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Denial Malpractice Liability Insurance MarketSurveys of Insurers and Insurance Commissioners
SURVEYS OF INSURERS AND INSURANCE COMMISSIONERS DAVID J. O’HARA, M.A.; DOUGLAS A. OONRAD, M.H.A., M.B.A., PH.D.; PETER Ml LG ROM, D.D.S.; LOUIS FISET, D.D.S.; CORALVN WHITNEV, PH.D.
Q he m alpractice liability insurance m ark et h as been subject to cycles altern atin g betw een relatively low prem ium s and high availability of coverage, and higher prem ium s w ith a restricted supply of insu rers—th e la tte r occurring m ost recently betw een 1984 and 1986.1 Prem ium s today are relatively low, but in 1984-86 there was a liability insurance crisis. Medical m alpractice insurance prem ium s and defensive m edi cine contribute significantly to national medical care costs. D en ta l m ark et. The dental segm ent of the overall m alpractice liability insurance m arket has experienced a sim ilar cyclical history. D uring 1982-84, the availability of insurance constricted while prem ium s rose.2 D entistcontrolled companies came into existence in some states, including California, w here litigation was relatively common. The m edian paym ent for claims in dentistry is generally com parable to those in general medical practice,3 and the average duration of a dental claim parallels the average duration of a medical claim. No studies of m ark et size or concentration, m erit ratin g or the presence of Jo in t U nderw riting Associations
A
B
S
T
R
A
C
T
Surveys of malpractice insurers and state insurance commis sioners in 1992 show a highly concentrated market with opportunities for greater competition. Fewer than 50 firms write coverage nationally. Weighted premiums for $1 million/S3 million coverage vary
test several hypotheses. In particular, we expect th at: «" states w ith competitive, less restrictive ratin g law s will have more insurance companies operating com pared w ith states w ith restrictive laws; *■ states w ith competitive ratin g law s will have higher prem ium s compared w ith states w ith restrictive laws; ■■ states w ith a non-competitive ratin g law will be m ore likely to have JUAs.
across U.S. census divisions M ETHODS from $1,700 in the South to $3,0 0 0 in the Northeast. These data may be of interest to practitioners who purchase insurance and will aid dental associations in effectively participating in revisions of malpractice liability statutes as part of overall health care reform.
(JUAs) in dental m alpractice insurance have previously appeared in th e literatu re. This paper reports the results of national surveys of dental m alpractice insurers and state insurance commissioners. We describe the m alpractice insurance m arket character istics th a t affect all dentists and
S u rvey o f in su r a n c e com p anies: Sam pling and instrum entation. An accurate listing of in su rers selling dental m alpractice liability insurance in any of the 50 sta te s and the D istrict of Colum bia was identified by combining inform ation from state insurance comm issioners, the Am erican D ental Association Council on Insurance and “Best’s Insurance Reports.” To assure th a t the list included all known insurers, the 51 state dental associations were surveyed about the existence of a JUA, and the endorsed professional liability carrier was identified. The final census included 74 companies and JUAs. A 14-page, 21-item survey instru m en t was developed to JADA, Vol. 125, October 1994
1385
include questions on claims m anagem ent, underw riting/rat ing practices, th e company’s response to regulation, the competitive environm ent, reinsurance and inform ation on prem ium s and coverage. (A copy of th e in stru m en t can be obtained from Dr. Milgrom.) The in stru m e n t was pretested w ith several m ajor carriers to reduce response burden and improve th e quality of the data. The survey was m ailed to the senior executive officer of the firm in 1992. Two m onths later, a follow-up m ailing was se n t to non-respondents. Extensive telephone contact was m ade w ith the firm s for six m onths to answ er questions and clarify responses. S u rv ey o f sta te in su r a n c e co m m issio n ers: S am p lin g a n d in str u m e n ta tio n . A twopage, eight-item , survey in stru m e n t was m ailed to each insurance commissioner in the 50 sta te s and the D istrict of Colum bia using a m ailing list of th e N ational Association of Insurance Commissioners. After follow-up, 47 of th e 50 states and th e D istrict of Columbia responded. One state provided unusable inform ation; 46 usable responses (90 percent) to m ost questions were available for analysis. One hundred percent response was achieved in the N orth C entral and W est census divisions, 94 percent in the South and 67 percent in the N ortheast. Specific inform ation was collected on the availability of d a ta on dental m alpractice liability prem ium s, dentalspecific claims frequency and severity, th e n a tu re of the jurisdiction’s insurance prem ium ratin g law (particu larly, the degree of open or 1386
JADA, Vol. 125, October 1994
TABLE 1
UNIVERSE OF DENTAL MALPRACTICE LIABILITY INSURERS, 1992. American Physicians Insurance Exchange Britamco Cincinnati Financial Corporation Clarendon National CNA Colorado Dentists Professional Liability Trust Continental Insurance Company Dentists Benefits Insurance Company Farmers Insurance Group Fireman’s Fund Insurance Company Florida Medical Malpractice JUA Florida Physicians Insurance Company Frontier Hartford Insurance Group Home Insurance Company Indiana Residual Malpractice Insurance Association Kentucky Medical Insurance Corporation MAG Mutual Insurance Company Medical Defense Associates Medical Inter-Insurance Exchange Medical Malpractice JUA of Louisiana Medical Malpractice JUA of Massachusetts Medical Malpractice JUA of Minnesota Medical Malpractice JUA of New York Medical Malpractice JUA of Rhode Island Medical Malpractice JUA of Virginia
“competitive” rating) and the presence of a JU A in the state. RESULTS
S u rv ey o f in surers: U n iv erse o f in su rers. The universe of dental m alpractice liability insu rers includes 50 insurers (Table 1). Twenty-four of the 74 firm s and JUAs originally identified did not w rite m alpractice insurance for dentists a t the tim e of the survey. Of the rem aining 50 insurers, five were deemed too sm all in size and scope for the study. One in su rer refused to participate. Thirty-five of the rem aining 44 insurers (80 percent) responded to the survey. The total m arket share represented by these respondents ranged from 49 to 100 percent across the 51 jurisdictions.
