Newsletter
Issue 2
False Accounting: How Medical Malpractice Insurance Companies Inflate Losses to Justify Sudden Surges in Rates and Tort Reform
THE FOUNDATION FOR TAXPAYER AND CONSUMER RIGHTS
December 2005
Executive Summary
In this study, the Foundation for Taxpayer and Consumer Rights (FTCR is a non-profit, non-partisian organization) reviews the loss projections of medical malpractice insurance companies, beginning with the "insurance crisis" of the mid-1980s. The data shows that medical malpractice insurers have historically inflated their loss projections and then revised their reported losses downward in subsequent years. The "incurred losses" that medical malpractice insurance companies initially reported for policies in effect in each of the years examined were, on average, 46% higher than the amount the insurers actually paid out on those policies.
The study also finds that inflation of insurers’ reported losses was higher during the last "insurance crisis" than in subsequent years. In 1989, for example, medical malpractice insurers’ loss estimate were overstated by 66%.
For each of the years examined - during and after the last insurance crisis - insurer’s annual revisions of estimated medical malpractice payouts declined over a ten-year period.
A case study of The Doctors’ Company, one of the nation’s largest medical malpractice insurance companies, reveals the same loss inflation trends.
Based on the analysis, FTCR concludes that the "incurred loss" date reported by medical malpractice insurers do not represent, or even approximate, the actual losses a company will sustain as a result of claims against its policyholders. If historical loss inflation is any indicator of current trends, insurance companies overstated loss projections by $15 billion between 1995 and 2003.
FTCR notes that many insurers have falsely characterized loss data in statements to lawmakers, news media and the public, and cautions that lawmakers and regulators should not rely upon the insurance industry’s current loss projections, because those figures are not based on hard or otherwise reliable data.
The study concludes that the insurance industry is in need of stringent regulatory and accounting reforms. Until such reforms are enacted, FTCR believes a moratorium is necessary on both rate increases and legislatively enacted limits on legal rights known as "tort reform." Finally, whether insurance companies are intentionally inflating their reported losses is a question that can only be resolved by state regulators and state and federal law enforcement officials, who must invoke their authority to investigate the insurers’ accounting practices.