RiskProf

Gotta Love Them Experts

From the 12/16/2005 edition of the Insurance Journal comes this headline:

Experts Quibble Whether New Madrid Fault Poses Threat

Nevada Counter Sig Law Struck Down

This is an interesting case noted by Diane Polscer at the National Insurance Law Forum. The 9th Circuit struck down a state law requiring insurance contracts to be signed by an agent licensed and residing within the state. What is interesting is that this case never once mentions the McCarran-Ferguson Act (MFA) which essentially says that the commerce power cannot be used as a barrier to, or restriction on, then state regulation of insurance. In Met v. Ward the Supreme Court struck down an Alabama tax which taxed foreign insurers at a higher rate than domestics using the Equal Protection Clause. In this 9th Circuit case the Court used the Privileges and Immunities Clause of Article IV! So, in jest I ask, what is left of the MFA? (And don't say the antitrust immunity either...)

Intersesting Papers

RiskProf (all three of us were there) went to to Chicago earlier this week for a conference put on by the Northwestern Law School's Searle Center.

Some interesting papers (in no order of importance)

A Jurisdictional Competition Approach to Reforming Insurance Regulation by Henry N. Butler, Northwestern University School of Law and Larry E. Ribstein, University of Illinois College of Law

This paper suggests a different approach to the insurance regulation debate that is quite interesting. Essentially we would let insurers choose a state that is its regulator and it can then operate in any other state. No matter which state the insurer operates it is bound by the rules of its home state. The idea is similar to the corporate chartering laws. butler and Ribstein's approach would allow the legislature of any state to set some parameters on how a foreign company operates within the state, but for the most part, insurers would have unfettered access to every state and only have to comply with home state regulations. This, arguably, would allow more regulatory competition among the states akin to the style of competition we see with corporate codes.

Rate Regulation, Uninsured Driving and the Cost of Automobile Accidents by Sharon Tennyson, Cornell University & Mary Weiss, Fox School of Business, Temple University.

This paper suggests that automobile rate regulation (which is often justified so that people can afford auto insurance so they do not drive without cover) has not been a successful public policy. Strict price regulation, in fact, is associated with higher costs since society subsidizes high risk drivers.

The Past and Future of Insurance Regulation: The McCarran-Ferguson Act and Beyond Robert W. Klein, J. Mack Robinson College of Business, Georgia State University & Martin F. Grace, Department of Risk Management, Georgia State University

Awesome review of where we are and how we got there by two of the The Robinson College's best 11th Floor (on the north side of the building) insurance regulatory economists. Modesty prohibits me from saying more. However, download this paper only if you have insomnia! We promise the final version will be a bit shorter.

Influences on Organizational Form on Medical Malpractice Insurer Operations by Joan Schmit, Actuarial Science Risk Management and Insurance Department, University of Wisconsin & Yu Lei, Barney School of Business, University of Hartford

Over the last three waives of tort reforms, a number of physician directed med mal insurers have formed to provide insurers to local docs.
This paper analyzes the performance of their reserving practices (How well they estimate future losses when the claims first come in). The authors find that, because physician directed med mal companies tend to be single line/ single state companies, they do not have the ability to diversity across lines of business or geography. As a result then they may behave differently. The authors find that they tend to over reserve and have lower long run loss volatility compared to non-physician directed med mal insurers. This suggests to me, but is not shown in the paper that these types of companies are less prone to the periodic shocks that occur in the market.


How Tort Reform Affects Insurance Markets by Martin F. Grace, Robinson College of Business, Georgia State University & J. Tyler Leverty, Henry B. Tippie College of Business-University of Iowa

Consumer advocates are always saying things like tort reform just benefits insurance companies and we know this because premiums never fall after tort reform (see here for example). The paper notes that since 1985 some 40 out of 148 tort reforms are judicially overturned. Rational insurers should price liability insurance based on the likelihood that tort reform will "stick" rather than merely on the presence of a law which has some probability of being declared unconstitutional. The paper replicates earlier work which suggests premiums do not fall and then shows that if one controls for the likelihood of the reforms' survival, that for the most part loss are lower, premiums, are lower, loss volatility is lower, and more firms enter the liability insurance lines when the reform is expected to stick. Also, some guy in the audience accused us of reverse engineering the result. I didn't get mad about it until about two hours later. So there were no snippy ripostes to report.

