Medical malpractice – fixed or broken?

The medical malpractice insurance business is either back under control and meeting the needs of the market without the benefit of major and widespread tort reform, or is in crisis, near death, and likely to expire without major tort reform.
Where you sit determines what you see.
From consumer watchdog group Americans for Insurance Reform comes the following excerpt from their press release:
“Americans for Insurance Reform (AIR) released a new study today confirming the wholesale decline of medical malpractice insurance rates nationwide. The AIR study also shows that this phenomenon is occurring whether or not states enacted restrictions on patients’ legal rights, such as “caps” on compensation. The medical malpractice insurance “crisis” is over, according to the study.
AIR’s study is based on the most recent Council of Insurance Agents and Brokers survey of market conditions, showing that the average rate hike for doctors over the past six months has been 0 percent. This is following similar results for the last quarter of 2004, which saw rates rising only 3 percent at the end of that year. By comparison, rates jumped 63 percent during the same quarter of 2002. ”
In contrast, the Council of Insurance Agents and Brokers released their own interpretation of the numbers, noting:
“‘ to interpret that data to mean that the ‘crisis’ is over is a gross misrepresentation of the situation,” Crerar said. “First of all, having rates stabilize for one or two quarters doesn’t mean those rates have gone down. It only means that they have not gone up any farther. It is like saying that just because gasoline costs $2.50 a gallon today, down from $3 a gallon last year, we don’t have an energy crisis, and gas is cheap.”
CIAB also finds fault with AIR’s math, and reading CIAB’s interpretation it does appear the Americans for Insurance Reform could do with a little more practice with the calculator.
So, what’s the real deal?
Well, the malpractice “crisis” is partially related to insurance cycles (we’re in a transition from a hard market to a confused one right now), and as I’ve noted before, has a relatively small impact on overall health care costs. While the med mal debate is interesting, it is a sideshow – med mal is not a major force in US health care.
That said, the interesting point is that the drop in rates is occuring in states that implemented tort reform and those that did not. Makes one wonder what influence tort reform has on costs…


P&C Industry results

Wilma, Katrina, et al hammered insurer profits almost as badly as they hit the Gulf Coast, resulting in the insurance industry losing $2.8 billion during the first three quarters of 2005. There is actually good news in this, as the losses forced insurers to stop cutting prices, thereby starting a downward trend in industry financials.
According to “Insurance Journal”,
“Before Hurricane Katrina, rate decreases and competition on many lines began to emerge throughout the majority of 2005. However, following this event, the trend of rate declines reversed on some lines of business, particularly in those areas directly impacted by the hurricane, and stalled on others. While this rate environment will have a positive impact on future results, A.M. Best believes the retreat from rate decreases will be short-lived.
The insurance industry’s cycles are well-known and well-documented – it marches off the same cliff over and over again, each time promising itself that it won’t be that stupid again.
History predicts otherwise.
I’d expect rates to stay somewhat firm, as early forecasts are for a storm season every bit as fierce as the one just passed. And, it is coming up in a few short months.
What does this mean for you?
A chance to tell me what a lousy prognosticator I am if rates plummet.


Property and casualty results for 2005

Dr. Robert Hartwig of the Insurance Information Institute recently gave an interview to Insurance Journal on the US property and casualty industry’s 2005 results, and made a few predictions about this year. According to Hartwig, 2005 will deliver a combined ratio of 99%, a surprisingly strong result given the impact of the four hurricanes. The weather had a huge effect on results; after stripping out extra-ordinary events, the industry actually would have had a combined ratio of in the 80’s. (However, there are always extra-ordinary results, so I’m not sure what stripping them out does


TRIA extension provisions’ impact

The extension of the Terrorism Risk Insurance Act was met with lukewarm enthusiasm by the insurance industry, for good reason. However, it was likely the best that could be obtained given the strong political desire on the part of Congress and the Administration to mitigate the Feds’ risk.
There have been significant changes to TRIA, which will be in place through the end of 2007. Here are a couple of the key provisions and the impact of same.
1. In 2007 the insurance industry’s “deductible” will increase to 20% of direct earned premium from 17.5%. The result – more risk at the insurer level.
2. The share of the risk that the government will take will also decrease from 90% to 85%.
Modeling done by Risk Management Solutions indicates that the World Trade Center attacks, which produced a loss of $32.5 billion, would result in minimal funding through TRIA if they occurred under the 2007 provisions.
The “good news” is RMS predicts there is less than 10% likelihood that any one attack would produce a loss of this size.
What does this mean for you?
There are two components to claims costs – frequency and severity. While all of us fervently hope that no attacks occur, the realists among us are more


Property and Casualty 2005 results

The property and casualty insurance industry was headed towards record profits last year, only to have Katrina et al blow the black ink right off the books. The latest estimates indicate 2005 will actually result in a net loss for the industry as a whole. This will likely inspire a hardening of the market, as we have been predicting for several months.
The industry-wide combined ratio (losses plus expenses before investment income) should end up around 105% for 2005. While analysts expect 2006 to improve, I wouldn’t put much, if any, stock in their predictions – the vagaries and severity of natural disasters have made a mockery out of human predictive capabilities.
From a financial perspective, the industry’s hit in 2005 resulted in a Return on Equity (ROE) of 9.5%, hardly a stellar result but not too bad considering historically low interest rates and the up-and-down nature of the equity markets. On the bright side, the renewal of the Terrorism Risk Insurance Act (albeit in modified, and slimmed-down form) for two more years has added a lot of stability to what otherwise would have been a very nervous market.
What does this mean for you?
Pressure on underwriting results should mean a stronger focus on managing claims. Some of the recent initiatives by companies like Crawford indicate more and smarter approaches are in the offing. And that’s good news.


