Are MPL Loss Reserves a Better Bet than the Patriots?
Tim Mosler

Are MPL Loss Reserves a Better Bet than the Patriots?

Tim Mosler October 14, 2015 Posted in: Blog Posts, Health Care / MPL, Loss Reserving
I recently attended the Casualty Actuarial Society’s Loss Reserve Seminar. During the conference, I attended two sessions on medical professional liability insurance (MPL) and led a roundtable discussion on MPL reserving. It reminded me of professional football.

Consider this NFL team:
  • They’ve been a good team for several years in a row.
  • They won their division last year.
  • They have several weak teams in their division and it seems safe to assume that the two games against each of those teams will be wins.
  • They are picked by most to win their division again this year.
Do you think they’re going to have good season this year?

Consider this additional information about that team:

  • A key to their success is their quarterback. However, he’s been injured in the past and an injury this season would significantly impact the team’s winning chances.
  • Some of the opposing teams in their division have made personnel moves in the offseason and, if those moves are successful, they may no longer be such easy wins.
  • There are several veteran players on the team who are more susceptible to injury and may not be able to perform at the same level as in past years.
  • Finally, there’s inherent variability in the wins as many games are very close and decided by how the ball bounces or whether the referee calls a penalty.
Now, how sure are you that this team will have a good season? Broncos, Colts, Cowboys, Packers, or Patriots fans, this could be about you.

It is a similar situation for MPL insurers and the loss reserves they carry. Each year-end, these companies establish reserves to fund the settlement of their open claims. In aggregate for each of the last 11 years, the reserves have developed favorably (i.e., downward). That is, the held reserves were reduced each year by an amount that is greater than what was paid out during the year. That difference between the reserves eliminated and the claims payments flows directly into income. For many companies, it is the most significant driver of positive income.

Given this history of downward loss development and given that the early indications of claim counts and claim size for recent years appear favorable, is it safe to assume that reserve development in 2015 and future years will be also be favorable?

We have to remember that, like the NFL team, MPL reserves have a number of significant risks.

For instance, a significant driver of the downward loss development is the reduction in filed claims and that reduction in claims is due at least partially to favorable tort reforms. If those reforms are challenged (as we are seeing in several states) and ultimately overturned, then it’s very likely that the reserves would not develop as favorably as they have in past years.

The ultimate effect of the Affordable Care Act (ACA) on MPL is still unknown, but it is safe to say that it will lead to changes in the way that many patients receive and pay for health care. If individuals are unhappy with the changes, it could have an effect on the likelihood of a claim being filed and on the resolution of open claims. Because the ACA affects everyone, even a small unfavorable change could be significant to the adequacy level of the MPL reserves.

Then, there’s inflation. The last several calendar years have been characterized by record-low levels of inflation. If there is any reversion to average historic levels of inflation, then it may reduce the relative adequacy of held reserves. The reserves may be adequate to pay all claims in today’s dollars, but are they adequate to pay all claims at the inflated amounts that could exist years from now at the time of settlement?

Finally, there is an inherent volatility in the resolution of MPL claims. They can be affected by the performance of attorneys, judicial decisions, and jury attitudes. The outcome of just a few significant trials can have a material effect on a year’s results. MPL verdicts are especially subject to contagion and trends. What works for a plaintiff in one case may be replicated by a plaintiff in other cases. So, one verdict or ruling in an MPL trial can ”go viral” and impact many more.

Ultimately, for good NFL teams and for MPL insurers, it has to be acknowledged that a run of good results in the past cannot guarantee continued good results going forward. It’s important to keep making the quality decisions that produced the good results while developing plans to avoid or mitigate any risks that could materialize.

It’s going to be an interesting football season. At the end of it, it will interesting to see whether MPL insurers and the Patriots have kept their streak going for another year.

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