While injured Californians face damage caps, medical malpractice insurers have record surpluses
Thursday, September 23, 2010
Since 1975, after complaints that medical malpractice insurance rates were out of control, Californians injured by medical malpractice have been limited by law in how much they can be awarded in compensation. But what’s out of control now is the money available for profits for medical malpractice insurance companies.
Doctors are complaining their medical malpractice insurance premiums are still too high? It’s not because injured Californians seek compensation for their injuries. It’s because medical malpractice insurance companies haven’t lowered premiums anywhere near as quickly as their claims payments have dropped.
The total amount of medical malpractice insurance premiums paid in California fell 26.7% from 2003 to 2009. But the total amount those insurance companies expected to pay out in medical malpractice claims fell 64.8% during that same period.
In 2009 alone, companies that provide medical malpractice insurance in California took nearly $420 million more in premiums than they expect to pay out in claims. That’s nearly double the amount that would allow insurers to earn a fair profit, according to industry standards. It’s completely out of line with the percentage of premiums paid out in other insurance lines, such as homeowners or auto liability. And California’s malpractice insurers have consistently overestimated the amount they will have to pay out in claims, meaning the excess reported for 2009 will likely wind up being even greater.
Each year the California Department of Insurance requires licensed insurers to report the premiums they’ve earned and an estimate of the total amount of the claims payments they expect to make from cases in that year. This figure is estimated because medical malpractice claims can take up to ten years to be settled; claims often aren’t even filed in the year in which the malpractice occurred. The estimated claims payouts divided by the premiums earned is known in the industry as the “loss ratio.” The lower the loss ratio, the more money is available for the company’s profit, as well as to pay overhead and expenses (including executive salaries).
(The industry term for the estimate of claims payments is “losses incurred.” The term can be misleading to people outside the insurance industry because “losses” in this sense are not the opposite of “profits.” Any claims payment is referred to as a “loss.” When a company says it has “reduced its losses,” that doesn’t mean it was losing money and is now losing less money; it means it has reduced the amount it has paid out in claims. An insurance company can see an increase in “losses” and still be extremely profitable.)
Jay Angoff provides the framework with which to analyze loss ratios. He is a former state insurance commissioner in Missouri and is now the director of the Office of Consumer Information and Insurance Oversight in the U.S. Department of Health and Human Services. In a 2008 affidavit in a California court case, Angoff wrote, “An incurred loss ratio much above 70 means the insurer is likely earning an inadequate profit; a ratio much below 65 means its profit is likely excessive.”
On its web site, the California Department of Insurance provides loss ratios for all licensed insurers going back to 1991; the data for medical malpractice insurers is found on Line 11 of each year’s California P & C Premium and Loss Summary. In the last 19 years, how many times have medical malpractice insurers had a collective loss ratio above 70 percent, indicating the likelihood of an inadequate profit?
And how many times have medical malpractice insurers collectively posted a loss ratio below 65 percent, meaning their profit is likely excessive (defined by the Department of Insurance as more than 6% plus the average return on short, intermediate and long-term U.S. government bonds)?
Every single year.
And in almost every year, the medical malpractice insurance loss ratio was WELL below 65%. The highest ratio between 1991 and 2009 was 57.2%, in 2001. It has been below 40% in each of the last six years. In 2008, it was 16.4%; in 2009, 22.9%. And the largest provider of medical malpractice insurance in California, The Doctors Company, had a loss ratio in 2009 of 10.0%. That’s the lowest such figure for any of California’s major medical malpractice insurers going back to 1998, the time period for which the data is available for individual companies on the Department of Insurance website.
Compare the medical malpractice loss ratio to the loss ratio for all insurance lines written in California in 2009, which was 52.0%. For private passenger auto insurance (liability and physical damage combined), the largest category of the insurance market, it was 57.2%. For worker’s compensation insurance, the second largest category, it was 68.5%.
And for medical malpractice insurance it was 22.9%. That means more than three-fourths of money paid as premiums was available for general overhead, defense lawyers fees, agents commissions and profit.
Jay Angoff said the medical malpractice loss ratio in California is “astoundingly low. It means that the insurers, rather than the doctors, are receiving the benefits” of the California law that puts a cap on the amount victims of malpractice can receive.
But wait, you say…won’t those claims payments increase over time as more claims are filed based on 2009 injuries? No. Remember, the insurance company reports of “Losses Incurred” include estimates of such future claims…and those estimates have consistently overstated the amount insurance companies will actually wind up paying.