FLA Assocciation for Justice on Doc Shortage: Make them Work

The president of the Florida Association for Justice is after the medical malpractice industry too.  He asserts it is not the state's legal environment that is causing the problem.  However, he notes that one reason why there is an emergency room shortage is that doctors may not get paid enough or that their medical malpractice premiums are too high.  He also suggests that:

[N]othing is being done to address the infinitely more complex issues driving a very real problem - the lack of ER doctors and physicians willing to take call. These include hospitals that no longer require doctors to take call duty as a prerequisite of enjoying practice privileges because they fear losing their physicians to other hospitals, coupled with doctors who place greater value on their families and personal lives and therefore are increasingly unwilling to take call.

In addition, Medicare, Medicaid and HMO reimbursement rates are too low to cover costs, while insurance rates have not dropped despite extreme caps on damages and plummeting claims and payout rates.

Fixing health care in Florida will not be easy. We can say for a certainty, however, that "tort reform" and "tort immunity" are not the solution, because Florida already offers its doctors - and especially emergency room physicians - some of the most generous legal immunities and protections in the country.

Policymakers should instead focus on real solutions to this problem, even though they may be more politically difficult. These could include addressing reimbursement rates, increasing requirements for doctors to take call as a condition of practice, requiring hospitals to shoulder more responsibility and implementing true medical malpractice insurance reform that requires insurance companies to pass their savings on to Florida's doctors. (emphasis added)

A lawyerly solution --turn the doctors into public utilities!  That will cause doctors to rush to Florida!

via Tampa Trib.

NRO on Crist

"He's No Jeb Bush," but I guess he might be a VP contender.

Credit crunch hitting state storm insurance fund

Now everyone is questioning Florida's ability to pay claims.

Link: Credit crunch hitting state storm insurance fund -- via  MiamiHerald.com.

If Florida Has One, We Want One Too

California wants to get into the insurance business to compete against Warren Buffet.

I was going to have a April Fool's Day Post about the dual surprise announcements that Florida Governor Crist stepping down to take over the Insurance Information Institute and that Florida Insurance Commissioner McCarty was going to head up the Independent Institute .... but California taking on Warren buffet was so much more unbelievable.

Florida is Full of Good Ideas

According to the Miami Herald a law maker is thinking of taking reserves away from Citizens (the state owned insurer of last resort) to capitalize new insurers. 

Two things to note here.  First, Citizens is still under capitalized in a big way. So taking away some of its reserves to put into the private market seems crazy. Essentially, the state would be taking money from an under-capitalized company to subsidize a private market company. This isn't any different than subsidizing Citizen's customers by keeping prices artificially low. Second, Florida is terrible about picking companies to give money to.  A major Florida player, POE, was essentially  started by the state through the institution of Citizen's previous take out program.  POE is, ironically, never more......

A Really Big Grain of Salt ...

Christ Robinette points to this Concord Monitor (NH) op/ed by the president of the NH Association for Justice. The op ed says that insurers are to blame for med mal premiums --not lawyers. Prof. Robinette mentions the author might be biased, but the op/ed does seem to have some data to support his position.

Now lets look at the data purportedly provided by the NHAJ.

Two recent studies reported in the March 2008 Journal of Empirical Legal Studies found that "the supply of OB/GYNs in a state has no relationship to either a doctor's malpractice premiums or a state's liability laws."

The cites are not provided and I could only find one on point.  But here is the table of contents.  There are two papers on med mal in the March 2008 edition of the JLS--one on physician supply linked above and the other on med mal claiming behavior within the State of New York. 

• The paper on point on tort reform and physician supply does not find an effect as the op/ed suggests. (I think the paper is thorough and that it covers a number of possible avenues for tort reform influencing physician supply).  I acknowledge that it is difficult to find peer reviewed level quality statistical links between physician location choices and the level of medical malpractice premiums.  In fact, there are few papers that find such a relationship (See e.g., Klick and Stratman 2007 Journal of Legal Studies  Here is the non-gated version ).
  
