Claims-Made and Reported Policies and Insurer Profitability in Medical Malpractice

Abstract

The liability crisis of the 1970s led to the introduction of a new type of insurance policy designed, according to Doherty (1991), to reduce the un-diversifiable uncertainty associated with writing long-tail liability lines. These new claims-made and reported policies gained favor in place of the traditional occurrence coverage in the early eighties not only in medical malpractice, but also in the general liability arena. Under occurrence coverage, a loss incurred in a given year is covered by the contract for that year, regardless of when the claim is reported. In contrast, a claims-made policy pays only the claims reported in the policy year. Our paper presents a structure, conduct, and performance analysis a la Joskow (1973) of the medical malpractice insurance industry by focusing on the differences between the two contracts. The main question we want to address is why there are two types of contracts that cover the same risk exposure in the medical malpractice insurance industry whereas in other lines of insurance, only one exists primarily.

Keywords: medical malpractice insurance, industry structure and performance analysis, claims-made contracts