Volume 1, Number 6
August 2001

What are you willing to pay for a sense of Security & Peace of Mind?

What are you willing to pay for a sense of security and peace of mind? That's exactly what doctors practicing in Pennsylvania are asking themselves when they receive their bills for medical malpractice insurance. They, like their brethren in Illinois, Texas, Massachusetts, West Virginia and other states are being asked to pay between 30% and 100% more for their policies this year than they did in 2000.

With ghosts of 1975 lurking in the background, many doctors are participating in organized protests. Last February, about a thousand West Virginia physicians donned their white coats, drove to the capitol and threatened they would either shut down their practices or move to states where insurance is cheaper. In April, hundreds of Pennsylvania doctors closed their offices on several Tuesdays and surged on the legislature demanding malpractice reform. It's only a matter of time before doctors in other states follow their example.
The question is: Why are malpractice premiums going up so suddenly? The answer is: There are many reasons-all rooted in the economics of supply and demand. 
Those who have been practicing over 20 years will remember that the 1975-76 malpractice crisis was triggered when Travelers and other dominant commercial carriers either stopped writing malpractice insurance or raised their prices beyond affordability. Doctors filled the void by forming their own insurance companies and kept prices down by issuing claims made instead of occurrence type policies. It took the commercial carriers almost 15 years to acknowledge the financial success of the "bed pan mutuals" and reenter the market.

In previous editions of FrontLine, we've tried to keep our readers abreast of what's happening on the supply side of the equation. We've observed that as long as there is an abundance of unused underwriting capital vying for market share, competition will keep prices down despite adverse loss experience. The supply side started to become saturated in the late 1980's after a significant number of commercial underwriters realized that the doctor-owned companies were accumulating vast amounts of surplus even though their underwriting results were at a break-even or marginally profitable.  Because it takes so long to settle malpractice claims, carriers are able to show an underwriting loss and still build their surplus by investing their loss reserves and retaining the after-tax proceeds. In the insurance business it's called "cash flow" underwriting.
No one expected interest rates to drop to pre-1970 lows or that the stock market would stay in a prolonged nosedive.  Virtually all property/casualty insurance carriers are under intense pressure to make up the resulting cash flow short-fall by improving their underwriting results.  The entire general insurance industry is moving into "hard market" mode with medical malpractice just one piece of the insurance mechanism that needs fixing. The quick solution: raise premiums!

In its recently published study, "Medical Malpractice Insurance: A Prescription for Chaos," Conning & Company observed that the combination of decreases in investment income and increased severity of lawsuits coupled with the rising costs of reinsurance, will very likely make medical malpractice a difficult market for underwriters for the foreseeable future. As a group, malpractice insurers combined ratios of indemnity, settlement and underwriting expenses to net premiums written have been steadily increasing since 1995. Over a period of just four years, the combined ratio increased from 96.4% on net written premiums of $4.8 billion in 1995 to 125.8% on $5.1 billion in 1999. The combined ratio for 2000 is expected to come in at 139%.

It's difficult to get a handle on why loss ratios are climbing. According to Conning, insurer reserve deficiencies grew to $1.7 billion. Some blame the rise on an unexpected increase in the frequency of claims being filed against healthcare providers. Others say that increasing severity, i.e. the average claim amount, is the cause. At the risk of sounding a bit cynical, we think the increase may have more to do with declining interest rates and a tanked stock market than actual claims frequency or severity. Look at it this way. Loss ratios are based upon claims paid, plus reserves for claims reported, plus reserves for claims incurred but not reported. A carrier can avoid paying taxes on an underwriting profit by increasing reserves. The money saved is then invested. The decline in investment income caused by external economic factors can be at least partially, if not totally, recouped by increasing the amount invested. Reserves can be boosted by reserving for incidents reported that might not become claims. This increases frequency. When reserves on incidents and claims reported are increased, the per claim severity obviously increases.  The only thing that tempers our cynicism is that several leading writers have declared moratoriums and are not accepting new applications.
Despite overall industry statistics, many regulators are refusing to put their stamp of approval on all or a part of the rate increases requested by some carriers. In principle, state regulators only have the authority to regulate the form and rates offered by carriers that they have "admitted" to sell insurance in their respective states.