• The "second" paper on claiming behavior is a within state analysis and it does not account for physicians moving among the counties in the state.  While the endogenous claiming behavior is different in each part of the state,  the tort law presumably is the same across the state.  Thus, this paper can not say much about how tort law influences physician supply. (And, I do not think the authors meant it to do so.)
• While the authors of teh claiming behavior paper found no relationship between physicians per capita and claims, they did find a significant relationship between lawyers per capita and claims (Table 5).  I won't go so far as to suggest that lawyers cause claims (because there could be many confounding effects), this result seems to undermine the op-ed's position that it is insurers and not lawyers which cause med mal problems.

The op/ed's second point was that

A July 2005 study by Jay Angoff, former Missouri insurance commissioner, found that the payout on malpractice claims over the preceding five years was essentially flat, but that the U.S. malpractice insurance carriers raised doctors' premiums 120.2 percent over the same period.

• This is not a peer reviewed result.  The starting and ending points were cherry picked. Ted Frank and I have a short critique of this "report" and others like it.  Our critique is also not peer reviewed, but it gives a flavor of the debate.  [To be fair, I have been critical of Mr. Angoff's reports before, see, e.g. this post and this one] .

Next, we have the issue of reserving...

During this same period, 12 of the larger malpractice carriers collectively increased their reserves up to a staggering $3.81 billion, which the National Association of Insurance Commissioners reported as excessive. While the industry told the regulators that they needed to increase their reserves to cover "possible future claims" the footnotes in their filings stated that "their projected claims losses are likely materially inaccurate and in the past have also been materially inaccurate." You have to question where all this surplus money is then going.

Three points are important here...

• The NAIC never says reserves are excessive.  There job is to develop statistics for  solvency regulation and a firm can never be too solvent as far as they are concerned.   This is a new take on the story that med mal insurers are increasing their reserves and that they are excessive. The NAIC has a risk based capital formula that tells regulators that they have to intervene if the reserves are too low.  If the formula suggests that the insurer has enough capital, the regulator need not intervene in the insurer's affairs.  Having capital is prudent.  Having reserves is prudent.  [Here's a link to a  discussion of another Mr. Angoff's reports attacking an insurer for having too much in reserve.]
• Many insurers in med mal are doctor owned mutual insurance companies or reciprocal insurers.  This means that when insurers collect premiums they put them in reserve for their customer/owners.  If surplus grows to the point that a dividend is given, the customers get their money back.  The residual claimant in a mutual or a reciprocal is the customer.  To the extent that stock companies offer medical malpractice, they have to compete against doctor owned companies.   
• Med mal insurance is notoriously hard to price and to set proper reserves. Prices are high if their is legal uncertainty regarding future claims. Insurers are being honest when they say they believe their estimates to be materially inaccurate.  This reserve uncertainty is not caused by doctors, but the state's legal environment.

The trial bar repeatedly makes the same factual errors about insurers.  If this was such a good business to be in, the AAJ should start their own med mal carrier and make boatloads of cash --or --if they were truly interested in justice, they could cut prices so that doctors can afford their med mal cover.  Seriously, we do not see many insurers clamoring to get into the business.  Does this suggest there is a gold mine here?

Optional Federal Chartering for Lawyers

On the Spitzer, Scruggs, Weiss Trifecta ....

What gets me, however, is the deafening silence out of Washington. When insurers step out of line--such as when bid-rigging and contingency fee abuse was exposed, or when thousands of policyholders were left bare after questionable Hurricane Katrina claims-handling--Congress rushed to probe the business, vowed to pass sweeping reforms and threatened to revoke the industry's cherished federal antitrust exemption. However, I don't see Congress rushing to investigate the plaintiffs bar, despite the outrageous criminal behavior of two of the profession's highest-profile litigators. As far as I understand the system, lawyers are state-licensed. Perhaps the Feds should take over! (Or shall we have an optional federal license for attorneys?)

Sam Friedman at NU.