Medical Mutual Group Medical Mutual Liability Insurance Group Medical Protective Insurance Company Missouri Medical Mutual Assurance Society of Alabama National Dental Mutual Insurance New Hampshire Malpractice JUA Northwest Dentists Insurance Company Orion Capital Companies Physicians Insurance Company of Indiana Physicians Insurance Company of Michigan Physicians Insurance Company of Ohio Physicians Insurance Company of Wisconsin PIE Mutual Princeton Insurance Company Professional Insurance Exchange Professional Mutual Insurance Group RCA Mutual Insurance Company SAFECO South Carolina Medical Malpractice JUA St. Paul Companies Texas Medical Insurance Underwriting Association The Dentists Insurance Company Unisource
U n d erw ritin g /ra tin g p r a c tic es. Eleven of 35 insu rers (31 percent) currently apply some form of m erit surcharges to general dentists w ith claims histories. Ten of 35 (29 percent) use some form of retrospective ratin g or dividends. Four factors predom inate in screening applicants for coverage: claims history (28/35); education and train in g (15/35) and professional qualifications (14/35); procedures performed (including the use of a n esth et ics, 6/35); and practice charac teristics and practice “style” (6/35). O ther factors m entioned less th a n 10 percent of the tim e were ADA m em bership, current/prior insurance, peer review, experience or age and practice m anagem ent and recordkeeping.
TABLE 2
iliiliilnilMl CENSUS D IV IS IO N
N o r t h N
C e n t r a l
o r t h e a s t
MEAN
M E D IA N
R A T IO O F H I G H E S T TO LO W EST
3 ,1 5 5
2 ,4 9 2
6 .2 6
4 ,3 8 4
3 ,7 5 7
4 .5 1
S o u t h
3 ,3 7 1
2 ,4 0 6
6 .5 1
W e s t
5 ,2 9 6
4 ,9 2 5
4 .9 6
R e g u la tio n an d its effects. E ight states were reported to have an “undesirable” business clim ate for m alpractice liability insurers: California, Florida, New York, Illinois, New Jersey, Texas, M assachusetts and Pennsylvania. High loss exposure, large ju ry verdicts, legal regulations, an overall anti-industry regulatory environm ent, several litigious venues and high-risk patients were the leading reasons for these perceptions. C o m p etitiv e en v iro n m en t. The H erfindahl Index1was used a t the state level to characterize the degree of concentration of dental m alpractice insurance. The m easure calculates th e sum of th e squared percentage m ark et shares of each competi to r in a given area. Thus, the theoretical m axim um is 10,000 (100x100) for a single-firm monopoly, and the m inim um approaches zero (1/n, w here n is the num ber of competing firms). The dental m alpractice insurance m ark et is highly concentrated (Table 2). The m ean H erfindahl Index ranges from an average of 3,155 in the N orth C entral states to 5,296 in the West. S tates in th e N orth C entral and South census divis ions generally have a larger num ber of insurers. The W est ern states have the sm allest average num ber of insurers.