So how did St. Paul Companies, the nation's leading writer of malpractice insurance, get its rate increases in Georgia? In a May 14, 2001 press release, St. Paul announced its subsidiary, St. Paul Surplus Lines Insurance Co., was launching a new medical liability policy for Georgia's physicians and surgeons. By taking the "non-admitted" surplus lines route, St. Paul doesn't have to obtain prior approval to offer what it describes as an enhanced product that combines medical professional liability with a variety of other property and casualty coverages.   

In the same press release, St. Paul affirmed that it remains committed to serving physicians and surgeons, "as long as it can do so profitably." St. Paul closed 2000 with a 138% combined ratio for malpractice liability. At the end of the first quarter of 2001, its ratio climbed to 170.8%, up from 115.4% for the first quarter of 2000. With a market share of almost 7% to protect, it doesn't take much imagination to believe it will introduce its surplus lines product in other states if it doesn't get needed rate relief for its admitted products. While St. Paul's commitment is commendable, either way doctors will have to pay considerably more for their sense of security and peace of mind.
Even though it doesn't appear any carriers are voluntarily bailing out (as opposed to being forced out due to insolvency as was PIE Mutual a couple of years back), several of the larger writers have closed their doors to new applicants while they try to get their footing. Frontier, Reliance, and AIG are not currently accepting new physician applications. SCPIE placed a moratorium on standard business for roughly eight months this year and Evanston Insurance Company isn't entertaining high-risk specialties that require prior acts coverage. And, CNA, the second largest medmal underwriter in the country, just lifted their national moratorium only after massive rates hikes gained approval state by state this year. The bottom line is, doctors who want or need, to go shopping for coverage will find it increasingly difficult to find underwriters willing to compete for their business at the lower prices of the 90's. And that's not all.

Underwriters are making applicants jump over several hurdles before they will offer a premium quotation. The soft market ways are long gone. Like bankers with one glass eye, they are scrutinizing every submission to find a reason to say no! It doesn't matter whether an applicant is a solo practitioner or a group, small or large. The selection process starts with the rejection of those that are on their decline risk such as obstetricians, tele-radiologists, and emergency medicine specialties.  Hospitals and nursing homes are on most carriers' no list.  The chosen ones must then clear several other hurdles. 

Here are some of the more significant changes in underwriting that applicants are encountering.  
- Many carriers previously willing to accept submissions from any broker designated by an applicant are now turning away presentations unless the broker is on their approved list.
- Some carriers have reduced the rate of commissions they pay brokers. As a result, some brokers are adding fees to recover the difference.
- Underwriters are no long being lured by the perfume of the premiums paid by large groups if the stench of losses is overwhelming.
- Carriers will no longer accept "memo" submissions. 
They won't even look at a submission until they receive their application form fully completed and properly signed. 
- Carriers won't take an applicant's word about prior losses. They want written verification from the prior carrier even if there have been no losses.
- Large group practices, including provider organizations such as IPOs, PPOs, and MCOs, are now being asked to provide financial statements. Financially shaky applicants are being shunned as if infected with a fatal disease.
- Prior acts, for high-risk specialty's coverage may not be available.  Even if a carrier is willing to offer coverage, it won't be free. 

We've said it before. Competition exists, even in a hard market.  The best way to get through the maze of changes is to let an experienced and competent insurance broker that specializes in medical malpractice insurance do it for you. 

EDITOR'S NOTE: Just prior to going to print, two major market events occurred that we felt deserved mention as they directly support this article. Instead of adding these news items to the preceding article, (written before these two important announcements) we have included summaries of these late-breaking developments on page 5. As you will see, major changes are here-changes that will affect nearly all those who purchase medmal insurance.


The New MIEC Large Loss Survey

In 1999, MIEC made a big change in their survey of California medical malpractice verdicts, settlements and arbitration awards. They decided to limit the study to cases involving awards of $1,000,000 or more. They began the Large Loss Trend Study in 1973, when they reviewed cases with $50,000 indemnity. About ten years later they increased the threshold to $100,000. That was the pattern until two years ago, when they analyzed 137 cases, including 33 that exceeded $1,000,000. 

