Dynamics of the Market for Medical Malpractice Insurance
Neale, Faith R., Eastman, Kevin L., Drake, Pamela Peterson, Journal of Risk and Insurance
Public attention has been directed recently at the market for medical malpractice insurance, yet disagreement persists over whether this market has changed and, if so, what has caused this change. In this study, we examine factors that affect the market for this insurance, including the growth in premiums, losses, and investment earnings, and loss variability. Our analysis suggests that there was significant deterioration in the market for medical malpractice insurance beginning in 1998 and culminating in 2001. We conclude that insurers' losses are the primary driver of the market deterioration during the period 1998 through 2003.
Medical malpractice insurance is coverage for medical professionals for liability resulting from claims of professional negligence. The market for medical malpractice insurance is important because it affects the availability and cost of medical malpractice liability insurance. If the market performs poorly over an extended period of time, medical malpractice insurance may become unaffordable or unavailable, resulting in physicians discontinuing needed high-risk medical services, continuing to practice but with limited liability protection, or engaging in defensive medicine resulting in higher medical costs. (1) Currently, there is considerable debate among the stakeholders involved in medical malpractice insurance regarding the performance and underlying stability of the medical malpractice insurance market.
The American Medical Association (AMA) reports that 21 states were considered to be in a medical liability crisis, based on factors such as the availability of liability coverage, the number of insurers writing policies, the cost (and rate of increase of the cost) of insurance, and the number of insurers leaving the market. (2,3) Albert (2002) reports that physician groups and advocates also cite rising jury awards as the primary reason for affordability problems, with higher claims leading to higher premiums. Insurers cite increases in claim frequency, severity, and uncertainty of jury awards, competition in the 1990s that resulted in underpricing premiums, and decreases in market rates leading to insufficient loss reserves as factors contributing to insurer profitability problems that translated into availability problems for physicians. (4) Plaintiff attorneys state that rising premiums are a result of decreased investment income, insurer management inefficiency, or even greed as reported in Treaster (2002). The purpose of this study is to identify whether the medical malpractice insurance market changed significantly over the period from 1993 to 2002 and, if so, determine the effect of the changes on the stability of this market.
We proceed as follows in this study. In the "A Review of the Literature" section, we review the research that analyzes medical malpractice insurer data from the 1970s and 1980s and that addresses general liability crises. The latter is included because the rich literature surrounding the causes of the underwriting cycle in general liability lines allows us to consider causes for the very similar behavior that occurs in the market for medical malpractice insurance. In the "Results" section, we analyze medical malpractice insurer performance measures, investigate the stability of the market, and determine whether it actually has deteriorated as some have stated. We analyze the causes of the changes in market performance in the "Causes of the Decline in the Medical Malpractice Insurance Market" section, and conclude our study and discuss the implications of our findings in the "Conclusions" section.
A REVIEW OF THE LITERATURE
The Medical Malpractice Market of the 1970s and 1980s The first identified major change in the market for medical malpractice insurance occurred in the 1970s. (5) In this period, many commercial insurers withdrew from the market, with many of those being large insurers that supplied over half of the market capacity. …