Per treating physician, medmal claim filings in Illinois were stable from mid-90s through 2004; reports of "legal hellhole" conditions in certain counties were not supported by jury verdict data, according to a recent study by Duke Prof. Neil Vidmar. The study acknowledged dramatically rising insurance premiums were impacting the health care industry, and attempted to find support for reports that premium increases were the result of rising jury verdicts and runaway juries in certain counties reputed to favor plaintiffs. lawarchive - Medical Malpractice and the Tort System in Illinois
The American Insurance Association criticized Widmar's study as based on "faulty and incomplete 'research,'" according to the Insurance Journal. An AIA spokesperson pointed to rises in incurred medical malpractice claims losses between 2000-2004 as data not examined by Prof. Widmar. The spokesperson did not dispute Prof. Widmar's data, but criticized his statistics as being "of little use." Insurers Dispute Study of Ill. Courthouse Med-Mal Data
Prof. Vidmar frequently publishes quantitative studies concerning the medical malpractice claims and insurance field. Earlier this year, he and Dr. Paul Lee of Duke published a study of Florida medical malpractice litigation. Unintended Consequences: Duke Study: No Real Rise in Florida Med Mal Claims Over 14 Years
As Congress considers arguments for and against the extension of the Terrorism Risk Insurance Act (TRIA), one that recurs is that the insurance industry could not absorb a $100 billion loss from terrorism. Yet, without federal reinsurance, the insurance industry is already exposed to comparable shock losses of similar magnitude, in the form of hundred-year or 200-year killer windstorms or earthquakes striking key population centers in the developed world.
See, e.g., an earlier Unintended Consequences post on May 6: Unintended Consequences: Useful sources on terror risk "super catastrophes"
For possible terror attacks, one exposure not often discussed is that to workers compensation insurers. A Towers Perrin/Tillinghast study saw a $90 billion comp loss in a worst-case scenario. RMS studies reportedly found potential for $4 billion from a major truck bomb attack and $32 billion from a large-scale anthrax attack. The total capital in the workers comp market is said to be about $30 billion, so these would be major hits. Some speculate that the anticipation of this might cause a crisis in workers compensation insurance as employers with urban concentrations are non-renewed and left to get comp insurance from the residual market or assigned risk plans, if TRIA is not extended. The article, with links to more detailed studies, is at International Risk Management Institute, "TRIA's Sunset: The Dawn of a New Workers Compensation Crisis?" (May 2004)
To further put a $100 billion exposure in perspective, consider the unfunded liabilities in existing corporate pension programs. According to a recent release by Wharton, the Pension Benefit Guaranty Corporation (PBGC) estimates a projected liablity of $450 billion, almost $100 billion of that in plans sponsored by financially troubled companies. The recent default by United Airlines on $6.6 billion in pension liabilities is just one instance of such a call on PBGC. Retirement Programs Face an "Aging-Population Tsunami" - Knowledge@Wharton
Health Affairs published Prof. Ken Thorpe's 2004 paper examining the impact of tort reforms on the current medical malpractice "crisis." Based on his review of data, he attributes rising insurance premiums to increasing claims severity and concludes that premiums in states capping tort awards are lower than in states that do not cap.
His analysis takes into consideration the influence of recently formed physician-owned mutuals and the exit of companies from the market voluntarily (e.g. St. Paul) and because of insolvency. He notes that in some states with the most acute "crisis" in medmal insurance price/availability, "carriers exiting the market accounted for a substantial (up to 40 percent) share of premiums written."
The author notes the expansion of two physician-owned companies, PHICO (Pennsylvania) and PIE Mutual (Ohio) outside of their home states, generating substantial large operating losses in such expansion markets. PIE Mutual was declared insolvent in 1998 and PHICO insolvent in 2002. Their sudden exit from their home and expansion markets, with St. Paul's exit at the end of 2001, contributed to the hardening of the medmal market generally demonstrated in data in the author's paper. The author characterizes these exits as "new, and it is hoped, transitory events" that "may not signal long-term problems of competition or capacity."
