Social inflation accounts for 8% to 11% of all medical malpractice losses for carriers that insure physicians, according to an actuarial analysis commissioned by The Doctors Co.
TDC hired Moore Actuarial Consulting to estimate how much insurers’ average losses are growing in excess of the overall inflation rate, the difference being what the insurer defines as social inflation.
The actuaries used data reported on medical professional liability insurers’ annual statements to track losses paid over 15 years and data reported to the National Practitioner Data Bank. Payments made by insurers that focus on health care facilities such as hospitals were excluded to focus results on physician practices.
The data indicates social inflation cost from $2.4 billion to $3.5 billion over the past 10 years.
“Our research shows that the pace of settlements larger than $1 million has accelerated, and large settlements are a significant driver of social inflation” stated TDC President Robert E. White Jr. in a press release. “It is a reason malpractice premiums are rising for many physicians.”
The report says settlements of more than $1 million made up from 7% to 8% of reported losses from 2006 to 2013, but began ticking up in 2014, reached 10% in 2018 and remained at about that level through 2021.
The average amount paid per report rose slowly from 2006 until 2017, when it jumped 8.6% and then 2.6%. Average payments declined in 2020 and 2021, which the researchers attribute to a general slowdown in litigation because of the pandemic.
“The change in development patterns in 2020 and 2021 was abrupt and significant,” actuary David Moore said in an email. “We have seen similar changes in other lines, including commercial auto. Such a material and consistent change is unlikely to be random fluctuation. The pandemic had major macro-economic impacts and the slow-down in development appears to be one of them.”
Had the increases in amounts paid in 2018 and 2019 been the same as the Consumer Price Index, costs to insurers would have been approximately $450 million loss, or 6.2%.
Insurer reserves have not matched the growth in costs. Since 2012, the amount reserved has declined by about 30%, but paid losses have not declined, the report says.
“We are not speculating about the cause of case reserve adequacy changes,” Richard C. Soulsby, a senior vice president and chief actuary for TDC, said in an email. “However, it’s important to note that carried reserves are made up of case reserves plus bulk and IBNR (incurred but not reported) reserves, so a decline in case reserves wouldn’t necessarily mean overall reserves are inadequate.”
The trend lines for malpractice insurance are muted when compared to other lines, most notably commercial auto. That may be because regard for medical professionals grew in 2020 with the onset of the COVID-19 pandemic, according to the report. Also, 30 states cap non-economic damages in medical malpractice cases.
“The situation is somewhat different for medical malpractice as the reserves in this line have been redundant and insurers had been taking favorable development through 2018,” Moore said. “While they have taken some unfavorable development in 2019 and 2020, current estimates from Conning and AM Best suggest the reserve position is still redundant. For commercial auto, the reserves have been deficient for many years and insurers have continued to take adverse loss development.”
The report notes, however, that California recently revised a $250,000 non-economic damages cap that has been in place since the mid-1970s to allow damages of up to $500,000 in wrongful death cases, with the limit increasing $50,000 per year for the next 10 years and then 2% annually.
“Any changes in California, which has nearly 12% of the nation’s population, can have a significant impact on countrywide averages,” the report says.
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