Insurers are required to file an annual statement with the National Association of Insurance Commissioners (NAIC), showing how much they have reserved to pay future claims, including their legal costs. Angoff explained how it works:
Because only after nine years have elapsed will substantially all claims that arose in a given year have been paid, an insurer can not know whether its initial estimate of its ultimate liabilities for claims arising in a given year is accurate until nine years after that year. Accordingly, in their [NAIC] Annual Statements insurers disclose the initial estimate they make of their ultimate liabilities for claims arising in the year nine years before the Annual Statement year, and also their current estimate of those liabilities, which is substantially equivalent to their true ultimate liability. They disclose this data, on a countrywide basis only, in Schedule P, Part 2 of the Annual Statement.
(The preceding, as well as all following quotes from Angoff, are taken from his 2008 affidavit in Stinnett v. Tam.)
While The Doctors Company is California’s largest medical malpractice insurer, with nearly 38% of the market in 2009, it writes medical malpractice policies in all states and does only about a third of its business in California. Therefore, Angoff said, it’s not possible to fairly draw conclusions about the company’s California business based on the Schedule P data.
But Norcal Mutual Insurance Company has always written substantially all of its business in California. Norcal was typically, through 2008, the state’s largest provider of medical malpractice insurance. In 2009 Norcal’s share of the market went up, to 27.7%, but the company fell to number two in the market after The Doctors Company, which had been number two, bought SCPIE Indemnity Company, which had been number three.
For the years 1989-2000, Norcal over-reserved by more than 25%. Those are the most recent years that can be accurately analyzed, since it takes nine years to have a complete picture of the actual liability. But according to Norcal’s 2009 Schedule P, it has already reduced its estimated liability for every year from 2002 through 2008, in some cases dramatically. And as Angoff points out, overestimating its liability gives an insurer grounds for setting higher rates.
Because rates are based on the amount the insurer estimates it will pay out, not on the amount it has actually paid out, the fact that Norcal’s estimates of the amount it would ultimately pay out have consistently been far higher than its actual payouts is an indication that its rates have consistently been excessive.
SCPIE, which also wrote substantially all of its business in California, shows a similar pattern of over-reserving. For the years 1989-2000 it ended up paying almost 22% less than it had originally estimated.
In addition to loss ratios and reserves, there is a third area of financial performance that bears scrutiny: surpluses. Here’s Angoff’s definition:
The surplus of an insurance company is the amount it holds over and above the amount it has reserved to make its estimated future claims payments. There are two main sources of surplus funds: profits the company declines to distribute to its owners – its policyholders in a mutual company, its stockholders in a stock company – and funds that are transferred from reserves to surplus because the company has paid out less in claims than it has reserved for such claims. Because the three leading California malpractice carriers’ profits have been excessive and because they have routinely reserved far more than they have actually paid out, their surplus has soared during the last five years.
It’s a good idea for an insurance company to maintain a surplus, to ensure it will be able to pay claims even if it has underestimated the amount it will have to pay. The NAIC has established a formula for a minimum required surplus for each insurer, based on its particular mix of risk assumed and assets held; state insurance departments will require the insurer to have double that amount.
Angoff notes an insurer might need to carry an unusually large surplus if it routinely under-reserves, but we’ve seen that’s not been the case for California’s major players. Yet those companies maintain massive – and growing – surpluses.
Norcal’s surplus has been more than four times the minimum required each year since 2003. Its 2009 surplus was its highest ever, more than $506 million – almost TEN TIMES its minimum requirement.
The Doctors Company has also had a surplus of more than four times the minimum required each year since 2003. It also had a record surplus in 2009, more than $1.06 billion (with a “b”) – almost nine times the minimum required. (In 2007 its surplus was more than eleven times the minimum required.)
SCPIE’s surplus has been more than three times the minimum required each year since 2003. Its 2009 surplus was a record $240 million – more than TWELVE TIMES its minimum requirement.
“These surplus levels are perhaps the best evidence of how flush the California medical malpractice industry is today,” Angoff said.
And yet, while insurance companies are sitting on hundreds of millions of dollars of extra cash, the maximum that can be awarded for non-economic damages to Californians injured by medical malpractice has not changed since 1975, not even with an adjustment for inflation.
— J.G. Preston