Highlights of the 2000 Survey
€ Highest number of $1 million+ cases ever reported (39)
€ Fewer verdicts (25.6% of the 2000 cases vs. 52.6% in 1999)
€ Shorter average length of time from incident to settlement or verdict 
(less than four years for the first time in the history of this study)
€ Preponderance of cases (74.4%) and indemnity (77.8%) are still in 
Southern California (but not as high as in prior years)
€ Birth injury cases, again, represented the largest category (43.6% of cases) and largest share of indemnity (44.8%, or $51.6 million)
€ Anesthesia-related cases are reappearing (4 in 2000 compared to zero in 1999 and one in 1998)
€ More arbitration awards reported in 2000 (4 cases representing 
10% of indemnity)

For a complete copy of this report visit www.miec.com.


A Hole in the Bucket
MedMal Losses Wipe Out Year 2000 Premiums Increases 
by Rick Mortimer

For over two years I've been forecasting that dark clouds of a medical malpractice insurance crunch were looming on the horizon and have alerted health care providers to prepare for a flood of premium increases. If you haven't already done so, take a moment to read our cover story, "What Are You Willing to Pay" for an update. As I predicted, it's starting to rain. The bad news is that despite rising premiums, the deluge of claims has many underwriters bailing for survival and Noah like storms are on the way.

The statistics are gloomy. During 2000, the direct written malpractice premiums written by all U.S. carriers increased by 4.86%, from $6,011,992,000 in 1999 to $6,304,315,000. Unfortunately, the industry's adjusted loss ratio increased by 5.75%, from 78.2% in 1999 to 82.7%. The $289,323,000 premium increase was washed away by the torrent of $512,290,000 of additional losses.

It's particularly interesting to look at the shift that took place in 2000 in the ranking of the top 20 carriers and their respective premium and loss results. AP Capital Group seems to have appeared out of no where to take the 19th spot with no basis for comparing its 2000 results to 1999. The APC story is interesting because it exemplifies the consolidation of carriers taking place. APC is an amalgamation of Michigan Physicians Mutual Liability Company, RML Insurance Company, Kentucky Medical Insurance Company and New Mexico Physicians Mutual Liability Company.

Overall, 19 of the 1999 top 20 carriers (APC's 1999 numbers aren't included), controlled 69.5% of the market with $3,712,663,000 of the direct premiums written. In 2000, the top 20's share (including APC) dropped to 68.8% on $4,332,863,000 in premiums. Together, their combined adjusted loss ratio rose from 77% in 1999 to 79.3% in 2000. Assuming a break-even of 70%, it would seem the underwriters' boats are leaking badly. The tables below tell a different story. Of the 20, only eight suffered adjust loss ratios significantly above 70%!

More significantly, only five of the top 20 experienced a drop in direct premiums. Although 11 lost market share, collectively the combined premiums of the 20 increased $610,200,000. A little simple arithmetic tells us the remaining 80+ carriers' combined writings decreased by $317,877,000. What does this mean? Just this: when the industry sees underwriters like St. Paul and other leading writers struggling to make a profit, they all start raising prices and tightening their underwriting standards to buttress the flood of new applications that pour forth as canceled policyholders and those looking for bargains scramble to find new boats. 


News Flash

EDITOR'S NOTE: Just prior to going to print, two major market events occurred that we felt deserved mention as they directly pertain to, and support, our cover story. Instead of revising our lead story, (written before these two important announcements) we offer the following summaries of these late-breaking developments. As you will see,major changes are here-changes that will affect nearly all those who purchase medmal insurance.

AUGUST 14, 2001
In an August 14th letter to Agents and Brokers, St. Paul Fire and Marine Insurance Company announced a "New Health Care Strategy" that denotes a dramatic shift in their medical malpractice underwriting commitment. The bottom line: in order to renew profitability, "tightening prices, terms and conditions" can be expected. The hardest hit by St. Paul's new "strategy" are going to be "OB/GYN, General Surgery, and Emergency Department risk" among other higher-risk surgery classes. Tele-radiology, locum staffing services may also be added to the higher risk classes. A general overall firming continues. 