P rem iu m s. Figure 1 represents the average of the 1992 prem ium for a $1 million/ $3 million claims-made policy, weighted by the num ber of dentists insured. W eighted average annual prem ium s ranged from $1,700 in the South census division to som ew hat above $3,000 in the N ortheast. The N ortheast and W est census divisions have the highest annual prem ium s, followed by the N orth C entral and South. R ein su ra n ce. Prim ary dental m alpractice insurers also en te r into reinsurance contracts w ith professional reinsurance firm s to protect th eir solvency by ceding the risk of exception ally large losses to others. This increases the prim ary firm ’s capacity to offer prim ary m alpractice coverage and can provide technical assistance and inform ation on under w riting risk. Sixty-five percent (23/35) of the firm s are reinsured. Twenty-four percent (8/35) of th e insu rers have reinsurance in th e proportional form. U nder proportional reinsurance, both prem ium s and losses are allocated on the basis of fixed percentages. In m any cases, th is reinsurance is purchased on a “surplus” basis where about 30 percent of th e losses are retained by th e prim ary
in su rer before the reinsurance is effective. On average, in our survey, the level of risk retained by prim ary insu rers who have this form of reinsurance was $775,000. About th ree-q u arters of the firms (27/35) purchased reinsurance on a non proportional basis. In th is case, the rein su re r covers losses only above a predeterm ined “deductible” (retention) and up to a preset lim it. The average retention per occurrence (th at is, individual claim for dental m alpractice) for in su rers of this type was about $500,000. The average deductible for aggregate losses was about $1 million. In fo rm a tio n from in su r a n c e c o m m issio n ers. Only 43 percent (20/46) of the comm issioners collect separate inform ation regarding prem ium stru ctu re of dental m alpractice liability, compared w ith 74 percent (34/46) for medical m alpractice policies. T hirty percent (14/46) of the insurance commissioners m ain tain data on frequency of dental m alprac tice claims, b ut 59 percent (27/46) have data for m edical m alpractice liability. Similarly, 33 percent of the insurance comm issioners (15/46) m aintain data on severity of dental m alpractice claims, and 57 percent (26/46) have d a ta for medical m alpractice liability. The m ajority (59 percent) of states require an nual reporting by m alpractice liability insurers. The survey data also reveal prior approval (non-competi tive) to be the m ost common ratin g law (54 percent) currently in effect. Forty-six percent of the responding jurisdictions (21/46) have a JADA, Vol. 125, October 1994
1387
TRENDS
competitive ra tin g law. Thirtyfive percent (14/40) of the ratin g laws became effective before 1960 and 35 percent (14/40) since 1981. The insurance commissioners were also asked about JUA s in th e ir states, which exist to assure availability of m alprac tice liability insurance for m edical and/or dental profes sionals. T hirty percent (14 of 46) of the responding jurisdic tions had JUA s. Of the 14 states reporting JUAs, 11 answ ered the question of w hether contributions were m andatory. Fifty-five percent (6/11) reported contributions by liability in su rers to the JU A pool as m andatory. (We verified th e list of JU A s reported by the insurance comm issioners w ith state dental associations and a legal compendium produced by th e Agency for H ealth Care Policy and Research. Of th e states offering dental m alpractice insurance coverage, 11 have JUAs.) H y p o th esis te stin g . After testin g our hypothesis (regres sion specifications used to estim ate th e four equations in th e model of th e dental liability insurance m ark et and the statistical resu lts are available from Dr. Milgrom), we found: ■■ There was no relationship betw een competitive ratin g laws and the num ber of in su rers or higher prem iums. The best predictor of the num ber of in su re rs and prem ium was th e num ber of dentists in the state. "■ There was no relationship betw een competitive ratin g law s and m ark et concentration. Instead, a sm aller num ber of dentists and few er people per dentist were related to less m ark et com petitiveness. 1388
JADA, Vol. 125, October 1994
TA BLE 3
M E D IC A L M A L P R A C T IC E IN S U R E R S (1 9 8 6 )
IN D E X
L o w
c o n c e n t r a t io n
8
s ta t e s
DENTAL M A L P R A C T IC E IN S U R E R S (1 9 9 2 )
8
s ta t e s
( H e r f in d a h l In d e x u n d e r
1 ,8 0 0 )
H e r f in d a h l In d e x b e tw e e n
1 ,8 0 0
3 9
s ta t e s
2 9
s ta t e s
a n d
5 ,0 0 0
H ig h
c o n c e n t r a t io n
4
s ta t e s
1 4
s ta t e s
( H e r f in d a h l In d e x o v e r 5 ,0 0 0 )
The results of th e analysis supported the hypothesis th a t the presence of a JU A would be negatively related to the com petitiveness of the prem ium r a t ing laws. The analysis suggest ed th a t, other things equal, states w ith competitive ratin g laws were 18 percent less likely to have a JUA. Of the other state-specific variables included to control for th e extent of the potential dental liability m arket (dentist population, total population-to-dentist ratio and per capita income), both dentist population and population-todentist ratio were m arginally significant. S tates w ith more dentists or a higher populationto-dentist rate, or both, were more likely to have a JUA. D IS C U S S IO N
This survey provides the first detailed picture of the Am erican dental m alpractice liability insurance m arket. In contrast to previous work in medical care,1the companies w ith the m ajor m arket shares in all states are represented in the survey results. U n d erw ritin g /ra tin g
p r a c tic es. Less th a n one of three insurers uses any form of m erit rating. Few er use a retrospective ratin g system. In contrast, Sloan and colleagues1 found about tw o-thirds of firms (9/14) w riting medical liability coverage used a form of m erit ratin g and an additional 21.4 percent (3/14) used retro spective ratin g or dividends. No studies of the effect of m erit or experience ratin g on the practice behavior of dentists have been performed. B ut if the use of m erit rating were to increase, we m ight expect, a t least theoretically, th a t the d eterren t effect on negligence of th e m alpractice liability system would be accentuated. Thus, th e in su r ance system could potentially promote b e tte r care. W ith regard to screening criteria used by firms, the dental m alpractice insurance underw riting p a tte rn s closely m atch those used in medical m alpractice.1 C om p etition . There is little competition in the dental m alpractice insurance m arket. These findings are qualitatively