His short paper does not address the question whether or not such boom/bust behavior is (in different guises) in itself a long-term condition of competition or capacity that regularly contributes to perceived "crises." He acknowledges the potential contributory role of the insurance cycle to insurance price/availability crunches, but highlights rising claims severity as the principal contributor to the crisis observed at the time of his paper.
Such analyses may be profitably revisited as we observe signs that the medmal market may now be softening as new capacity enters and existing capacity reorganizes (e.g. Berkshire's acquisition of Medical Protective from GE Insurance Services).
In addition to the links in the earlier post Unintended Consequences: TRIA Renewal Said Vital to Workers Comp Market, several useful articles recently released address some of the hard questions about the Terrorism Risk Insurance Act, (TRIA), its societal value and the coverage it provides. (read more)
Prof. Kent Smetters of the Wharton School wrote "Insuring Against Terrorism: The Policy Challenge" (NBER 2005) which argues that "mostly unfettered insurance and capital markets are capable of insuring large terrorism losses, even losses 10 times larger than the $40 billion loss that occurred on September 11, 2001. A $400 billion loss in capital markets is common." He argues "if there is any 'failure,' it rests with government policies. Government tax, accounting, and regulatory policies have made it costly for insurers to hold surplus capital. They have also hindered the implementation of instruments that could securitize the underlying risks."
His paper also points out that TRIA makes no concurrent premium charge for its billions in “supercat” reinsurance, making it impracticable for private competitors to offer reinsurance. He suggests that elimination of the government subsidy would encourage the development of private alternatives.
A free copy of the 2004 draft is online at: http://irm.wharton.upenn.edu/WP-Insuring-Smetters.pdf
How does the $100 billion “ceiling” on government coverage compare to the probable maximum loss in an historic hurricane or earthquake? Some estimates are that a 100-year hurricane hitting Miami head-on, or a 100-year earthquake hitting San Francisco (again), could cost close to $100 billion in property damage, business interruption and loss of life. Why is the federal government not passing special legislation about that? Because it’s a regional hazard? Florida and California have addressed their local catastrophes with state legislation and catastrophe pools.
In February 2005, the General Accounting Office released a study "Catastrophe Risk : U.S. and European Approaches to Insure Natural Catastrophe and Terrorism Risks," GAO 05-199 (2005). It looks at terror risks and major natural disaster risks and suggests:
* that the industry may not be able to address a major natural catastrophe,
* that CAT bonds and tax-deductible reserves may have the potential to enhance industry capacity for CATs
* that European countries mix approaches to insure natural catastrophes and have national terror insurance programs
It includes statistics on the 2004 hurricane season losses ($20 billion losses in Florida) and the impact of that quadruple-cat on government windstorm “backstop” programs, plus statistics on CAT bonds outstanding 1997-2004. It compares policies embedded in French and German terror coverage schemes and the reserve policies in European countries. It looks at consumer motivations in not buying available earthquake insurance (which implies similar “won’t happen to me” forces at work re terror insurance). It also examines the structure of "Special Purpose Reinsurance Vehicle" (SPRV) structure and payment flows.
It addresses proposals to change U.S. tax law so that insurers could set aside funds on a tax-deductible basis to establish reserves for potential future natural catastrophes or terrorist attacks. Presently, insurers may not deduct money set aside as reserves for events that have not occurred and the losses from which are not probable and reasonably estimable.
The 2005 GAO study is online at: http://www.gao.gov/new.items/d05199.pdf.
Recent state insurance department and Attorney General investigations are probing the use of high-layer catastrophe reinsurance, such as that sold by Berkshire Hathaway's National Indemnity and other reinsurance subsidiaries. A recent article at MarketWatch.com reported that in 1999 the New York Insurance Department criticized "supercat" finite reinsurance agreements between Berkshire subsidiaries and Gerling Global.
