Unless you have been hiding in a cave, you have noticed the long bull run in the stock market. Over the last ten years, the value of the Dow Jones Industrial Average and the S&P 500 have both more than doubled. That kind of bull market cannot last forever.

So why am I talking about the stock market? What does the stock market have to do with the looming malpractice insurance crisis? In a word: Everything.

Malpractice insurance companies compete with one another for business. The primary method of competition is through the price of coverage. The coverages are pretty much the same so the big differentiator is price. When selecting one carrier over another, doctors ask themselves, “How much is it going to cost me to buy this insurance as opposed to that one?”

Like all other forms of insurance, malpractice insurers collect a premium based on a risk assessment. How likely is this doctor to be sued? How likely is it we are going to have to defend a claim against her and how much are we likely to pay in defense costs and damage awards? The higher the risk, the more the company charges for the insurance. The process of risk assessment and premium setting is called underwriting.

Once the company sells the policy and collects the premium, it invests the premium and waits to see if there will be any claims. Medical malpractice policies are “claims made” policies. They only cover claims made against the doctor during the year for which the policy provides coverage. So by the end of the policy year, the company knows if there are going to be any claims which have to be defended and perhaps paid. Unless and until a claim is made, the company is earning a return on the premium it invested.

In order to draw in new business, sometimes a malpractice insurer will reduce its premium below what the risk assessment calls for as sort of an introductory offer. It will most often do this when it is earning a good return on its invested premiums. It will figure it can earn enough money on the invested premium to make up for any underwriting losses. Next year, after the introductory period, it may raise the premium it charges to a level commensurate with the risk.

The two main factors in setting malpractice premiums are loss experience (how much does the company pay out in claims?) and return on the invested premium (how much money is coming in from investments to offset any losses?). There is usually very little change in the loss experience from what the company predicted when it was doing its underwriting and setting its premium. That is decidedly not the case with the portion of the premiums which are invested in the stock market. When there is a big downturn in the stock market, the company suddenly does not have the investment return it was counting on to pay claims. When this happens, there is only one answer – raise premiums. And the bigger the downturn, the bigger the premium increase must be to make up for it.

No one likes to have their insurance premium raised and doctors are no exception. The difference is that you can’t do much when your premium is raised. Doctors, on the other hand, can and do go down to the legislature demanding help in reducing premiums. The doctors claim there is a crisis. They claim that frivolous malpractice claims and runaway verdicts are forcing the insurance companies to raise premiums to intolerable levels and that only more restrictions on patient claims can restore order in the universe. Legislators, who are often recipients of doctor contributions to their campaigns, are only too happy to be of assistance. Legislators can’t do much about the stock market, but they can do things to reduce the amount malpractice victims recover from doctors when a claim is made. In other words, they can make the loss experience more favorable for the companies.

So this is what we have to look forward to. The stock market will turn down. It is only a question of when. When it does turn down, insurance rates will rise, doctors will howl, and the legislature will be asked to do its part to resolve the latest crisis. Given the way of the world, the legislature is likely, at least in Arizona, to make life even harder on patients injured by careless doctors. Count on it.

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