sim ilar to 1986 observations of m edical m alpractice by Sloan and colleagues.1 H erfindahl indexes exceeding 1,800 for 43 of the 51 states and the D istrict of Colum bia were found in those studies (Table 3). A H erfindahl value of 1,800 is roughly the equivalent to six equal-size firm s, th e threshold a t which the U.S. D epartm ent of Justice applies special scrutiny to proposed m ergers. There is a correlation of .69 betw een the w eighted average dental m alpractice insurance prem ium and th e H erfindahl index a t th e census division level. B ut several years of d a ta on concentration and prem ium s would be needed to determ ine w hether concentration is causally related to the level of prem ium s. These d a ta suggest th a t th ere m ay be scope for prem ium -low ering innovation through new entry into local m arkets. However, since there do not appear to be artificial b arriers to entry in the dental m alpractice insurance sector and th e absolute size of prem ium differences is relatively sm all, the potential gains from any such new entry are not likely to be large. P rem iu m s. Prem ium levels for dental m alpractice in su r ance do not represent a substantial
share of general den tists’ practice incomes. S tructural factors in th e m arket, such as the n a tu re of state insurance regulation and interfirm competition in local and regional m arkets, and the underw riting and rating practices of insurers will play a large role in determ ining w hether this situation persists in the longer term . R eg u la to ry factors s h a p in g th e m ark et. Annual dental m alpractice liability prem ium s total more th a n oneq u a rte r billion dollars, m aking this m arket a significant entity separate from medical m alpractice. U nfortunately, state governm ents have not generally m aintained dental malpractice-specific d a ta bases on prem ium s, claims frequency and aw ard sizes. This lack of dental liability-specific inform ation a t th e state level m akes it difficult to analyze the im pact of num ber of insurers, th eir respective m arket share and specific pricing strategies on th e level of dental m alprac tice prem ium s and other aspects of dental behavior. In theory, a competitive state ratin g law directly affects the supply of dental m alpractice liability insurance. B ut dentist population and per capita income act as outside dem ands for dental liability insurance
Dr. M ilgrom is professor, Depart ment of Dental Dr. Whitney is
Dr. Conrad is
Scie n ce s, University
Dr. Fiset is research
research a ssistant
professor, Depart
of W ashington, S M -
a ssociate professor,
professor, Depart
m ents of Health
3 5 , Seattle, g 8 1 9 5 .
Department of
ment of Dental
S e rvice s and Dental
Public Health
A d d r e s s reprint
Dentai Public Health
Public Health
Public Health
re qu e sts to Dr.
Sciences, University
Scie n ce s, University
Scie n ce s, University
Milgrom.
of Washington.
of Washington.
of Washington.
through th eir prim ary effect on the dem and for dental care. One im portant assum ption in the em pirical analysis was th a t factors raising the underlying dem and for dental services will increase indirectly the level of per den tist dem and for m alpractice liability insurance. Our observations did not support these propositions. Com petitive ratin g laws allow in su rers more flexibility in setting rate s and are favorable to insurers. Non competitive ratin g can be considered a b a rrier to entry. Therefore, the num ber of insurers was expected to be positively correlated w ith the competitive ratin g variable. The presence of a competitive ra tin g law is a rem oval of the constraint on the price of insurance prem ium s. Prem ium s are expected to be higher in the unconstrained case. Therefore, the price of dental m alpractice insurance was expected to be positively correlated w ith the competitive ratin g variable. Theoretically, competitive ratin g law s should increase the num ber of insurers. The H erfindahl index is a m easure of m ark et concentration. Increasing the num ber of insurers in the m ark et reduces the concentration. We found he hypothesized inverse relationship betw een m arket concentration and competitive ratin g was not supported empirically. Non-competitive ratin g laws and the presence of a Mr. O ’Hara is JU A both research associate, Department of represent an Dental Public Health “interven Sciences, University tionist” attiof W ashington. JADA, Vol. 125, October 1994
1389
tude of th e sta te insurance regulators. As such, JUAs were more likely to be observed in jurisdictions w ith non com petitive ra tin g laws. Conversely, JU A s were not present in sta te s w ith com petitive ra tin g laws, and the presence of a JU A was negatively correlated w ith the com petitive ra tin g variable. C O N C L U S IO N
O ur findings concerning rating law s are generally sim ilar to those of th e physician segm ent of the m ark e t.1From each of the em pirical analyses, we found th a t competitive ratin g was u n related to the behavior of the
dental m alpractice m ark et and th a t the num ber of dentists is the strongest factor determ in ing th e prem ium s charged and the num ber of dental m alprac tice insurers operating in the state. This resu lt implies th a t the size of the m ark et is the prim ary factor influencing the in su rer’s decision to en ter th a t m arket. O ther considerations— the jurisdiction’s population, w ealth, regulatory regim e and legal clim ate—are of secondary significance. ■ The authors acknowledge the assistance of Prof. Frank Sloan of Vanderbilt University who provided a survey instrum ent used in earlier studies of medical malpractice insurers. They also thank Dale Nelson of the CNA Insurance Co. and staff of the SAFECO
Insurance Co. for their assistance in the development of the survey instrument. The findings are those of the authors and do not represent policies or opinions of the firms or individuals who assisted in the development of the research or the American Dental Association. The study was supported by Grant No. HS/DE-06554 from the Agency for Health Care Policy and Research, U.S. Public Health Service. 1. Sloan FA, Bovbjerg RR, Githens PB. Insuring medical malpractice. New York: Oxford University Press; 1991. 2. American Dental Association Council on Insurance. The outlook for dental malpractice insurance. JADA 1985;110:395-7. 3. Milgrom P, Fiset L, Whitney C, Conrad D, Cullen T, O’Hara D. Malpractice claims ** during 1988-1992: A national survey of dentists. JADA 1994;125:462-9. 4. Rizzo J. The impact of medical malpractice insurance rate regulation. J Risk Ins 1989;56(3):482-500.
