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Why Doomsday Hasn't Arrived for Malpractice Insurer

This blog post shares an excellent article from Crain’s Chicago Business about the profitility of the malpractice insurance industry in recent years. The article was shared by Timothy M. Whiting.

As a personal injury lawyer with extensive experience in handling actions for victims of medical malpractice cases, I was not surprised to learn that the malpractice insurance industry is achieving record profits despite predicting doom and gloom when the Illinois Supreme Court struck down a law capping damages in jury verdicts.

The following article by Andrew L. Wang was originally posted on the Crain’s Chicago Business website.

Why Doomsday Hasn’t Arrived for Malpractice Insurer

Profits at the state’s largest medical malpractice insurance carrier reached a record $57 million in 2012, two years after the Illinois Supreme Court struck down a law capping damages in jury verdicts.

That’s not the doomsday scenario the insurance industry was predicting. Responding to the controversial 2010 ruling, ISMIE Mutual Insurance Co.‘s chairman, Dr. Harold Jensen, said fewer frivolous lawsuits and flattening malpractice rates were “practical proof” that the $500,000 cap on non-economic damages had been working in the five years it was in effect (view the PDF).

ISMIE’s skyrocketing profits come during a prolonged soft market for the medical liability industry. Fewer claims have driven down premium revenue, but profits, buoyed by investment gains, have remained high.

By nature, the medical liability industry goes through cycles, but experts say the recent soft market has stretched into the longest in memory, helped along by award caps in some states, rising costs of pursuing cases and more stringent risk-management practices by doctors and hospitals, which have limited errors.

According to state filings, ISMIE’s net income in 2012 was its highest in at least 20 years. The company, which holds more than half the market in policies for independent physicians in Illinois, earned it even after committing a $17 million dividend to its 12,000 members. Rating service A.M. Best Co. of Oldwick, N.J., recently upgraded its financial strength rating for ISMIE to A- (excellent) from B++ (good). (View the PDF.)

The soft market means more competition among insurers and greater choice for physicians, who have benefited from deeply discounted premiums. Still, insurance remains a major expense of running an independent practice, and the Chicago area has among the highest rates in the country.

For internists in Cook County, ISMIE’s 2012 base premium, before credits or other adjustments, was $37,688 for policies with limits of $1 million per occurrence and $3 million per year, according to the Medical Liability Monitor’s annual survey. The annual base premium for general surgeons was $98,888, and $138,484 for obstetrician-gynecologists.

Liability Landscape

Dr. Ashwani Garg says his annual premium makes up about 20 percent of his budget for his solo family practice in Hoffman Estates. But the liability environment in Illinois has improved, in part because there are many carriers offering insurance. Dr. Garg is not an ISMIE member because he gets better prices from Clive, Iowa-based Professional Solutions Insurance Co.

Illinois physicians were in the opposite position four decades ago, when huge malpractice losses forced many insurers to leave the state. Faced with few options and high rates, the Illinois State Medical Society’s physicians in 1976 started their own mutual insurance company. ISMIE and the medical society are separate organizations but share four board members and addresses in Chicago and Springfield.

The state Legislature in 2005 passed the $500,000 cap on damages for pain and suffering after a period of spiking rates in the early 2000s. The law was intended to tamp down lawsuits and reduce rates, but a spokesman for ISMIE says the limit had little effect on premiums because it wasn’t given time to work. The organization also argues that it’s too soon to identify any trends as a result of the high court’s 2010 decision.

ISMIE wrote $264.9 million in gross premiums in 2012, down 38 percent from the peak of $425.3 million in 2004. Meanwhile, the number of claims reported fell 22 percent to 2,716; claims paid were down 39 percent over the same period to 171; and the combined outlay for claims and defense costs fell 16 percent to $185.9 million, according to filings with the state Department of Insurance.

Despite the shrinking revenue, ISMIE has posted steadily increasing net income over the last four years and hasn’t seen a loss since 2002. Its investment income has topped $42 million in each of the last three years.

Painful Scenario

Experts say the music will stop at some point.

“If rates continue to fall, the industry’s financial results will eventually become insupportable and therefore unacceptable,” writes Chad Karls, a Milwaukee-based actuary at workforce consultancy Milliman Inc., in the Medical Liability Monitor, an industry newsletter based in Oak Park. “As painful as that scenario is to contemplate, it might prove to be the industry’s one and only path back to a truly ‘hard’ market.”

ISMIE declines to make senior officials available for interviews but says in written responses that it could be years before the true financial picture of 2012 is clear, because lawsuits can be filed years after a disputed medical outcome. When the insurer performs well financially, it pays back policyholders in the form of dividends that are credited to future premiums. ISMIE in May committed to pay $45 million in dividends to its members (view the PDF).

“I’d say they’re doing extremely well,” says Keith Hebeisen, a malpractice attorney at Chicago-based Clifford Law Offices and a past president of the Illinois Trial Lawyers Association, a frequent adversary in Springfield of ISMIE. “Otherwise, how would they be able to do that?”

For complete coverage of Chicago-area health care, visit ChicagoHealthCareDaily.com.

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