March 10, 2005
Gail E. Tverberg, FCAS, MAAA
Pitfalls in Evaluating ProposedTort Reforms
CAS 2005 Ratemaking Seminar
Session Call-2
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Outline
Introduction
Frequently Used Reforms
Ten Pitfalls
Conclusion
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Introduction
Little in actuarial literature regarding tort reforms
CAS Loss Reserve Seminar Sessions in 1987, 1989
—Gail Tverberg – Tort Reform Impact on MalpracticeReserves
—Phil Miller – ISO Closed Claim Data Analysis
1998 CAS Paper by Allen Klein & Jason Israel – ISO
—The Analysis of the Effect of Tort Reform Legislation onExpected Liability Insurance Losses
Contingencies – November/December 2003
—Richard Biondi & Arthur Gurevitch – The Evidence Is In:Noneconomic Damage Caps Help Reduce MalpracticeInsurance Premiums
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Frequently Used Reforms
Caps on non-economic loss
Collateral source offsets
Limitations on joint-and-several liability
Punitive damage restrictions
Periodic payments
Frivolous suit penalties
Limitations on attorneys’ fees
Immunity statutes
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Frequently Used Reforms (Continued)
Legislation usually includes multiple provisions
Evaluate entire package
Changes in pre-judgment interest
Establishment of pre-trial hearing panels
Establishment of state-operated funds to handle certain claims
Changes to the statute of limitation or statute of repose
Mandatory mediation
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Pitfall #1
Not Adequately Understanding the Proposed Reform
Obtain copy of legislation
—Read carefully
—Compare to existing statutes
Talk to someone familiar with practices in state
—Existing statute may have been declared unconstitutional
—Existing statute not enforced
—Reasons for current legislation
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Pitfall #2
Thinking Economic Loss Is a Uniquely Defined Amount
Life expectancy of impaired lives
Adjustment for inflation
Adjustment for discounting
Quality of care
Wage loss of injured individuals not in the labor force
Wage loss of caregivers
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Pitfall #3
Expecting Too Much of Closed Claim Data
Problem of 0s and blanks
Quality of economic loss data that is provided
Matching multiple claims
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Florida Closed Claim Database–ExcludingMultiples
Count
Indemnity($Mil.)
Econ Loss($Mil.)
Non-Econ($Mil.)
Econ + NonEcon. Total
AverageIndemnity
Econ. Loss/Indemnity
Econ > 0, Non Econ > 0
1,255
$343
$440
$271
$711
$273,192
128%
Econ > 0, Non Econ = 0
325
92
170
0
170
$282,592
185%
Econ = 0, Non Econ > 0
1,774
405
0
353
353
$228,483
0
Econ = 0, Non Econ = 0
1,304
263
0
0
0
$201,717
0
Total
4,658
1,103
610
624
1,234
$236,811
55%
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Pitfall #4
Misunderstanding the Phase-In Implications of the Reform
Count awards after certain date
—Affects open claims on past report years
Suits filed after certain date
—Similar to claims made coverage
Claims arising from medical injuries after date
—Accident year basis
Impact of reform can change over time
Up or down
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Pitfall #5
Missing Indirect Impacts
Impact on settlements likely different than awards
If easier, quicker to file, likely more claims
If changes in contingency fees, attorneys may be less willing toaccept small claims
State excess funds may handle claims differently than primaryinsurer
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Pitfall #6
Expecting a State Fund to Behave Like a Private InsuranceCompany
Funding may be pay-as-you-go
Expenses, profit margins, FIT often lower
May be more willing to settle
Employees often less experienced
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Pitfall #7
Missing Additional Expense Resulting from the Reform
Pre-Trial Hearing Panels
—Need to present case twice
—Potential for delays
Patient Compensation Funds
—Additional layer of expenses
Higher policy limits
—May be indirect result of high ($2 Million) caps
—Changes what is an appropriate settlement
Features to make program balanced
—Example: Requiring pre-notification of insureds about rateincrease; having rate hearings; and prior approval
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Pitfall #8
Forgetting the Difference between Anticipated Indemnity Savingsand Expected Change to Current Rates
Legislators don’t think like actuaries
—Indemnity savings means rate decrease
Need to consider adequacy of current rates
Also components of rates other than indemnity
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Pitfall #9
Failing to Consider Differing Impacts by Policy Limit and by DirectInsurer vs. Reinsurer
Policy limits of hospitals ($20 million +) generally much higherthan individual physicians ($1 or $2 million)
Size of losses varies also
Legislators often mandate uniform rate adjustments for caps
—Not equitable
Reinsurer often provides excess of loss coverage
—Rate rollbacks do not affect reinsurer
—Reinsurer gets greatest benefit of cap
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Pitfall #10
Special Considerations for One Line / One State Insurers andSelf-Insurers
How optimistic should one line/one state insurer be in estimatingreform benefit?
If overcharge, can give excess back as dividends
If undercharge, may be financially impaired
Companies generally provider-owned
—If excess premiums are collected, funds remain in provider-owned company
—One goal of company is to provide a market
Given these considerations, insurers are often cautious inrecognizing savings from reforms
Competition a consideration also – encourages recognition ofreform benefit
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Conclusion
Need to evaluate any proposed reform carefully
Be aware of 10 pitfalls
Be careful to explain difference between savings from proposedreforms and indicated reduction to current rate level
Pitfalls discussed relate only to actuarial issues
Other types of studies also have pitfalls
Example – estimating number of iatrogenic injuries caused bynegligence
Area for further analysis