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JADA, Vol. 125, October 1994
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Q he m alpractice liability insurance m ark et h as been subject to cycles altern atin g betw een relatively low prem ium s and high availability of coverage, and higher prem ium s w ith a restricted supply of insu rers—th e la tte r occurring m ost recently betw een 1984 and 1986.1 Prem ium s today are relatively low, but in 1984-86 there was a liability insurance crisis. Medical m alpractice insurance prem ium s and defensive m edi cine contribute significantly to national medical care costs. D en ta l m ark et. The dental segm ent of the overall m alpractice liability insurance m arket has experienced a sim ilar cyclical history. D uring 1982-84, the availability of insurance constricted while prem ium s rose.2 D entistcontrolled companies came into existence in some states, including California, w here litigation was relatively common. The m edian paym ent for claims in dentistry is generally com parable to those in general medical practice,3 and the average duration of a dental claim parallels the average duration of a medical claim. No studies of m ark et size or concentration, m erit ratin g or the presence of Jo in t U nderw riting Associations
A
B
S
T
R
A
C
T
Surveys of malpractice insurers and state insurance commis sioners in 1992 show a highly concentrated market with opportunities for greater competition. Fewer than 50 firms write coverage nationally. Weighted premiums for $1 million/S3 million coverage vary
test several hypotheses. In particular, we expect th at: «" states w ith competitive, less restrictive ratin g law s will have more insurance companies operating com pared w ith states w ith restrictive laws; *■ states w ith competitive ratin g law s will have higher prem ium s compared w ith states w ith restrictive laws; ■■ states w ith a non-competitive ratin g law will be m ore likely to have JUAs.
across U.S. census divisions M ETHODS from $1,700 in the South to $3,0 0 0 in the Northeast. These data may be of interest to practitioners who purchase insurance and will aid dental associations in effectively participating in revisions of malpractice liability statutes as part of overall health care reform.
(JUAs) in dental m alpractice insurance have previously appeared in th e literatu re. This paper reports the results of national surveys of dental m alpractice insurers and state insurance commissioners. We describe the m alpractice insurance m arket character istics th a t affect all dentists and
S u rvey o f in su r a n c e com p anies: Sam pling and instrum entation. An accurate listing of in su rers selling dental m alpractice liability insurance in any of the 50 sta te s and the D istrict of Colum bia was identified by combining inform ation from state insurance comm issioners, the Am erican D ental Association Council on Insurance and “Best’s Insurance Reports.” To assure th a t the list included all known insurers, the 51 state dental associations were surveyed about the existence of a JUA, and the endorsed professional liability carrier was identified. The final census included 74 companies and JUAs. A 14-page, 21-item survey instru m en t was developed to JADA, Vol. 125, October 1994
1385
include questions on claims m anagem ent, underw riting/rat ing practices, th e company’s response to regulation, the competitive environm ent, reinsurance and inform ation on prem ium s and coverage. (A copy of th e in stru m en t can be obtained from Dr. Milgrom.) The in stru m e n t was pretested w ith several m ajor carriers to reduce response burden and improve th e quality of the data. The survey was m ailed to the senior executive officer of the firm in 1992. Two m onths later, a follow-up m ailing was se n t to non-respondents. Extensive telephone contact was m ade w ith the firm s for six m onths to answ er questions and clarify responses. S u rv ey o f sta te in su r a n c e co m m issio n ers: S am p lin g a n d in str u m e n ta tio n . A twopage, eight-item , survey in stru m e n t was m ailed to each insurance commissioner in the 50 sta te s and the D istrict of Colum bia using a m ailing list of th e N ational Association of Insurance Commissioners. After follow-up, 47 of th e 50 states and th e D istrict of Columbia responded. One state provided unusable inform ation; 46 usable responses (90 percent) to m ost questions were available for analysis. One hundred percent response was achieved in the N orth C entral and W est census divisions, 94 percent in the South and 67 percent in the N ortheast. Specific inform ation was collected on the availability of d a ta on dental m alpractice liability prem ium s, dentalspecific claims frequency and severity, th e n a tu re of the jurisdiction’s insurance prem ium ratin g law (particu larly, the degree of open or 1386
JADA, Vol. 125, October 1994
TABLE 1
UNIVERSE OF DENTAL MALPRACTICE LIABILITY INSURERS, 1992. American Physicians Insurance Exchange Britamco Cincinnati Financial Corporation Clarendon National CNA Colorado Dentists Professional Liability Trust Continental Insurance Company Dentists Benefits Insurance Company Farmers Insurance Group Fireman’s Fund Insurance Company Florida Medical Malpractice JUA Florida Physicians Insurance Company Frontier Hartford Insurance Group Home Insurance Company Indiana Residual Malpractice Insurance Association Kentucky Medical Insurance Corporation MAG Mutual Insurance Company Medical Defense Associates Medical Inter-Insurance Exchange Medical Malpractice JUA of Louisiana Medical Malpractice JUA of Massachusetts Medical Malpractice JUA of Minnesota Medical Malpractice JUA of New York Medical Malpractice JUA of Rhode Island Medical Malpractice JUA of Virginia
“competitive” rating) and the presence of a JU A in the state. RESULTS
S u rv ey o f in surers: U n iv erse o f in su rers. The universe of dental m alpractice liability insu rers includes 50 insurers (Table 1). Twenty-four of the 74 firm s and JUAs originally identified did not w rite m alpractice insurance for dentists a t the tim e of the survey. Of the rem aining 50 insurers, five were deemed too sm all in size and scope for the study. One in su rer refused to participate. Thirty-five of the rem aining 44 insurers (80 percent) responded to the survey. The total m arket share represented by these respondents ranged from 49 to 100 percent across the 51 jurisdictions.