Sedgwick CMS acquired by Fidelity National

Sedgwick CMS, one of the leading claims administrators in the property and casualty industry, will be acquired by Fidelity National, the largest title insurance company in the country. This followed a several-month process wherein a number of entities were competing to purchase Sedgwick.
If you haven’t heard of Fidelity National (no. 261 on Fortune 500), here’s their PR blurb…
“(Fidelity is a) leading provider of core financial institution processing, mortgage loan processing and related information products and outsourcing services to financial institutions, mortgage lenders and real estate professionals. Through its wholly-owned subsidiaries, FNF is also a provider of specialty insurance products, including flood insurance, homeowners insurance and home warranty insurance…”
Looks like a complementary deal – Sedgwick does “outsourced” claims processing, albeit serving a different marketplace and different customers. In the announcement, FNF’s CEO said Segwick’s acquistion will enable FNF to “leverage our core expertise in title insurance processing and financial transaction processing…”
Perhaps FNF is thinking that their home-grown expertise in processing title insurance and other transactions can be helpful to Sedgwick, or Sedgwick can provide FNF with expertise that will streamline operations at their new parent.
Other than that, I don’t see any “synergies”.
Thanks to an anonymous reader for the heads-up.


Greenberg will not be charged with crime

Hank Greenberg, ex Chairman of AIG, has escaped criminal charges at least for now. A spokesman for Eliott Spitzer, NY Attorney General, announced that while civil charges may be pending, no criminal charges will be filed by the state.
However, Mr, Greenberg is not yet out of the woods. According to Insurance Journal, there are two federal investigations still in process, with the potential for federal charge. And, Spitzer is likely to add charges to his civil complaint in the near future.
Spitzer’s and other state attorneys’ probes of the insurance industry has already resulted in criminal charges filed against over a dozen individuals, hundreds of millions in fines and settlements, and a dramatic reshaping of several venerable firms including Marsh and AIG.
What does this mean for you?
Even though we didn’t need any more proof, more evidence that crime, or the appearance of crime, does not pay.


Property Casualty insurance rates

The latest information from MarketScout indicates the property casualty insurance market remains soft, with prices continuing to fall in October. This comes as somewhat of a surprise as industry analysts predicted a hardening (price increases) of the market after the disastrous hurricane season.
According to Insurance Journal;
“In October 2005, the composite rate for all lines of property and casualty coverage was down 4%, a slight market correction from the preceding month but still a noticeable composite premium reduction from the 2% increase in October 2004. The total market differential for the last 12 months has been 8%, with a gradual market softening from rate increases of 2% in October 2004 to a rate decrease of 6% in August 2005.
After Hurricanes Rita, Katrina and Wilma hit the U.S. mainland, the market began a measured correcting pace as premium reductions have subsided, particularly in property business. The market appears to be headed towards an overall rate increase sometime in the summer of 2006.”
There are likely two main factors delaying the impact of the hurricanes on premiums and coverage. First, many renewals had already been negotiated and agreed upon, therefore the rates were set before the storms hit. Second, primary insurance rates are driven in part by reinsurance rates, coverage limitations, and treaty arrangements. Most of the primary insurer – reinsurer contracts have yet to be renegotiated; when they are you can rest assured reinsurance rates will increase substantially, driving up the cost of insurance to the consumer.
Of interest to many readers, workers comp rates were down 6% year over year in October. However, these rate decreases were driven in large part by significant reforms in California and Florida; rates in most other states did not drop nearly as much as those two bellwether jurisdictions. Of note, workers compensation rates in California have dropped 26.7% since imposition of the reforms at the beginning of this year.
What does this mean for you?
Renew now while you can, before the impact is felt by renewed reinsurance arrangements. As it is, if you have yet to sign a deal, it is very likely too late.


Hurricanes hit insurer’s financials

The first indication of the financial impact of Rita and Katrina is St Paul/Travelers’ announcement that they took a $1 billion charge (after tax) to account for the costs of the two storms in the most recent quarter.
Interestingly, gross premium income was only up 2% from the prior year’s quarter. This is yet more evidence of the current soft market in property and casualty insurance. As noted here previously, rates are already heading back up as insurers seek to rebuild reserves after taking hits for the current storm season. Which is not yet over…
Return on equity was a strong 11.9% for the first nine months on an operating basis, even after including the hurricane impact. Without those storms, RoE would have been a very healthy 18.4%.
What does this mean for you?
As indicated here before, strong financial results usually mean prices will be coming down for insurance. However, the recent weather has likely hit confidence levels as well as financials. Thus, I would expect pricing to firm up rather than continue to soften.


Hurricane Wilma’s financial impact

Early indications are that hurricane Wilma will result in US insured losses of $6 to $9 billion. Although lower wind speeds and the faster movement of the storm contributed to these relatively modest claims (at least in comparison to Rita and Katrina), Florida’s strong building codes are also being credited with reducing the storm’s financial impact.
When a multibillion dollar storm is considered good news, the P&C markets are in trouble. And adding Wilma’s expected impact to that of the season’s previous storms makes this far and away the worst season on record in terms of financial damage. Wilma will likely cause additional damage as she moves up the coast, with strong winds and rain now hammering New England and the NYC area.
What does this mean for you?
Your insurance rates are going up.