Insurance Companies, Insurace Policy

Insurers rarely settle a claim in the same year in which a loss occurred. As we mentioned above, large losses often litigate for decades before the file finally closes. For this reason, insurers expend a lot of effort figuring out, based on losses incurred this year, how much extra money to reserve for settling those losses in future years

. In this report, the GAO spends a lot of time (and paper) trying to understand such reserving practices, finally concluding that they don't know enough about what was happening at each of the studied insurers to figure out why rates went up. The GAO's implication is that malpractice premiums are clearly related to insurers' reserving practices, if only we could figure out how.

The paid losses went up! In the final analysis, this is the only significant factor affecting the steady increase in malpractice insurance rates. The effect of reserving policies is simply to smooth the volatile fluctuations of annual incurred losses by distributing their effects over a number of subsequent years. This may affect an insurer's cash flow issues, but it does nothing to reduce the number of dollars going out the door. That number is determined almost entirely by sympathetic juries whose legislators have trained them to view the transfer of wealth through litigation as a kind of free public lottery.

In 1997, medical malpractice insurers paid losses totaling $4 billion. The next four years—the last four of the study—saw that number increase by 32.5%. Any guesses as to what 1997's incurred losses—worth $3.5 billion in 2001 dollars—will be worth when finally paid in 2007? Is it any wonder that insurance companies are abandoning the medical malpractice business?

On page 24, after claiming they need more data, the GAO says "potential causes" for the increasing medical malpractice claims might be: "greater societal propensity to sue, a lottery mentality, older population, greater expectations for medical care because of improved technology, a breakdown in the doctor-patient relationship."