Medical Mutual Group Medical Mutual Liability Insurance Group Medical Protective Insurance Company Missouri Medical Mutual Assurance Society of Alabama National Dental Mutual Insurance New Hampshire Malpractice JUA Northwest Dentists Insurance Company Orion Capital Companies Physicians Insurance Company of Indiana Physicians Insurance Company of Michigan Physicians Insurance Company of Ohio Physicians Insurance Company of Wisconsin PIE Mutual Princeton Insurance Company Professional Insurance Exchange Professional Mutual Insurance Group RCA Mutual Insurance Company SAFECO South Carolina Medical Malpractice JUA St. Paul Companies Texas Medical Insurance Underwriting Association The Dentists Insurance Company Unisource
U n d erw ritin g /ra tin g p r a c tic es. Eleven of 35 insu rers (31 percent) currently apply some form of m erit surcharges to general dentists w ith claims histories. Ten of 35 (29 percent) use some form of retrospective ratin g or dividends. Four factors predom inate in screening applicants for coverage: claims history (28/35); education and train in g (15/35) and professional qualifications (14/35); procedures performed (including the use of a n esth et ics, 6/35); and practice charac teristics and practice “style” (6/35). O ther factors m entioned less th a n 10 percent of the tim e were ADA m em bership, current/prior insurance, peer review, experience or age and practice m anagem ent and recordkeeping.
TABLE 2
iliiliilnilMl CENSUS D IV IS IO N
N o r t h N
C e n t r a l
o r t h e a s t
MEAN
M E D IA N
R A T IO O F H I G H E S T TO LO W EST
3 ,1 5 5
2 ,4 9 2
6 .2 6
4 ,3 8 4
3 ,7 5 7
4 .5 1
S o u t h
3 ,3 7 1
2 ,4 0 6
6 .5 1
W e s t
5 ,2 9 6
4 ,9 2 5
4 .9 6
R e g u la tio n an d its effects. E ight states were reported to have an “undesirable” business clim ate for m alpractice liability insurers: California, Florida, New York, Illinois, New Jersey, Texas, M assachusetts and Pennsylvania. High loss exposure, large ju ry verdicts, legal regulations, an overall anti-industry regulatory environm ent, several litigious venues and high-risk patients were the leading reasons for these perceptions. C o m p etitiv e en v iro n m en t. The H erfindahl Index1was used a t the state level to characterize the degree of concentration of dental m alpractice insurance. The m easure calculates th e sum of th e squared percentage m ark et shares of each competi to r in a given area. Thus, the theoretical m axim um is 10,000 (100x100) for a single-firm monopoly, and the m inim um approaches zero (1/n, w here n is the num ber of competing firms). The dental m alpractice insurance m ark et is highly concentrated (Table 2). The m ean H erfindahl Index ranges from an average of 3,155 in the N orth C entral states to 5,296 in the West. S tates in th e N orth C entral and South census divis ions generally have a larger num ber of insurers. The W est ern states have the sm allest average num ber of insurers.
P rem iu m s. Figure 1 represents the average of the 1992 prem ium for a $1 million/ $3 million claims-made policy, weighted by the num ber of dentists insured. W eighted average annual prem ium s ranged from $1,700 in the South census division to som ew hat above $3,000 in the N ortheast. The N ortheast and W est census divisions have the highest annual prem ium s, followed by the N orth C entral and South. R ein su ra n ce. Prim ary dental m alpractice insurers also en te r into reinsurance contracts w ith professional reinsurance firm s to protect th eir solvency by ceding the risk of exception ally large losses to others. This increases the prim ary firm ’s capacity to offer prim ary m alpractice coverage and can provide technical assistance and inform ation on under w riting risk. Sixty-five percent (23/35) of the firm s are reinsured. Twenty-four percent (8/35) of th e insu rers have reinsurance in th e proportional form. U nder proportional reinsurance, both prem ium s and losses are allocated on the basis of fixed percentages. In m any cases, th is reinsurance is purchased on a “surplus” basis where about 30 percent of th e losses are retained by th e prim ary
in su rer before the reinsurance is effective. On average, in our survey, the level of risk retained by prim ary insu rers who have this form of reinsurance was $775,000. About th ree-q u arters of the firms (27/35) purchased reinsurance on a non proportional basis. In th is case, the rein su re r covers losses only above a predeterm ined “deductible” (retention) and up to a preset lim it. The average retention per occurrence (th at is, individual claim for dental m alpractice) for in su rers of this type was about $500,000. The average deductible for aggregate losses was about $1 million. In fo rm a tio n from in su r a n c e c o m m issio n ers. Only 43 percent (20/46) of the comm issioners collect separate inform ation regarding prem ium stru ctu re of dental m alpractice liability, compared w ith 74 percent (34/46) for medical m alpractice policies. T hirty percent (14/46) of the insurance commissioners m ain tain data on frequency of dental m alprac tice claims, b ut 59 percent (27/46) have data for m edical m alpractice liability. Similarly, 33 percent of the insurance comm issioners (15/46) m aintain data on severity of dental m alpractice claims, and 57 percent (26/46) have d a ta for medical m alpractice liability. The m ajority (59 percent) of states require an nual reporting by m alpractice liability insurers. The survey data also reveal prior approval (non-competi tive) to be the m ost common ratin g law (54 percent) currently in effect. Forty-six percent of the responding jurisdictions (21/46) have a JADA, Vol. 125, October 1994
