Frontline Volume 1, Number 2 Fall 1997

Are Med-Mal Premiums Set to Head Higher in 1998? The Historical
Prospective

Prior to the 1975-76 national medical malpractice insurance crisis,
commercial insurance companies collected an estimated 80% plus of the
premium dollars paid by health care providers for malpractice insurance.
 In swift response to the commercial insurers' demands for overwhelming
premium increases, sought to off set huge underwriting losses suffered
through an explosion in frequency and severity of claims reported and
paid, doctors united state by state to form their own mutual's or
reciprocal insurance companies and cooperative underwriting facilities. 
Overnight, the "bed pan mutuals"  (so-called by their commercial carrier
competitors at the time) captured the individual physician and small
group market by convincing doctors to replace their expensive
occurrence-type policies with the new claims-made coverage model.  This
new form offered very attractive initial rates.  And combined with the
lure of lower operating overhead and their non-profit status, "bed pan
mutuals" gained rapid market share and 20 years later, respect of their
peers in the insurance community.

Other than changing to the claims-made policy form and to doctor managed
mutuals, by and large the new companies carried on the commercial
underwriter's practice of catering to the needs of the individual
physicians and surgeons who dominated the health care market place. 
When presented with requests for proposals from physician partnerships
and other groupings, some struggled with the concept, and many continued
to issue  separate, stand-alone policies to each individual doctor, or
refused the larger clinic opportunities.  Carriers who specialized in
covering corporate risks, hospitals and larger clinics avoided extending
individual doctor coverage under their policies to independent
physicians and surgeons who had been granted staff privileges by their
hospital and/or clinic policyholders.  At the time, many viewed these
physicians as in-direct corporate risk of which they had no insurable
interest or ability to manage their risk effectively.

The Evolving Market The changes in the way health care insurance
protection is purchased accelerated the growth of large group practices
and managed care facilities and forced malpractice insurance
underwriters to rethink the way they do business.  Policies and services
originally designed for individual practitioners and small groups do not
fully meet the coverage needs of providers that require protection for
their corporate interests.  Particularly the new demands for creative
financing options for larger numbers of physicians under one buyer. 
Many underwriters are beginning to recognize that the malpractice
exposure can be more accurately quantified when significant numbers of
doctors are required to conform to defined treatment standards and are
paid based upon patient volume rather than for services rendered. 
However, with this change has come a trend towards increasing numbers of
medical malpractice cases of failure to and/or delay to diagnose claims;
which could be an out growth of managed care. Progressive underwriters
are willing to gamble a share of their surplus to capture the premium
pool and related services paid by large managed care companies, group
practice and integrated delivery facilities.  Others are more cautious
about taking on large groups of physicians at discounted rates, as
losses are growing disproportionately to historical trends and premiums
continue at eight year lows, largely ignoring the trends and their
actuary's minimum suggested rate levels. (see related article page 2).
New commercial carriers are reentering the physicians market and
existing commercial are more aggressive.  As well, an increasing number
of doctor-owned companies previously committed to underwriting primarily
individual practitioners and small groups in single states are now
willing to innovate and tailor their policies and services to the
specific needs of large groups, hospitals and integrated systems in
multiple states.  If they do not, they face declining market share to
the big commercial underwriters who are better situated to meet the
needs of larger corporate risks in health care.

