The Impact of Medical Malpractice Insurance Rate Regulation

The Impact of Medical Malpractice Insurance Rate Regulation Abstract This study examines the impact of rate regulation laws on direct writer market share and loss ratios for the medical malpractice insurance industry. Direct writer market share is significantly higher in states which have both non-competitive rating (NCR) laws and active joint underwriting associations (JUAs) than in states which have only one or neither of these characteristics. NCR laws have had little independent effect on underwriting results in this industry. However, direct writers appear to fare better under NCR laws than they do under competitive rating (CR) laws. While direct writer market share is positively related to the loss ratio in CR states, in NCR states this relationship is far weaker. Introduction The impact of rate regulation on underwriting results has been the subject of a number of studies. Most of these have examined the auto insurance industry. Others have focused on homeowners insurance and general liability. To date, no study has examined the impact of rate regulation laws on medical malpractice insurers. Such a study is of interest, however, for at least three reasons. First, the structure of the medical malpractice insurance industry differs substantially from that of other lines of insurance which have been examined in the context of rate regulation. Examining the impact of rate regulation on such a dramatically different line of insurance provides a test of the robustness of earlier findings. Second, such a study would enhance understanding of some important economic factors which have served to shape today's medical malpractice environment. Previous studies in what may be broadly referred to as "the economics of medical malpractice" have focused on the determinants of malpractice claims frequency and severity, and the impact of malpractice litigation on physician behavior. However, little attention has been paid to the medical malpractice insurance industry. Third, gaining insight into the determinants of underwriting results in the medical malpractice insurance industry is important from a practical standpoint because this line of insurance has suffered acutely in recent years and, as a result, the cost of malpractice insurance has increased while its availability has dwindled. This study investigates the impact of rate regulation laws on state-level loss ratios for the medical malpractice insurance industry. A telephone survey of each state insurance commissioner's office was conducted to obtain rating laws pertaining to medical malpractice insurers. The impacts of other variables of interest, such as direct writer market share, are also examined. This article first overviews the literature on the effects of rate regulation on underwriting results. Then the medical malpractice insurance market is described and contrasted to other lines which have been examined previously for rate regulation effects. The specification of the model and the empirical results are presented next. The results and their implications are then discussed. Previous Multivariate Approaches The literature on the impact of rate regulation laws is extensive. This section briefly reviews the results of large sample studies which have employed multivariate techniques to assess the impact of rate regulation laws. For a full survey of the literature on the impact of rate regulation laws, see Harrington [8]. Ippolito [12] used the multivariate approach to control for factors that may influence loss ratios independently of rating laws. Ippolito examined the impact of auto insurance rating laws on loss ratios, employing two estimation strategies. The first strategy used pooled cross-section time series data, but did not correct for either heteroskedasticity or autoregression. The model was estimated by ordinary least squares (OLS), and no effect of rate regulation on loss ratios was observed. …