Academic journal article Journal of Risk and Insurance

Claims-Made and Reported Policies and Insurer Profitability in Medical Malpractice

Academic journal article Journal of Risk and Insurance

Claims-Made and Reported Policies and Insurer Profitability in Medical Malpractice

Article excerpt

ABSTRACT

The liability crisis of the 1970s led to the introduction of a new type of insurance policy designed to reduce the undiversifiable uncertainty associated with writing long-tail liability lines. These new claims-made and reported policies gained favor in place of the traditional occurrence coverage in the early 1980s not only in medical malpractice but also in the general liability arena. The main question we want to address in this article is why two types of contracts that cover the same risk exposure exist in the medical malpractice insurance industry whereas only one exists primarily in other insurance lines.

INTRODUCTION

The medical malpractice insurance industry has been one of the most scrutinized industries in recent years. Periodic performance "crises"--evidenced by increasing premiums and reduced availability of liability coverage--have prompted a variety of legislative responses including, for example, legal reforms and the implementation of state victim compensation funds. Amid ongoing concerns for the rising cost of health care and an increase in the number of uninsured individuals for health-care services, it is not surprising that medical malpractice insurers' operations are called to question; to the extent that higher premiums or nonrenewal of coverage causes health-care providers to reduce or discontinue services, patients' access to care is disrupted. (1)

Attempts to explain problems in the medical malpractice insurance industry typically examine the influence of exogenous factors on the performance of the member insurers. These exogenous factors include increased litigation by patients, increased jury verdicts and out-of-court settlements, falling investment income, rising reinsurance rates, and changes in the legal environment. Interestingly, researchers have devoted little attention to developments within the industry and their potential influence on insurer performance. One such development was the introduction in the mid-1970s of claims-made and reported (CMR hereinafter) policies (2) in place of the traditional occurrence coverage (OCC hereinafter).

Touted as a way to reduce the uncertainty associated with writing long-tail liability lines (including the uncertain legal environment as in Doherty, 1991), claims-made policies gained favor not only in medical malpractice but also in the general liability arena (Sloan, Bovbjerg, and Githens, 1991). One major medical malpractice insurer, St. Paul Fire and Marine, switched its entire book of business to claims-made in the 1980s (and dropped completely the line 20 years later). By 1984, claims-made policies accounted for 50 percent of total premiums written in medical malpractice, leading Posner (1986) to predict that "further growth of up to seventy to eighty percent is extremely likely" (p. 45).

In our study, we examine firm-level variations in the use of CMR versus OCC policies in a national sample of insurers, for the period 1992-2006. We evaluate institutional and organizational factors that explain why CMR and OCC policies coexist. In our analysis, we focus on the differences between insurers using CMR policies only, OCC policies only, or a combination of the two types. In particular, we evaluate the respective roles of organizational form, scale and scope of operations, competition, and profitability, among other factors, in determining the types of policies offered.

The remainder of the article goes as follows. We next present the theoretical foundation for the emergence of CMR contracts alongside OCC contracts. In the third section, we present our analysis of the medical malpractice insurance market where the two contracts are sold competitively. We conclude in the fourth section and offer avenues of future research.

THEORETICAL FRAMEWORK

Several veins of insurance research have addressed questions pertaining to the unique structure of the U.S. insurance market. …

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