RiskProf

Hey, Whaddaya Know?

Normally, we think of tort reform as having effects on damage awards or litigation rates…we don’t often think of the next step—unemployed lawyers. 

via The Legal Reader

The Demise of Litigation Tourism

The Illinois Supreme Court used the state’s new venue restrictions to throw out a case brought by a Louisiana plaintiff in Madison County Illinois. 

 In Gridley, the plaintiff resides in Louisiana where he alleged wrongdoing, and raised issues of title laws, in connection with a purchase he made there. The case also involved witnesses and evidence located almost entirely in Louisiana. Aside from State Farm's corporate headquarters in Bloomington, Ill., there was no connection to Illinois, yet he brought his case to Madison County ….

via IJ

 see Gridley v. State Farm Mutual Automobile Insurance Company, case No. 94144.

It must be that the Louisiana Courts were just not able to do this case justice.

More Jay Angoff Reports

Mr. Angoff has a new report claiming that the Washington based Physicians Insurance is over reserving and should release reserves (so as to lower prices).  The company, a mutual insurer has reduced its over reserving the last couple of years, but let’s think about three things. 

First, reserves are there to protect third parties injured by a covered physician’s negligence.  The higher the reserves the higher the protection afforded the injured third party, but the higher the insurance premium to the physician.  Apparently Mr. Angoff’s values the physician’s interests over that of the injured third parties.

Second, the insurer is a mutual.  That means if a company is over-reserved and the firm eventually releases reserves, the member physicians receive a rebate of premiums or a dividend.  Not the shareholders— the physicians.  A mutual's surplus is like a long term CD for the physician. If claims are less than predicted the physician gets his or her money back with interest. 

Finally, A.M. Bests rates the company a B++ with a negative outlook.  A B++ rating, while good, is not a stellar rating and implies that the company has a higher risk of default than an A rated company.  The fact that there is a negative outlook suggests the company probably should not reduce its reserves.  If the insurer were to lower its reserves and then go bankrupt because it could pay its claims to innocent third parties, we’ll see these so-called consumer advocates complaining about the insurer’s poor management too.

I might have some sympathy for this over reserving argument if the company were a stock company and had an A++ rating.  It could be that an insurer needs to hold too much capital in reserve to obtain  A++ rating and it may be costly (in terms of opportunity costs) for the firm to obtain that level of a rating.  Thus, the reserves should be reduced.  However, when we are looking at a physician owned mutual company with a B++ rating this argument does not make any sense.  The physicians own the company so the excess reserves belong to them and they will get it back with interest if the firm is truly over reserved. 

What Mr. Angoff’s report overlooks is why the firm behaves the way it does.  A med mal mutual tends to be less diversified in its product lines and its geographical dispersion.  Further, it does not have access to capital markets the way a publicly traded stock company does.  This makes the company have a lower appetite for risk and thus higher reserves. 

What motivation does the mutual have to over charge itself for med mal insurance if it gives the surplus back when it is not needed?  None — as higher profits mean higher dividends to the member physicians. The real question is what motivation does Mr. Angoff’s group have in increasing the insurer’s insolvency prospects by forcing it to reduce its reserves.

What Do You Think of the Tort Reform Wiki?

Read Evan Schaeffer’s take on the Wiki and comment at his site.  It looks ok, but it needs more substance on both sides of the debate.  It is also missing references to the law and economics literature (although it has some recent links to Walter Olson’s intellectual arguments).  One problem in the discussion of the edits—should tort reform have scare quotes or not?  Also note the reference to the nefarious Ted Banks who works for the Manhattan Institute (move down to think tank funding) and cites his colleagues.

More Refutation of Angoff's Report

While the PIAA  and the HCLA have gone after the easily disputable report by Mr. Angoff (see here and here), the American Academy of Actuaries  which normally stays above the fray has also put in their two cents.

Historically, the subcommittee has not commented on individual medical liability studies. However, the July 2005 study by Jay Angoff commissioned by the Center for Justice & Democracy entitled Falling Claims and Rising Premiums in the Medical Malpractice Insurance Industry is an exception because of the public attention it has received, the apparent credibility ascribed to its conclusions and, in our view, the poor quality of the analysis.   …

In our opinion, the report is incomplete, actuarially unsound, and misleading. The report uses improper data comparisons, incomplete information and appears to misuse certain insurance industry benchmarks. Besides reviewing the report, we have reviewed studies commenting on the report and concur with various points made in these studies. Key among these are that the report: contains misleading and inappropriate comparisons of financial data presented in insurance company Annual Financial Statements; does not include all costs associated with providing the insurance product (e.g., costs of defending claims, administrative expenses, etc.); does not adjust for growth in insureds over time; misrepresents and misuses Risk Based Capital (RBC); in addition to other mischaracterizations and misinterpretations.

(crossposted at PointofLaw.com)

LA Times, Overlawyered and a Cast of Characters

Walter Olson and Ted Franks (I & II) took the LA Times to task for its article on big tort awards.  See Evan Schaeffer’s Legal Underground (which evidently provides comment services for Overlawyered.com)  for further discussion.  Evan — I always liked that stapler!

More Simplistic Tort Reform Research

One of the problems in the tort reform debate is the use of simplistic statistics.  The identification of particular problems in assessing the existence of the need for tort reform or the effect of tort reform has generated a number of studies.  Many of them conflicting.  This is because they tend to be advocacy briefs rather then  disinterested research.  Robert Hunter, writing under the aegis of the Americans for Insurance Reform, is the latest into the foray.  His report finds that doctors are being gouged by their insurers.  He uses a pretty good data set of loss costs by state and he finds that the losses have not risen to reflect the crisis that is supposed to exist.  Further, he finds that the growth in losses are not that much different in the last five years (so-called crisis years) from the previous five years.  In fact the report claims that tort reform did not make a difference.  While he does show statistics—he does no statistical tests.  Not one.

