Insuring Medical Malpractice

by Frank A. Sloan, Louis Schweitzer, Penny B. Githens

Overview

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.

Product Details

ISBN-13:	9780195361513
Publisher:	Oxford University Press
Publication date:	09/26/1991
Sold by:	Barnes & Noble
Format:	eBook
File size:	3 MB

About the Author

Duke University

The Urban Institute

Vanderbilt University

Table of Contents

List of Tables		xvii
List of Figures		xix
List of Boxes		xxi
Introduction		3	(18)
Background		3	(1)
Periodic Crises: The 1950s to the 1980s		4	(6)
The Mid-1970s and Before		4	(1)
Industry and Legislative Response		5	(1)
Renewed Crisis in the 1980s		6	(1)
Trends in Premiums and Claims		7	(3)
1980s Responses		10	(1)
Reasons for Public Concern		10	(2)
Insurance Availability and Price		10	(1)
Higher Prices for Medical Care and Reduced Access to Care		11	(1)
Quality of Medical Care		12	(1)
Chapter Plan		12	(2)
Conclusion		14	(1)
Notes		15	(1)
Appendix: Data Sources		16	(1)
Survey of Medical Malpractice Insurers		16	(1)
Survey of Former Medical Malpractice Insurers		17	(1)
Regulatory Survey of Insurance Departments		17	(1)
Premium and Claims Data		17	(2)
Premium Data		17	(1)
Claims Data		18	(1)
Data from A. M. Best Company		19	(1)
Best's Insurance Reports---Property/Casualty		19	(1)
Best's Casualty Loss Reserve Development		19	(1)
Best's Reproduction of Convention Statements		20	(1)
Market Share Data		20	(1)
Other Data Sources		20	(1)
Conceptual Framework and Institutional Context		21	(28)
A Portrait of Insurance Practice		21	(1)
The Nature of the Insurance Product		21	(6)
The Risk of Insurance		21	(1)
Legal Liability as a Risk		22	(1)
Third-Party Insurance		23	(1)
Low-Frequency, High-Severity Risk		24	(1)
Lag Between Premium Inflows and Cash Outflows		24	(1)
Earnings from Underwriting and Investment		25	(1)
Diversity of Organizational Forms		25	(1)
State-Specific Operations		26	(1)
Individual Coverage		27	(1)
Insurance Cycles		27	(1)
Chapter Overview		27	(1)
Theory of the Insurance Firm: The For-Profit Firm		28	(8)
Assumptions		28	(1)
Insurer Price and Output Decisions in Pure Competition		28	(2)
Underwriting, Investing, and Treatment of Risk		30	(1)
Underwriting Risk		30	(1)
Investment Portfolio Risk		31	(1)
Risk to Owners of the Insurance Company		31	(3)
Role of Reinsurance		34	(1)
Relaxing Some of the Assumptions		34	(1)
Competition		34	(1)
Single Line of Coverage		35	(1)
Exogenous Losses and Homogeneous Policyholders		35	(1)
No Regulation		36	(1)
Theory of the Insurance Firm: Alternative Organizational Forms		36	(6)
Rationale for Alternative Organizational Forms		37	(1)
Incentive Incompatibility		37	(1)
Conflicts Among Managers, Owner-Risk Bearers, and Policyholders		37	(1)
Responses to Conflicting Incentives		38	(1)
Other Differences Among Organizational Forms		38	(2)
Alternative Ownership Forms		40	(1)
Stock Companies		40	(1)
Mutuals		40	(1)
Reciprocals		41	(1)
Trusts		41	(1)
Lloyd's Associations		41	(1)
Risk Retention Groups		41	(1)
Joint Underwriting Associations		41	(1)
Patient Compensation Funds		42	(1)
Cycles in Premiums, Profits, and Supply		42	(4)
Recoupment of Loss on Investments		43	(1)
Competition Among Oligopolists		44	(1)
Loss Forecast Errors		45	(1)
Regulatory Lags		45	(1)
Capacity Constraints		45	(1)
Conclusion		46	(1)
Notes		47	(2)
Regulation and Its Effects		49	(25)
Regulation and Competition		49	(1)
Chapter Overview		49	(1)
A Brief History of Insurance Regulation		50	(2)
The Early Development of Regulatory Authority		50	(1)
Early Legal Developments		51	(1)
State Authority in the Current Era		51	(1)
Goals, Methods, and Structure of Regulation		52	(7)
Goals of Regulation		52	(1)
Solvency		52	(1)
Reasonalble Rates		53	(1)
Availability		53	(1)
Information and Fair Play		53	(1)
Other Goals		54	(1)
Methods of Insurance Regulation		54	(1)
Solvency		54	(2)
Reasonable Rates		56	(1)
Availability		56	(1)
Information and Fair Play		57	(1)
Structures of Regulation		58	(1)
Perpectives on Insurance Regulation		59	(2)
Formal Legal Analysis		59	(2)
Empirical Research		61	(1)
Evidence on Insurance Regulation		61	(9)
Solvency Regulation and Effects on Entry of Insurers		62	(1)
Evidence from Other Studies		62	(1)
Evidence from Our Survey of Medical Malpractice Insurers		62	(4)
Regulation of Prices		66	(1)
Evidence from Other Studies		66	(2)
Evidence from Our Survey of Medical Malpractice Insurers		68	(1)
Differences in Rules for Different Types of Insurer		69	(1)
Regulatory Responsibilities within Companies		70	(1)
Conclusion		71	(1)
Notes		72	(2)
Market Structure and Conduct		74	(27)
Conceptual Approach		74	(2)
Chapter Overview		76	(1)
Market Structure		76	(17)
Defining the Relevant Market		76	(1)
Product and Geographic Market Definition: The Case of Medical Malpractice Insurance		77	(2)
Exit and Entry		79	(1)
Evidence on the Top Three Medical Malpractice Insurers per State		79	(1)
Barriers to Exit		79	(1)
Evidence from Exiting Companies		80	(2)
Seller Concentration		82	(1)
Measuring Concentration		82	(1)
Concentration in Malpractice Insurance		83	(2)
Underwriting Standards and Product Definition		85	(1)
Demand Curves Facing Individual Insurers		86	(1)
Persistence of Physician Insureds with Their Insurers		86	(2)
Elasticity of Demand		88	(3)
Economies or Diseconomies of Scale		91	(2)
Conduct		93	(3)
Agreements Not to Compete		93	(1)
Other Possible Forms of Collusion		93	(1)
Use of Same Actuaries		94	(1)
Role of Rating Bureaus		94	(1)
Role of Medical Societies		94	(2)
Interdependencies in Premium Setting		96	(1)
Comparisons Among Ownership Types		96	(2)
Monitoring Physicians		97	(1)
Defending Physicians		97	(1)
Assuring Availability of Coverage		98	(1)
Conclusions and Implications		98	(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

Editorial Reviews

"The book should be of interest to anyone seeking to understand the key features of the insurance industry in the United States....It should be useful to those interested in insurance and those concerned with an important aspect of medical economics."—Journal of Economic Literature

"Culminates and extends the authors' extensive past published work on malpractice insurance. The book's clear organization allows the reader to easily find the connections between evidence and conclusions. It patiently explains institutional details, as well as the industry's legal and regulatory environment. A strength of the book is its presentation of extensive data developed by the authors and their institutions." —Inquiry

From the Publisher