AUGUST 16, 2001
Pennsylvania Department of Insurance announced that it petitioned the Commonwealth court to place PHICO Group in Rehabilitation under their direction. In an August 16th press release, PA DOI stated "PHICO filed a quarterly statement late yesterday that reflected a surplus of $6.8 million, a substantial and alarming decrease from its year-end 2000 surplus of more then $127 million. PA DOI took the action to safeguard PHICO policy holders and stabilize PHICO's assets while surplus levels remain below the mandatory requirement.


Risky Business
By Sharyn O'Mara, CPHRM
O'Mara & Associates

As the healthcare industry continues to experience rapid change in technology, economics and structure, integration of risk assessment, financial and prevention elements is critical to reaching the ultimate risk management goal of protecting the organization's and professionals' assets from loss. "Integrated Risk Management" refers to the comprehensive assessment of exposures to loss, implementation of appropriate prevention and control strategies, and identification of optimal risk financing and insurance programs.

With the hardening of the insurance markets, impacting access, coverage and costs to the insured, contract relationships and compliance presents risky business for all healthcare organizations. Exposures to loss exist because of what the organization does, including third-party obligations assumed through varied relationships, separate from the quality of services provided. 

Types of agreements:
- Professional services
- Reimbursement
- Affiliation agreements
- Transfer agreements
- Consignments
- Equipment contracts
- Maintenance and service
- Shared services 
- Deeds, leases, easements, permits

The business risks assumed are not "automatically" covered risks by commercial insurers. Dependence upon the typical "Hold Harmless" and "Indemnification Agreement" contained in contract documents is not adequate treatment of the exposures inherent in all contracts. Additionally, any extension of coverage in a given policy for "additional insured's" requires underwriting review and approval of the insurance carrier. Some risks are not insurable. Examples include Breach of Contract, Bad Faith, and Punitive Damages.

Assessment organizational risk exposure is gaining greater importance with the complexity of provider/payer relationships to assume appropriate and adequate insurance coverage. A risk profile, detailing organizational operations, is a good tool to use in presenting submissions to insurance underwriters for preferred consideration. Contracts and agreements contain "hidden" exposures rarely evaluated by the organization. Review of all current documents and relationships is important to assure adequacy of insurance coverage, and protection of assets. 

Here are some questions to ask:
What contracts exist currently?
Who is responsible for risk assessment of contract provisions?
Who can obligate the organization in contracts?
What are the performance requirements?
What exposures to loss potential exist?
What's insurable and what's not?
What are the operational requirements assumed by each party?
How is performance measured?
What are the provisions for ending the relationship/contract?
What procedure is followed to assure compliance with the stated provisions?

Case Illustration
The Department of Health Services (DHS) performed an unannounced site survey of a physician owned Ambulatory Surgical Center, ASC, at the request of HCFA. Medicare participation requirements for quality management, infection control and staff skills were cited as deficiencies. The report was sent directly to HCFA, and fast tract decertification of the facility initiated based upon "patient jeopardy" and lack of compliance. The emergency response required attorney's fees and revenue flow risks that resulted are not insurable.


This newsletter is for general informational purposes only. It is intended to provide a limited overview of the market and to provide thought provoking ideas for our readership to consider when arranging for risk transferal programs and insurance.

Please let us know if you have any suggestions or items of interest for upcoming newsletters. Your input is valuable to us.

How to reach us:

HealthCare Professionals' 
Insurance Services
Risk Finance Consulting & Insurance
475 S. State College Blvd.
P.O. Box 9699
Brea, CA 92822-9699
714.990.4430 € 714.255.0872 Fax
e-mail:  info@hcp-insurance.com
internet:  www.hcp-insurance.com


Publisher:
R.W. Mortimer & Associates
Insurance Agents and Brokers, Inc.
DBA: HealthCare Professionals'
Insurance Services
Rick Mortimer, Editor