Essentially what he does is look at states with a set of certain tort reform and states with fewer reforms.  He then looks a the percentage loss cost growth and uses the eyeball (it looks close to me) test to say there are no differences.  He also says that during the crisis years that loss costs grew less in states with relatively few reforms and more in states with the most reforms.  Now this is pretty interesting as one would expect the reverse at first glance. However, one might actually expect states under more pressure (higher increases in loss costs, higher premiums, etc.) are more likely to put in place new reforms.  States without loss cost growth are not likely to put additional reforms in place.  This failure to control for causation or at least control for the fact that the choice of reform is an endogenous choice is quite important.

I looked at the NAIC’s page 14  (state page data) and did some simple statistical tests for the years 1994-2004.  (I looked at firms that wrote more than $200,000 in premiums in any given state and year.  This excludes companies that are not really in the medmal business.  I also didn’t adjust for inflation as I was just doing this to avoid grading. I took the damage cap and non-economic damage cap information from the Appendix in Mr. Hunter's study.)

First, in Table 1 (click on table to enlarge) I looked at the med loss ratio by state and regressed it against whether the state had a punitive damage cap limitation or a non-economic damage cap limitation. (I used a state and year fixed effect model) and found that there appears to be of no statistical influence of the damage caps on the mean of the loss ratio.  This result is not uncommon and it seems to lend support to the group complaining that tort reform is a sham.  However, note that the standard deviation of the loss ratio is significant and positive.  This implies that if in the previous year the loss ratio was more volatile, one saw a higher mean loss ratio this year.  if we think about insurance pricing, price =expected losses + expense+ cost of risk.  As cost of risk increase, prices go up.  One can think of the standard deviation of the loss ratio as a proxy for the cost of risk.  As the loss ratio becomes more “uncertain”, a prudent insurer will have to hold more capital to support the risk.

The question then becomes, does the cost of risk depend upon tort reforms?  In Table 2, I estimate a similar regression looking at the standard deviation of the loss ratio as the dependent variable against the dummy variables for the damage caps and the lag of last year's loss ratio.  Note that the punitive damage cap seems to have  a significant negative effect on the standard deviation —thus reducing the cost of risk. 

The only point I want to make is that the the tort reform story is more complicated than some simple averages might lead one to believe.  My regression models are also simplistic and if I had more time I'd do a better job before running off the the New York Times to make an authoritative claim. The standards for analysis in this debate are too low.  Every group has their favorite whipping boy and their statistics to back it up.  However, just looking at point estimates and saying this estimate is bigger than another to make a conclusion ... is so 1930s.   I don’t think these reports would even get an average grade as an undergraduate term paper.  Shouldn't we expect more?

Some New Med Mal Evidence

One of the problems with much of the med mal debate centers on the use of medians to make a particular claim about the progress of tort reform. For example, the anti-tort reform crowd points to the fact a number of studies show that median awards are falling. Therefore, the claim is made, that we do not need tort reform (see e.g. Weiss's med mal report report from 2003).  However, what really matters is the mean.  Insurance prices are based upon the average award, not the median award.  Thus if the largest possible claim keeps rising, the price of insurance will also rise even if the median falls.  Last year I noted this same effect when discussing some other report that used the medians to refute the notion of tort reform.  What bring this topic up again is this morning’s mail brought my new improved copy of Jury Verdicts Research, Medical Malpractice:  Verdicts, Settlements and Statistical Analysis update (not available on-line).  The benefit of this information is that, in one place using the same dataset, one can make a direct comparison of median and mean jury awards over time.  As seen in following chart (for the time period 1997–2003) both median and mean awards increased, but the mean award is greater than the median award in each year.  Some may quibble about using JVR data as it may not be a true random sample, but is some evidence of the fact that mean jury awards are increasing and this is consistent with the observed higher med mal insurance prices.

(click to see larger picture)

Med Mal Costs

Over at Point of Law, I posted a table from the NAIC data base on the costs of medical malpractice insurance on a per capita basis.  Some things to note about the table.  First it ranks the states on three major characteristics:  Premiums per capita, direct losses incurred per capita, and defense costs incurred per capita.  The leaders in each case are NY, DC, and FL respectively.  Second, I also ranked the US average so that one could view where the state ranked relative to the US average.  Thus there are 52 possible ranking (50 states, DC, and the US Average).  See where your state ranks! 

How Not to Make Friends

ALBANY — Private jets. Elite hotel suites in tourist locales. Generous bar tabs. Cuban cigars.

These were among the perks enjoyed by board members and executives of Phoebe Putney Health System and their business associates, according to travel documents and receipts obtained by The Atlanta Journal-Constitution.

The perks came courtesy of a private malpractice insurance company that was set up in the Cayman Islands by Phoebe Putney, an Albany-based nonprofit organization, to save the hospital system money on malpractice insurance. But the insurer also financed expensive trips to London and the Bahamas.

In its effort to establish the insurer, Phoebe Putney also cultivated a business relationship with a veteran state legislator, Sen. George Hooks (D-Americus). The hospital system paid him as an insurance consultant and took him along on a trip to London, where rooms and expenses at the Ritz alone cost more than $30,000.

…

What is lavish, said CFO Kerry Loudermilk, "is all in the view of the beholder."

Responding to questions about how the health system has operated its insurance subsidiary, he said: "We own it. We'll manage it the way we damn well want."

via Andy Miller at the Atlanta Journal Constitution.