The agreements' reported triggers included one if a California earthquake between 4/1/94 and the end of 1995 exceeded $10 billion, another if windstorms in Florida, Georgia and the Carolinas during the same period exceeded $7 billion. A third would be triggered by Texas windstorm losses exceeding $5 billion in the same period. The article quoted one consultant as saying that the regulatory criticism was that "the trigger mechanisms for these policies were so high that no real risk was transferred." As a result, the regulator ruled that they should have been accounted for as loans rather than as reinsurance.
Do such regulatory positions have the effect of discouraging the sort of private reinsurance that might otherwise provide a private alternative to government programs for “supercats,” as Smetters suggests.
That article (which includes a link to the insurance department's report) is Barr, "Berkshire Reinsurance deals queried : Agreements helped Gerling Global manipulate results" (MarketWatch.com April 26, 2005).
NCCI, the insurance industry rating organization that manages many residual market pools, reported on industry results for the 2004 year. NCCI warns of potential market disruptions in workers compensation markets if the federal Terrorism Risk Insurance Act (TRIA) is not renewed. Volumes in the residual markets are at levels high enough to trouble NCCI and workers comp observers who remember the self-perpetuating "spiral" of depopulation caused by high "residual market loads" ("RML") not too many years ago. NCCI State of the Line Report: Workers' Comp Combined Ratio Best Since 1997
Studies by Tillinghast and Risk Management Systems, among others, support these concerns. (read more)
I’ve explored some possible sources for economic analyses of “super-cats.” One of the more helpful I found is “Managing Risk in the Aftermath of the World Trade Center Catastrophe,” (2002) published by Risk Management Solutions.
Its authors discuss various “supercats,” both natural and man-made, and issues of trying to value their impact. The RMS Publications site also contains dozens more papers related to the issues of valuation of catastrophes (they sell software for putting a number on a particular company’s exposure). It’s a wealth of reading about terrorism risk.
Another article links to two more detailed studies of workers comp exposures in a terror attack, and discusses possible market disruptions in workers comp if TRIA is not extended. One of them is a Towers Perrin / Tillinghast study that sees a potential $90 billion workers compensation industry loss in a worst-case scenario. RMS studies reportedly found potential for $4 billion from a major truck bomb attack and $32 billion from a large-scale anthrax attack. The total capital in the workers comp market is said to be about $30 billion, and NCCI just reported about $45 billion in premiums for 2004, so these would be major hits.
These impacts would be greatest on insurers that write large to medium size businesses with concentrations of workers in target areas. Terror risk and injury and disease arising out of and in the course of employment cannot be excluded from workers comp policies. The only way individual insurers may be able to mitigate their exposure is to not write policies on companies with high potential for such losses.
If that is the rational and common response, there may be insufficient companies ready to make a "voluntary" market for workers comp exposures in cities that might be a target for an attack, especially a radiological, chemical or biological attack. Some speculate that if TRIA is not extended, the anticipation of this might cause a crisis in workers compensation insurance as employers with urban concentrations are non-renewed and left to get comp insurance from the residual market or assigned risk plans.
This could lead to a self-perpetuating spiral exit out of voluntary markets as the remaining insurers seek to avoid having to pay the retroactive "residual market loads" that would be assessed on voluntary writers to pay the operating deficits from residual markets that would result from a devastating terror attack. Similar spirals have caused extraordinary market disruptions in the past.
The article, with links to more detailed studies, is at International Risk Management Institute, "TRIA's Sunset: The Dawn of a New Workers Compensation Crisis?" (May 2004).
The studies to which that article links are long; Towers Perrin study is 88 pages and an RMS study seems to be even longer (I've not yet read either myself). There is an executive summary of the Towers Perrin study available.
Wharton Professor Grace Wong analyzed transaction volumes and other factors potentially contributing to speculative bubbles, focusing on the fluctuation of prices in Hong Kong real estate. Her study suggests possible tools to detect speculative activities in cyclical markets, in time for regulators to act before damaging collapses.
