

(1)

Systemic Change Eliminating the Industry

216

(1)

Systemic Change with a Role for the Industry

217

(1)

Final Word

217

(1)

Notes

218

(1)

References

219

(12)

Index

231

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Insuring Medical Malpractice

Summary

Table of Contents

Supplemental Materials