Writing malpractice insurance: Know the past, forecast the future

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Studying the past and predicting the future are key to underwriters' decisions on whether to provide medical liability insurance and how much to charge for it, according to James Hurley, chair of the Malpractice Insurance Subcommittee at the American Academy of Actuaries.

Resolution of malpractice claims can take 10 years, said Hurley. Underwriters must be prepared to pay for claims made years before while they attempt to predict the risk of insuring health professionals currently in practice. It's a complex process, he said.

The underwriter first estimates potential losses in the upcoming coverage period by taking these steps:

Identify long-range, nationwide loss patterns over the previous decade.
Anticipate future payouts by reviewing claims filed in the previous decade and comparing them with loss patterns for the previous five years.
Calculate expected inflation in cost of medical care, lost wages and other factors that would define a patient's economic losses.

Taken together, this information helps an underwriter plan for losses associated with adverse claims resolutions.

Second, the company anticipates investment income and calculates return on investments that continue after a claim is filed and before its final resolution. Finally, after identifying operating expenses, the underwriter can compute premiums needed to meet payouts and maintain corporate financial viability.

Using these numbers, a company determines whether rates will rise or fall. Here, said Hurley, is where individual medical specialties enter the picture. Companies next begin comparing adverse claims resolutions of one specialty with those of its counterparts. . In doing so, underwriters assign a relativity score to each specialty. Higher scores mean higher risk and, accordingly, higher premiums.

"General surgery may have a score of 4; orthopedic surgery may be at 5; plastic surgery may be at 4.5," Hurley explained. "The calculated rates are based on that score."

Specialties with higher scores bear a greater premium increase than those with lower scores.

"If rates need an overall increase of 10 percent, not every specialty is going to get a 10 percent increase," said Hurley. "Obstetrics may go up more than 10 percent, but internal medicine may go down 8 percent."

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