1387
TRENDS
competitive ra tin g law. Thirtyfive percent (14/40) of the ratin g laws became effective before 1960 and 35 percent (14/40) since 1981. The insurance commissioners were also asked about JUA s in th e ir states, which exist to assure availability of m alprac tice liability insurance for m edical and/or dental profes sionals. T hirty percent (14 of 46) of the responding jurisdic tions had JUA s. Of the 14 states reporting JUAs, 11 answ ered the question of w hether contributions were m andatory. Fifty-five percent (6/11) reported contributions by liability in su rers to the JU A pool as m andatory. (We verified th e list of JU A s reported by the insurance comm issioners w ith state dental associations and a legal compendium produced by th e Agency for H ealth Care Policy and Research. Of th e states offering dental m alpractice insurance coverage, 11 have JUAs.) H y p o th esis te stin g . After testin g our hypothesis (regres sion specifications used to estim ate th e four equations in th e model of th e dental liability insurance m ark et and the statistical resu lts are available from Dr. Milgrom), we found: ■■ There was no relationship betw een competitive ratin g laws and the num ber of in su rers or higher prem iums. The best predictor of the num ber of in su re rs and prem ium was th e num ber of dentists in the state. "■ There was no relationship betw een competitive ratin g law s and m ark et concentration. Instead, a sm aller num ber of dentists and few er people per dentist were related to less m ark et com petitiveness. 1388
JADA, Vol. 125, October 1994
TA BLE 3
M E D IC A L M A L P R A C T IC E IN S U R E R S (1 9 8 6 )
IN D E X
L o w
c o n c e n t r a t io n
8
s ta t e s
DENTAL M A L P R A C T IC E IN S U R E R S (1 9 9 2 )
8
s ta t e s
( H e r f in d a h l In d e x u n d e r
1 ,8 0 0 )
H e r f in d a h l In d e x b e tw e e n
1 ,8 0 0
3 9
s ta t e s
2 9
s ta t e s
a n d
5 ,0 0 0
H ig h
c o n c e n t r a t io n
4
s ta t e s
1 4
s ta t e s
( H e r f in d a h l In d e x o v e r 5 ,0 0 0 )
The results of th e analysis supported the hypothesis th a t the presence of a JU A would be negatively related to the com petitiveness of the prem ium r a t ing laws. The analysis suggest ed th a t, other things equal, states w ith competitive ratin g laws were 18 percent less likely to have a JUA. Of the other state-specific variables included to control for th e extent of the potential dental liability m arket (dentist population, total population-to-dentist ratio and per capita income), both dentist population and population-todentist ratio were m arginally significant. S tates w ith more dentists or a higher populationto-dentist rate, or both, were more likely to have a JUA. D IS C U S S IO N
This survey provides the first detailed picture of the Am erican dental m alpractice liability insurance m arket. In contrast to previous work in medical care,1the companies w ith the m ajor m arket shares in all states are represented in the survey results. U n d erw ritin g /ra tin g
p r a c tic es. Less th a n one of three insurers uses any form of m erit rating. Few er use a retrospective ratin g system. In contrast, Sloan and colleagues1 found about tw o-thirds of firms (9/14) w riting medical liability coverage used a form of m erit ratin g and an additional 21.4 percent (3/14) used retro spective ratin g or dividends. No studies of the effect of m erit or experience ratin g on the practice behavior of dentists have been performed. B ut if the use of m erit rating were to increase, we m ight expect, a t least theoretically, th a t the d eterren t effect on negligence of th e m alpractice liability system would be accentuated. Thus, th e in su r ance system could potentially promote b e tte r care. W ith regard to screening criteria used by firms, the dental m alpractice insurance underw riting p a tte rn s closely m atch those used in medical m alpractice.1 C om p etition . There is little competition in the dental m alpractice insurance m arket. These findings are qualitatively
sim ilar to 1986 observations of m edical m alpractice by Sloan and colleagues.1 H erfindahl indexes exceeding 1,800 for 43 of the 51 states and the D istrict of Colum bia were found in those studies (Table 3). A H erfindahl value of 1,800 is roughly the equivalent to six equal-size firm s, th e threshold a t which the U.S. D epartm ent of Justice applies special scrutiny to proposed m ergers. There is a correlation of .69 betw een the w eighted average dental m alpractice insurance prem ium and th e H erfindahl index a t th e census division level. B ut several years of d a ta on concentration and prem ium s would be needed to determ ine w hether concentration is causally related to the level of prem ium s. These d a ta suggest th a t th ere m ay be scope for prem ium -low ering innovation through new entry into local m arkets. However, since there do not appear to be artificial b arriers to entry in the dental m alpractice insurance sector and th e absolute size of prem ium differences is relatively sm all, the potential gains from any such new entry are not likely to be large. P rem iu m s. Prem ium levels for dental m alpractice in su r ance do not represent a substantial