Financing the Medical Malpractice Risk During the past ten years, most
group administrators have relied primarily on the purchase of insurance
to finance the business risk associated with medical malpractice claims.
They have focused on reducing costs through mergers, acquisitions and
internal growth, and by expecting their underwriter to discount the
rates  charged for individual medical specialties simply because of the
large numbers of doctors available to insure from a single buyer For the
most part, they have given only passing consideration to risk management
methods, such as; loss prevention, mitigation, and risk retention to
reduce the cost of claims and insurance.  This approach has worked well,
largely because of the continued soft market pricing and abundant
capacity from dozens of underwriters willing to discount prices for
business. Between 1990 and 1997 group practices consistently negotiated
rates which were 10% to 45% below the standard (solo practice) premiums
charged by their carriers.  These deep discounts turned the
underwriter's actuarial tables upside down as time passed.  While the
loss experience of solo practitioners and smaller groups (those paying
under $250,000 annual medical malpractice premiums) remained largely
within expected ranges, underwriters began to realize they had
overestimated their ability to quantify and accurately price the
exposures of larger groups over time.  Many have suffered greater than
anticipated losses on their discounted group accounts before recognizing
that they must tighten the underwriting tourniquet to stop the financial
bleeding of eroding loss ratios. But they quickly learned that higher
rates lost accounts to new markets with deep pockets.  Because new
underwriters are willing to take the business at less premium.  Thus,
the continued soft market marches on... Note:  In 1990, 29% of cases
arose from failure or delay in diagnosis, and they represented just 19%
of total indemnity.  By 1995, these cases comprised 40% of the total and
accounted for 32% of all 1995 indemnity.  Average indemnity in failure
to diagnose cases grew from $550,973 in 1990 to $775,123 in 1995.  Of
the indemnity awards of more than $1,000,000 only 2 involved diagnostic
errors in 1995 compared to 13 in 1994, according to MIEC's 1995
California Large Loss Study. Still, during the past two years several
prominent carriers have tried playing catch-up by increasing premiums
for their larger group policy holders, in some cases by as much as 100%.
Faced with intense price-driven competition for health services, CFO's
were pressured to find ways to mitigate the upward move in the cost of
insurance and have sought new relationship with carriers who emphasis
risk management over the simple risk transfer to insurance.  Many
commercial insurance markets are responding as are a number of larger
"bed pan mutuals" who have grown to become key national players.
Conclusion Those seeking to grow by acquisition, merger and internal
growth can no longer always count on increasing their profits by
reducing their consolidated medical malpractice premiums through size
discounts alone as some carriers begin to tighten rates.  Rather, they
are faced with either: a) absorbing the premium increases, b) moving
into the unfamiliar world of alternative risk financing, c) jumping at
temporary price reductions offered by the vast array of new markets
seeking large accounts (often attached to self-insured retention SIR)
or, d) a combination of the various approaches. Many CFO's are, for the
first time, embracing the alternative funding mechanisms which have been
used for decades by their counterparts in large industrial
organizations.  They are realizing that, in general, first dollar
insurance is (in an increasing premium market) the most expensive way to
finance risk.  Rather than looking solely to insurance companies for
protection, they are implementing loss prevention programs, exercising
greater control over the management of claims, and reducing costs
through a combination of risk retention and the purchase of excess
insurance, among other loss sensitive plans. Balancing risk retention
with sound risk control practices and risk transfer/stop loss coverage
provides the game plan for medical groups, clinics and integrated
systems in the new millennium.  By implementing this strategy now, while
near the bottom but upward curve in the next  increased premium market,
forward thinking CFO's and risk managers will be ahead of those who
ignore these trends.

How prepared are you for the changes affecting malpractice insurance?
IPA's, IPO's, MCO's, MSO's, HMO's, PPO's, IDS's, PHO's, GPWW's, and solo
practice physicians, surgeons, and group practice models. Professional
Liability, Directors & Officers, Errors & Omissions, Employers
Liability, Property & General Liability, plans for the Health Care
Delivery Industry. When you need an independent, objective &
knowledgeable insurance broker/consultant with access to over 60+
markets, give HealthCare Professionals' Insurance Services a call:
714-990-4430 or e-mail us at HEALTHPROS@aol.com

a division of R.W. Mortimer & Associates Insurance Agents & Brokers,
Inc., since 1959


Health Care Liability Trends: ImplicationsInsurance for Captives
"Captive Company Reports" By E.B. Wroebel Reprinted with permission by:
HealthCare Professionals' Insurance Services Risk Finance Consulting And
Insurance Tillinghast - Towers Perrin actuary Ed Wrobel, our expert in
medical professional liability for health care insurers, including
captives, has written an important analysis of the current trends.  They
are not as favorable as published results would make them appear.

In recent years, medical malpractice has been one of the more profitable
lines of business in the insurance industry (see Exhibit 1), with loss
ratios of 77% to 85% from 1994 through 1996.  With favorable results
like these, ever more players are attracted to the market, adding more
capacity to an already intensely competitive situation.  However,
captive owners and malpractice writers alike should approach this market
with caution and look beneath the current financial results to the
underlying trends.

Frequency, severity:  Changes in claim frequency (number of claims per
exposure unit) have been the key drivers in previous turns in the market
cycle.  Following the decline in claim frequency that occurred during
the late 1980's, claim frequency has been relatively flat for the past 5
- 7 years, though results have been mixed from region to region and
insurer to insurer.  Signs of frequency increases are emerging.  St.
Paul, the largest medical malpractice writer in the country, saw its
claim frequency increase roughly 20% from 1994 to 1996 (see Exhibit 2). 
Average claim sizes have continued the trend upward throughout the
1990's.  The average annual increase is 6 - 8% per year, a rate that
shows no sign of decreasing.

With managed care-related changes sweeping the health care industry, new
exposures are emerging, causing upward pressure on claim frequency and
costs.  If claim frequency and security are increasing, shouldn't rates
be increasing? Rates and premiums:  Rates and premium levels, meanwhile,
have been relatively flat over the past few years.  We see more
instances of companies selecting rate levels at the low end of, or
below, the range suggested by actuarial indications. Companies appear to
be making liberal use of schedule rating premium credits, thereby
reducing premiums charged.  This is one way to attract physician groups
and their business managers. Downgradings:  A.M. Best recently
downgraded seven strong, otherwise healthy medical malpractice specialty
insurers from A+ to A, not because of negative changes in their
financial results, but because of Best's concern about the severe price
competition and the uncertainties relating to managed care.  The
companies in question also specialized in this one line of business, as
do health care captives.