Her study looked at and discounted the influence of various fundamental factors (e.g. interest rates, inflation, population growth, tax changes) sometimes offered to explain price spikes. She also considered historical bubbles, including the Tulip Craze of the 17th century and the tech stock bubble of more recent years. She derives some of her tools from work done by Scheinkman and Xiong in "Overconfidence and Speculative Bubbles." (2003) and "Speculative Trading and Stock Prices: An Analysis of China's A-B Share Premia." (2004).
Question: might Wong's studies be of value in understanding insurance price cycles and "crises" such as that in the medical malpractice sector? Can such recurring "crises" be seen as the analog of the inevitable "crash" following a speculative bubble in a real estate market, fueled by overconfidence? In insurance markets, the "crash" phase is manifested in suddenly rising prices as markets over-react to the excesses of the bubble of "exuberance," instead of the falling prices that evidence a "crash" in other financial markets? Is the regulatory attention better aimed at preventing the exuberent speculation or the over-reaction that naturally follows?
Abstract: The Hong Kong residential housing market index (CentaCity Index) experienced a real increase of 50 percent from 1995 to 1997, followed by a real decrease of 57 percent from 1997 to 2002. Using a panel data set of over 200 large-scale housing complexes (estates), increases in transaction volume and considerable cross-sectional variation in the size of price upswings are documented. Movements in fundamentals cannot fully justify the dramatic price upswing, the changes in turnover rate or the crosssectional variation. The non-fundamental price component is explored. Evidence consistent with overconfidence-generated speculation is provided, based on the model in Scheinkman & Xiong (2003), which predicts both a cross-sectional variation in the speculative price component, and co-movements in turnover rates.
Intrinsic vs. extrinsic incentives in profit-oriented firms supplying Open Source products and services, by Cristina Rossi and Andrea Bonaccorsi, First Monday, volume 10, number 5 (May 2005), URL: http://firstmonday.org/issues/issue10_5/rossi/index.html
This paper contributes to the literature on Open Source (OS) software by providing empirical evidence on the incentives of firms that engage in OS activities. Data collected by a survey conducted on 146 Italian companies supplying OS solutions (Open Source firms) show that (surprisingly) intrinsic, community-based incentives do play a role but are not, in general, put into practise. We investigate the discrepancy between attitudes and behaviours and single out groups of firms adopting a more consistent behaviour. Our results are in line with the literature on business models of the firms that enter the Open Source field.
Beyond markets and firms: The emergence of Open Source networks
by Federico Iannacci and Eve Mitleton-Kelly, First Monday, volume 10, number 5 (May 2005),
Although hierarchies and markets (i.e., autonomy) have been subject to extensive study, heterarchies represent different modalities of organizing that have been little researched. Drawing on complexity theory and the main features of complex evolving systems (CES), this paper sets out to remedy this imbalance by showing that heterarchies feature highly decentralized and relatively stable interactions which are coordinated through an emergent process of parametric adaptation. Implications in terms of learning are discussed casting a new light on the delicate issue of motivation in Open Source software development.
Warfare in western Sudan displaced more than 2 million Sudanese and resulted in world-wide contoversy over extensive reports of atrocities and genocide. Members and friends of the Dartmouth Lawyers Association formed the DLA Darfur Crisis Committee and volunteered their time to prepare a Call for Action just published by the DLA. A copy of the full report can be downloaded free from the DLA website.
The report recommends immediate actions by the United Nations and the government of the United States and other world leaders to help alleviate the plight of those displaced from their villages by two years of civil war. It includes several recommendations to Congress and the Bush administation which require immediate attention. The Committee is now exploring whether a class action may be brought on behalf of the displaced Sudanese against the Government of Sudan and commercial enterprises supporting the government. Read more and access the free report, "Winds of Madness" (Dartmouth Lawyers Association Darfur Crisis Committee 2005), at: DLA Weblog: DLA Publishes Darfur Call for Action