Falling Claims and Rising Premiums in the Medical Malpractice Insurance Industry
Jay Angoff, July 2005
Executive Summary
This Report analyzes the 2000-2004 performance of each of the 15 largest medical malpractice insurers in the United States rated by A.M. Best, the principal rating service for the insurance industry. The Report is based primarily on data from the carriers' 2004 Annual Statements filed with state insurance departments.
The Report finds the following:
- Over the last five years the amount the major medical malpractice insurers have collected in premiums has more than doubled, while their claims payouts have remained essentially flat.
- Some malpractice insurers substantially increased their premiums while both their claims payments and their projected future claims payments were decreasing.
- Malpractice insurers accumulated record amounts of surplus over the last three years.
Taken together, the malpractice carriers analyzed increased their net premiums by 120.2% during the period 2000-2004, although their net claims payments rose by only 5.7%. Thus, they increased their premiums by 21 times (120.2/5.7 = 21.09) the increase in their claims payments.
As a result of these two dramatically different trends, the ratio between these insurers' claims payments and premiums fell by more than half between 2000 and 2004: it declined from 69.9% to 33.6% on a net basis, and from 68.8% to 32.1% on a gross basis. Put another way, in 2004 the leading medical malpractice insurers took in approximately three times as much in premiums as they paid out in claims.
Moreover, several insurers substantially increased their premiums even though their claims payments actually fell--and fell substantially. For example:
- Healthcare Indemnity, Inc. (HCI), an affiliate of HCA corporation, increased its premiums by $173 million, or 88%, while its claims payments fell by $74 million, or 32%. As a result, in 2004 it paid out only 43 cents in claims for each premium dollar it collected.
- ProNational, an affiliate of ProAssurance Corporation, increased its premiums by $87 million, or 79%, while its claims payments fell by $43 million, or 63%. As a result, in 2004 it paid out only 13 cents in claims for each premium dollar it collected.
- Medical Assurance, another ProAssurance affiliate, increased its premiums by $151 million, or 89%, while its claims payments fell by a third. As a result, in 2004 it paid out only 10 cents in claims for each premium dollar it collected.
In addition, Lexington Insurance Company, an affiliate of AIG, reported that its net written premiums increased from $21.1 million in 2000 to 483.0 million in 2004--an increase of $461.9 million, or 2200%--while its net paid losses increased by only $52.9 million. As a result, in 2004 it paid out only 14 cents in claims for each premium dollar it collected.
Finally, even the ratio between the amount the leading malpractice insurers estimated they would pay out in the future and the premiums they earn--what insurers somewhat counter-intuitively call their "incurred loss" ratio--declined by almost 25% between 2000 and 2004. Due to this decline--which is in addition to the decline in the amounts these insurers have actually been paying out--they estimated in 2004 that they would ultimately pay out in claims only 51.4 cents of each premium dollar they earned. Perhaps most striking, in 2004 these 15 insurers taken together increased their earned premium by 9.3%, even though their incurred losses--the amount they estimated they would pay out in the future--declined by 21.1%.
Because of the overall surge in malpractice premiums with no corresponding surge in claims payments during the last five years, the leading malpractice insurers have increased their surplus by more than a third in only three years, and they are now charging more for malpractice insurance than either their actual payments in malpractice cases or their estimated future payments in malpractice cases would justify.