share of general den tists’ practice incomes. S tructural factors in th e m arket, such as the n a tu re of state insurance regulation and interfirm competition in local and regional m arkets, and the underw riting and rating practices of insurers will play a large role in determ ining w hether this situation persists in the longer term . R eg u la to ry factors s h a p in g th e m ark et. Annual dental m alpractice liability prem ium s total more th a n oneq u a rte r billion dollars, m aking this m arket a significant entity separate from medical m alpractice. U nfortunately, state governm ents have not generally m aintained dental malpractice-specific d a ta bases on prem ium s, claims frequency and aw ard sizes. This lack of dental liability-specific inform ation a t th e state level m akes it difficult to analyze the im pact of num ber of insurers, th eir respective m arket share and specific pricing strategies on th e level of dental m alprac tice prem ium s and other aspects of dental behavior. In theory, a competitive state ratin g law directly affects the supply of dental m alpractice liability insurance. B ut dentist population and per capita income act as outside dem ands for dental liability insurance
Dr. M ilgrom is professor, Depart ment of Dental Dr. Whitney is
Dr. Conrad is
Scie n ce s, University
Dr. Fiset is research
research a ssistant
professor, Depart
of W ashington, S M -
a ssociate professor,
professor, Depart
m ents of Health
3 5 , Seattle, g 8 1 9 5 .
Department of
ment of Dental
S e rvice s and Dental
Public Health
A d d r e s s reprint
Dentai Public Health
Public Health
Public Health
re qu e sts to Dr.
Sciences, University
Scie n ce s, University
Scie n ce s, University
Milgrom.
of Washington.
of Washington.
of Washington.
through th eir prim ary effect on the dem and for dental care. One im portant assum ption in the em pirical analysis was th a t factors raising the underlying dem and for dental services will increase indirectly the level of per den tist dem and for m alpractice liability insurance. Our observations did not support these propositions. Com petitive ratin g laws allow in su rers more flexibility in setting rate s and are favorable to insurers. Non competitive ratin g can be considered a b a rrier to entry. Therefore, the num ber of insurers was expected to be positively correlated w ith the competitive ratin g variable. The presence of a competitive ra tin g law is a rem oval of the constraint on the price of insurance prem ium s. Prem ium s are expected to be higher in the unconstrained case. Therefore, the price of dental m alpractice insurance was expected to be positively correlated w ith the competitive ratin g variable. Theoretically, competitive ratin g law s should increase the num ber of insurers. The H erfindahl index is a m easure of m ark et concentration. Increasing the num ber of insurers in the m ark et reduces the concentration. We found he hypothesized inverse relationship betw een m arket concentration and competitive ratin g was not supported empirically. Non-competitive ratin g laws and the presence of a Mr. O ’Hara is JU A both research associate, Department of represent an Dental Public Health “interven Sciences, University tionist” attiof W ashington. JADA, Vol. 125, October 1994
1389
tude of th e sta te insurance regulators. As such, JUAs were more likely to be observed in jurisdictions w ith non com petitive ra tin g laws. Conversely, JU A s were not present in sta te s w ith com petitive ra tin g laws, and the presence of a JU A was negatively correlated w ith the com petitive ra tin g variable. C O N C L U S IO N
O ur findings concerning rating law s are generally sim ilar to those of th e physician segm ent of the m ark e t.1From each of the em pirical analyses, we found th a t competitive ratin g was u n related to the behavior of the
dental m alpractice m ark et and th a t the num ber of dentists is the strongest factor determ in ing th e prem ium s charged and the num ber of dental m alprac tice insurers operating in the state. This resu lt implies th a t the size of the m ark et is the prim ary factor influencing the in su rer’s decision to en ter th a t m arket. O ther considerations— the jurisdiction’s population, w ealth, regulatory regim e and legal clim ate—are of secondary significance. ■ The authors acknowledge the assistance of Prof. Frank Sloan of Vanderbilt University who provided a survey instrum ent used in earlier studies of medical malpractice insurers. They also thank Dale Nelson of the CNA Insurance Co. and staff of the SAFECO
Insurance Co. for their assistance in the development of the survey instrument. The findings are those of the authors and do not represent policies or opinions of the firms or individuals who assisted in the development of the research or the American Dental Association. The study was supported by Grant No. HS/DE-06554 from the Agency for Health Care Policy and Research, U.S. Public Health Service. 1. Sloan FA, Bovbjerg RR, Githens PB. Insuring medical malpractice. New York: Oxford University Press; 1991. 2. American Dental Association Council on Insurance. The outlook for dental malpractice insurance. JADA 1985;110:395-7. 3. Milgrom P, Fiset L, Whitney C, Conrad D, Cullen T, O’Hara D. Malpractice claims ** during 1988-1992: A national survey of dentists. JADA 1994;125:462-9. 4. Rizzo J. The impact of medical malpractice insurance rate regulation. J Risk Ins 1989;56(3):482-500.
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