Nebraska Department of Insurance
EXPLAINATION OF HOSPITAL-MEDICAL LIABILITY SURCHARGE INCREASE
The Nebraska Hospital-Medical Liability Act
Cost of Coverage with the Excess Fund
November 16, 2001
For health care providers with insurance policies beginning on January 1, 2002 and after, the cost of coverage under the Excess Fund has been increased to 35%. During 2001, the surcharge rate was 20%, which was up from 5% in 1999. No matter how you do the arithmetic, an increase from 5% to 35% in the course of two years is huge.
As the author of this explanation, I would like to introduce myself. My name is Alan Wickman and I am the Administrator of the Actuarial Division of the Nebraska Department of Insurance. I have been responsible for advising the Department on matters related to Excess Fund rates and reserves since the Excess Fund's inception in 1976. As such, I take most of the credit or blame for the surcharge levels of the Excess Fund. The current level, as with most of the prior levels, matches a recommendation that I made at the annual hearing to determine the surcharge level.
Ideally, the Excess Fund should collect an average amount for losses each year, plus just a little extra as a reserve for unusual happenings (like an adverse court decision or an unusual rash of bad claims). Unfortunately, it has never worked so smoothly. The history of the Excess Fund has been that, after we initially charged enough to build up a cushion, that I have often either overestimated or (in a few recent years) underestimated loss liabilities and the rate of future losses. (In general, these misestimations should not be viewed "blunders," because the circumstances appeared to justify them at the time that they were made. Hindsight, however, is always 20-20.)
Surcharge levels in recent years for the Excess Fund have been as follows:
| Year | Surcharge Percent |
| 1992 | 40% |
| 1993 | 40% |
| 1994 | 30% |
| 1995 | 15% |
| 1996 | 10% |
| 1997 | 5% |
| 1998 | 5% |
| 1999 | 5% |
| 2000 | 5% |
| 2001 | 20% |
| 2002 | 35% |
Looks a little weird, doesn't it? In the earliest years that are shown and in the immediately prior years, I overestimated the losses that would happen in the future, plus we did better than expected with the investment of the assets of the Excess Fund. (I wish that I could take credit for investment savvy, but I can't. Investment of the assets is handled by another state agency.)
By 1993, it became apparent that the Excess Fund had significantly higher assets than what it needed. That is, I had overestimated the Excess Fund's needs during the prior years. As such, we decided to phase in a reduced rate for a period of time to lose money down to the point that our cushion was more reasonable. (In my defense, I had some "help" making these misestimations during this period of time. We had an outside actuarial firm analyze our rates and loss reserves a couple of times and, each time, the outside firm came up with numbers that I felt were too high. Our eventual decisions were certainly affected by these opinions, even though -- based on my advice -- we used somewhat lower estimates than we were given by the outside firm.)
Things went exceptionally well for us in the mid-1990's -- or so we thought. We had several years during this period of time with exceptionally low loss payments. It was deceiving, however, as the typical loss payment comes from an event that happened 4 or 5 years ago. What was really happening was that losses were increasing more than we had thought.
To give an idea of the severity of this, my estimation of unpaid claims in November of 1998 was $24,600,000. Some of this was for claims that had been reported in the last few years and some of it was for medical mishaps that had already happened, but for which we hadn't received a claim yet. Three years later, my best estimate is that the unpaid losses as of 12/31/1998 (only a few months different from the time of my hearing testimony) were really closer to $38,400,000. While an outside actuarial firm developed almost identical numbers during this period of time, and while there was a confluence of factors that contributed to this underestimation, I still view it as embarrassing that subsequent experience has proven my earlier estimate to be so far wrong.
In 1999, when examining reserves and the prospective surcharge level for 2000, it became clear to me that we needed to start increasing the surcharge level back to the level necessary to cover ongoing losses, rather than continue at the 5% rate that was designed to lose money. At that time, however, I said that it would be OK to wait another year to start raising the surcharge again. In retrospect, I wish that had more strongly recommended raising the surcharge in 2000. We probably would still be at a 35% surcharge in 2002, but we could have eased it in a bit more.
During 2000, loss experience was terrible -- the worst year that the Excess Fund has ever had. Paid losses were the highest ever -- more than twice the average of the prior three years. Reported losses also appeared to be more than twice as high as any prior year (although it's still too soon to tell for sure if that was really the case). At the hearing in November of 2000, I significantly raised my assessments of loss rates and liabilities. It appeared to me that the ongoing surcharge rate should be 50% (the most allowed under the Act). However, because the Excess Fund still had a cushion and because we didn't want to jar the medical community with such a dramatic increase, we raised the surcharge in 2001 to 20%, which the informal understanding that we intended to come back with a 35% surcharge in 2002 and a 50% surcharge in 2003.
Loss experience during 2001 was not as bad as 2000. Our paid losses were slightly higher than in the previous record year, but the rate of newly opened claims was not nearly as high as with the extremely high reported loss rate in 2000. In the hearing of a few days ago, I provided rate need and liability estimations that were only moderately higher than in November 2000 -- no surprises in that regard. I also recommended going to a 35% surcharge, which is consistent with what we had discussed a year prior.
So does that mean that we are going to a 50% surcharge in January 2003? The answer to that is -- no, not necessarily. There are several factors that will affect things during 2002:
- Insurance markets have tightened significantly and insurance prices of all kinds are on the rise. This means that we may end up getting significantly more income from this year's 35% surcharge than we expected a year ago.
- There is always the possibility that we may have a good year for a change. Because of personnel changes, the handling of claims and case-basis loss reserves has not been consistent during the last several years, and it is hard to tell the extent to which the Excess Fund's results may have been skewed as a result. I am virtually certain that it had a significant effect. We now have different people handling claims and case-basis loss reserves. It is possible -- but don't count on it -- that we may find that results in 2002 will be improved and that we will be able to operate without further increases in the surcharge.
As health care providers consider whether to purchase excess liability coverage under the Act, one thing that they must remember is that any overcharges (if, in fact, we are overcharging) will result in lower surcharge levels in the future. In spite of my inconsistent performance in accurately evaluating the best surcharge level from year to year, the long-term result of the Excess Fund is that health care providers in Nebraska have been able to purchase excess medical professional liability insurance "at cost."
Please feel free to e-mail me should you have additional questions about the financial condition of the Excess Fund.
Alan Wickman, ACAS
Administrator of the Actuarial Division