If rate levels are considered inadequate, and Best is downgrading
companies' ratings, why does this medical malpractice line of business
look so profitable? It's because of the significant reserve redundancies
left over from policies written in the late 1980's and early 1990's.  At
that time, loss costs unexpectedly turned favorable, and rate levels
didn't react for a period of years.  We are concerned with the present
state of rates and premiums.  Here's why:  when premium levels decrease
or remain flat, and underlying loss costs increase, at some point the
lines cross and the business becomes unprofitable (see Exhibit 3). We
are at or beyond that juncture in many medical malpractice insurers and
captives.

Appearance vs. reality:  A comparison of calendar year loss ratios (i.e.
the typical published financial information) with policy year loss
ratios (i.e. the estimated results of policies written in a given year)
illustrates this situation (see Exhibit 4).  Consolidated published
results from a sample of physician insurers reveal a 1996 calendar year
loss ratio of 85%.  This is the appearance: the reality is that the
expected 1996 policy year loss ratio is 128%.  Why such a big
difference?  The difference between the two is the release of the
redundant reserves from prior policy years into the 1996 results.  Won't
these same redundancies continue year after year?  Those crossing lines
shown in Exhibit 3 indicate that they won't.  When the redundancies dry
up, so will the rosy financial results. Health care captive owners need
to make strategic decisions with their eyes wide open.  It may not make
sense to try and compete in such a difficult market, depending on the
particular jurisdiction.  Key requirements for captive players in this
market are rational pricing, patience, and a long-term view. CICR
comment,:  New health care captives are still being formed, in spite of
these trends.  The driving force appears to be the providers and
physician groups.  Not to mention the promoters of captives, of course.

The Bottom Line by Rick Mortimer We concur with Ed Wrobel's view. 
Although we have a slightly different vantage point as
brokers/consultants designing and securing risk transfer plans for
medical providers with the 60+ qualified medical malpractice
underwriting facilities doing battle with one another today.  It is
still a buyers market in nearly every state when it comes to medical
malpractice coverage.  However, we do here rumblings from top executives
at some of these companies that prices and coverage (such as prior acts
so freely given over the last 20 years) will both need to be adjusted. 
But with competition as intense as it is, few carriers have the nerve to
be the first and lead with price hikes fearing significant loss of
market share to their aggressive new competitors. Tillinghast, in
February of 1994 warned in their monthly publication, "Emphasis", of the
looming hard market forces the numbers were suggesting.  They have been
silent until now, watching price fall even further and competition
increase. Nearly four years later, they warn the markets again to take
stock that sooner than later the premium will rise and the coverage
restrict as the number of markets are forced to over react to the trends
they have been ignoring.

Claims Corner Is California really the bell weather state? CA Average
Large Loss* 1990	$	811,280.	00 1991	$	997,343.	00 1992	$	734,665.	00
1993	$	623,131.	00 1994	$	818,400.	00 1995	$	957,717.	00
1996	$	840,219.	00 *MIEC Large Loss Study For a complete copy
of MIEC's Large Loss Study (20 pages), please call or write HCP
attention Ruth Ann Saine at (714) 990-4430 or email us at
HEALTHPROS@aol.com.

In the 1996 survey, managed care was mentioned in 16 of 147 cases. 
Three threads ran through these cases: n  Treatment was delayed or
inadequately performed due to economic constraints imposed on health
care professionals. n  Inadequate staffing led to monitoring lapses and
injury. n  Failure to transfer a patient in a timely manner to a
hospital better equipped for special care. National Jury Award and
Settlement Medians for Medical Malpractice Claims


Terms to be Familiar With:

RISK CONTROL encompasses the avoidance or elimination of risk and risk
eduction through loss control.  Loss control reduces the probability
that loss will  occur and also reduces the magnitude of losses that do
occur.  Risk control, however, only addresses a portion of the risk
management process and is not a complete solution in itself. RISK
FINANCING involves various techniques to pay for losses that occur in
spite of risk control techniques that are utilized.  It involves
assumption of risk and risk transfer. Assumption or retention of risk,
either wholly or partially, means that the risk is borne or financed
internally. RISK TRANSFER can mean either a contractual transfer of risk
or transfer through the purchase of insurance.

Trivia Questions

1. What insurer recently had AM Best down-grade their rating from B- to
D?

2. What mutual company went public in 1997?

3. How many awards over $1,000,000 were there in California in 1996?

ANSWERS 1.	P.I.E. Mutual Co., from B- to D.  11/17/97, Jeffrey
Dunsavage 908-439-2200 ext. 5618. 2.	Southern California Physicians
Insurance Exchange (SCPIE). 3. There were 28 awards.

This newsletter is for general informational purposes only.  It is
intended to provide a limited overview of the market and to provide
thought provoking ideas for our readership to consider when arranging
for risk transferal programs and insurance.

How to reach us:

HealthCare Professionals' Insurance Services Risk Finance Consulting &
Insurance 475 S. State College Blvd. P.O. Box 9699 Brea, CA  92822-9699
714.990.4430 714.255.0872 Fax HEALTHPROS@aol.com  E-Mail

Publisher: R.W. Mortimer & Associates Insurance Agents and Brokers, Inc.
DBA: HealthCare Professionals' Insurance Services Rick Mortimer, Editor