I’ve thought for months about how to write this article and actually get my point across without sounding like a psychic, because I certainly don’t possess an ability to perceive information hidden from the normal senses. The fact is, I’m not a psychic and I don’t have a crystal ball; if I did, I wouldn’t be working for a medical malpractice insurance company. But, since I’m just a regular guy and I work for HPIX, I feel it is my obligation to raise awareness among physicians and their managers about the intricacies of our business that are often overlooked or ignored.
Each decade, including and preceding the one we are currently living through, was plagued by a “medical malpractice insurance crisis.” You may have heard the expression used when referencing the business; “this is a cyclical business” – the fact is, it doesn’t have to be that way. The cyclic element refers to two things: pricing and availability of coverage. We refer to them in the business as capacity and rate.
Capacity and rates wax and wane. The rate component is most often determined by “loss costs” and capacity depends mostly on whether or not a company is achieving their targeted return on equity (ROE) on the line of business. OK – so already I’m getting technical, which is not my goal. Rather, I’m trying to do something very simple – teach you how to predict the future using past trends, much as I can.
The cyclical nature of this business is what drives our customers crazy. I’ve heard many customers say that they just want to be charged a fair price and be treated fairly in return. What they are saying is: they want stability. This is not a self-promotion for HPIX, but our mission is to bring stability to the medical professional marketplace.
Imagine going to the grocery store and purchasing a gallon of milk in 2008 at a price of $1.99. Now go to the same grocery store in 2011 and pay $5.99. This simple example may seem absurd, but it is an accurate representation of what happened to medical malpractice premiums from 2000 to 2005, better known as the last “medical malpractice insurance crisis.”
The two major reasons everyone heard in the media caused the crisis were not actually the reasons at all. The media blamed it on the lack of effective tort reform, run-away juries, and greedy insurance companies. In reality, it was because of rising loss costs and a shortage in capacity. One could argue that the media’s interpretation and the factual explanation are interrelated, and they may be, to a minimal extent.
We must peel the onion back several layers to get the full picture. If you recall, it was during this period of time that the number one writer of medical malpractice insurance pulled out of the market entirely and a very short time later a top five medical malpractice company went insolvent. So, the question you should be asking yourself is, what is so different now? What has changed?
You may attribute the positive changes to tort reform, patient safety, awareness, mass media or a plethora of other things. The fact is, they had an affect but they are certainly not the cause of the change. You see, for those of you who lived and worked through the last crisis, in order to predict the future with me, you need not focus on the crisis, but recall the three to four years leading up to it. Several things should jump out at you.
First, pricing was good, or as we refer to it, “soft.” Second, availability was probably at its peak, aided by the fact that large national carriers were writing medical malpractice at the time. Third, investment income was used to offset underwriting losses for a many of the largest companies, allowing them to turn a profit without sound underwriting. Less focus was placed on underwriting because only one thing matters when the market is so competitive – growing company market share.
Carriers lowered premiums to a level they knew could not be supported by sound actuarial analysis, but growth outweighed underwriting profitability. Investment income was the CEO’s “mulligan” for getting the fundamentals of the business completely wrong. Carriers began an era of “cash flow underwriting,” which is how I define buying business to immediately benefit the income statement. There are fundamental flaws in this strategy.
We operate in a “long tail” line of business, which means our liabilities are often not known for many years. As a result, our industry has been very slow to recognize the effects of under pricing business until it’s too late. If it’s true that the past is the greatest predictor of the future, why then do we not learn from the mistakes of the past and become greater predictors of the future? The answer: our long term memory is short. This is partly due to societal factors and how we give and receive information.
Customers and CEO’s of insurance companies have an instant need for gratification, which is often satisfied with bargain prices, which satisfies the need for growth and the customers bottom line. What I am telling you is that there is no greater leverage than the truth. The truth is very simple. Charge a fair but adequate premium and control loss costs and manage investments wisely and your company will be in business for a long time.
Unfortunately, in this business the truth is sought out in numbers, not facts. I’m ashamed to admit that our product is treated like a commodity. The truth doesn’t resonate with the customer, because it is never found. It’s very difficult to ignore the ridiculously cheap premium, but it’s very easy to ignore the claims service and reliability that you may be giving up to get it.
In theory, all medical malpractice insurance companies should need to charge the same premiums. Our loss costs are generally within a 10-15% range, however our expenses vary greatly. If the premium seems too good to be true, it’s likely that it is too good to be true. The problem is that by taking the bait and buying the “too good” option, you are increasing the likelihood and curtailing the timeline of the next big malpractice insurance crisis. Failure to diagnose these symptoms will inevitably lead to another uncontrollable rise in medical malpractice premiums, not because you’re doing anything wrong – after all, we are the ones enabling this behavior.
I’m not arguing for other people’s weaknesses, nor am I arguing for my own. I am simply pointing out mistakes that have been made. By admitting them, studying them and learning from them, we can come up with a better diagnosis. I know that I would much rather benefit from long-term stability than year-to-year volatility.
Nicholas Gaudiosi is Chief Operating Officer for Healthcare Providers Insurance Exchange.