James Copland took the Center for Justice and Democracy to task earlier this week for its recent report by Jay Angoff. Mr. Angoff is a former Insurance Commissioner for the State of Missouri and he seems to have particular problem with the med mal insurance industry as evidenced by an interview he gave published in Trial Magazine. I discussed this interview earlier this year.
James Copland has commented on a number of logical problems with the study and I thought I’d do a quick look at the data and provide a bit more information. The first chart shows the number of companies selling malpractice insurance, as well as the US average loss ratios over this period 1995–2004. (I excluded those companies that sold less than $10,000 in a given year because they are not likely really in the med mal business). As we can see, the number of companies decreases over the period and only recently increases. This recent increase reflects alternative companies formed, in part, to deal with the med mal crisis. Entry may also be occurring as it looks like industry is becoming more profitable for the first time in recent years.
Two other items to note are explored in this same chart. Mr. Angoff’s conclusion that the loss ratio (shown in pink on the chart) is now quite favorable to insurers is an accurate statement as far as it goes. The loss ratio is the ratio of losses incurred to premiums earned and does not include expenses. We see that starting in 2000 the ratio is steadily falling (thus less of the premium dollar is going to pay claims and incurred losses). What is truly amazing, however, about the report is its absolute failure to consider expenses. The second loss ratio (shown in green) suggests a very different picture. If we include loss adjustment expenses (which include legal fees, witness fees, and the like) we see that while the loss ratio including the expenses has decreased since 2000, it is still greater than 1. Thus, on average, a case costs $1.20 to close for each dollar of premium paid. This does not sound like the insurance industry is “profiteering” to use the words of Connecticut AG Blumenthal. To be fair this apparent loss is likely to be reduced somewhat as one must also include investment returns which may make the line profitable next year if the projections hold. However, we still are not talking profiteering as profits will signal others to enter the industry. This is an appropriate competitive reaction.
Another problem with Mr. Angoff’s report which is quite striking is the conjecture medical malpractice insurers hold too much surplus. James Copland also noted this new canard. The NAIC and the states have a risk based capital (RBC) standard which requires the company to hold assets in reserve in accordance with the risk the companies face. Thus, companies writing riskier lines of business must hold more capital to ensure solvency. RBC was designed, in part, to focus regulators on the truly troubled companies and provide the regulators with authority to undertake specific remediation if the insurer’s capital falls to such a level as to threaten the insurer’s viability. It was never suggested as an ideal or maximum amount of capital for an insurer to hold. Mr. Angoff, states that each of the companies he looks at has capital which “exceeds the surplus the NAIC deems as adequate.” RBC is a minimum standard!
In fact, my second chart shows the percentage of industry assets that are at each level of Risk Based Capital. The red categories are those where the regulator or the company must undertake some type of action. Companies in this group are troubled. Note that about 6 percent of the assets of the entire industry are at this level and approximately 1 percent of of those companies writing med mal insurance are on this level. Thus, according to Mr. Angoff’s argument, all of these companies are keeping un-required surplus. Regulators desire companies to have surplus and it is disingenuous for Mr. Angoff to use this standard as evidence of anything other than the companies have exceeded a minimum capital standard.
If consumer advocates make life difficult for med mal insurers to make money or to provide insurance upon sound actuarial principals, then they will leave the market. Med Mal is a voluntary market and firm’s will leave. In fact, while people quibble whether physicians actually leave markets, we know for sure that insurers do.