| President's Column
October 2005 / Volume 41, Issue 10
The insurance industry’s windfall
Well, they fooled me. I believed that the
insurance companies really were losing money and needed to raise
premiums, although I believed it was part of the same old story, relived
from the 1970s, 1980s, and 1990s. Stock prices were down, interest rates
were down, and insurers were losing money on their investments. They
wanted to make it up, as they always had before, on the underwriting
side.
I know you understand this: Insurance
companies typically don’t make money on underwriting; they almost always
pay out more in claims than they collect in premiums. This is true for
all lines of insurance—car, life, health. But because they don’t have to
pay the claims right away, they recoup the losses, and more, by
investing.
 So
I thought—and most other supporters of the Seventh Amendment argued
through the legislative fights of the last few years—that the insurance
problem, although real for doctors, was a self-inflicted wound for the
insurance companies.
I was wrong. We all were wrong. There
was no self-inflicted wound. There was no wound at all. The rising
premiums were the result of unadulterated, unchecked, unmitigated greed.
The insurance companies were not losing money while they continually
raised premiums. They were making money hand over fist.
Now the truth is out.
Jay Angoff, a former insurance commissioner of Missouri, undertook a
study funded by the Center for Justice and Democracy and endorsed by
Public Citizen and the Consumer Federation of America, among others. He
studied the 15 largest medical malpractice carriers in the United
States. He looked at documents that were filed under oath by the
insurance companies with the insurance commissions of the states in
which they do business. The under-oath part is important, because every
time insurance company executives have been put under oath, in
legislatures or courts, they’ve had to own up that caps won’t lower
premiums.
The Angoff study covers the years 2000 to 2004, so it provides current
information. Angoff looked at premiums earned compared to payouts in
those years, premiums earned compared to “incurred losses,” and
insurance company surpluses. The results are shocking.
During the years studied, these 15 insurance companies increased
premiums by 120 percent, while payouts increased by only 5.7 percent.
Take a second to think about the magnitude of that difference. In gross
dollars, the insurers took in three times what they paid out. (See
Rebecca Porter & Allison Torres Burtka, Med-mal Insurers Hiked Rates
While Payouts Dipped, TRIAL, Sept. 2005, at 76. To read the full study,
visit www.centerjd.org/ANGOFFReport.pdf.)
But some might say it’s unfair to compare current payouts to current
premiums. Insurance companies don’t work exactly that way. Sometimes it
takes years for claims to mature. So Angoff also looked at premiums
against what the insurance companies call “incurred claims.” That’s a
somewhat misleading term that really means “possible future claims.”
Such “incurred claims” have almost always proved to be inflated. Even
so, while premiums rose 120 percent, the “incurred claims”—as estimated
by the companies themselves—fell 25 percent.
The result? The companies accumulated vast treasuries, known as
“surplus” in the trade. The National Association of Insurance
Commissioners (NAIC) recommends how much surplus insurance companies
need in order to be safe. It’s logical and fair that insurers should
keep some money for a rainy day. The deluge would have to be Noah’s
flood, however, to sink these battleships. They have accumulated 200
percent of the surplus NAIC deems prudent.
No relief
Maybe the companies could justify this if their policyholders—in this
case, doctors—were getting some relief. Unfortunately, that’s not the
case. In 2003 and 2004, malpractice rates in states that recently
enacted caps went up 34 percent, compared to 18 percent in states with
no caps.
Lots of doctors have been, as my grandmother used to say, “mad as wet
hens” in the last couple of years. Some are justifiably angry about
their insurance premiums. Too bad they’ve chosen to blame their patients
and the right to a jury trial instead of the real villain. But then, I
guess they were fooled like I was.
Lots of legislators were fooled, too. The trouble for them is that they
now have to answer for their votes against the right to trial by jury.
Doctors were promised relief. It won’t be coming. Those wet hens are
coming home to roost.
—Kenneth M. Suggs
RELATED INFORMATION:
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Announcement of AAJ Presidency
Articles: "New President Hopes to Boost Trial Lawyers' Image"
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