BY GARY PERILLOUX
Daily Journal
Since the Mississippi tort reform debate turned red-hot in 2002, those close to the issue appear polarized over a pair of issues.
Poor investment returns for insurance companies versus huge jury awards.
Generally, lawyers backing the current civil justice system view declining investment income for insurers as the culprit behind higher insurance bills.
Doctors, hospitals and other businesses see bigger jury awards as the culprit behind soaring premiums.
Both are partially right, believes Mississippi Insurance Commissioner George Dale.
"There are other factors - and I have said publicly before that it is more than just the legal climate," Dale said recently. "It's underwriting, it's investment income and it's reinsurance."
In the area of medical malpractice alone, the insurance industry racked up nearly $3 billion in 2001 losses. The St. Paul Companies announced in December it would exit that business. By year's end, that company alone had lost nearly $1 billion on medical malpractice coverage for the year.
The St. Paul debate
Although St. Paul exited the business worldwide - deciding not to renew policies as they expire - the blow was a big one in Mississippi.
Of the state's 4,000 doctors, more than half are covered by the Medical Assurance Company of Mississippi, a private nonprofit firm formed by doctors in response to a mid-1970s medical liability crisis. A quarter of the remaining doctors - 427 - were covered by St. Paul.
The investment track record of companies such as St. Paul is behind much of what doctors and other customers are seeing in the way of higher premiums, said Jak McGee Smith, a Tupelo civil litigator.
And MACM, the doctors' insurer in the state, can count $200 million in assets to cover any excessive claims losses, he said.
"It seems to me they're not doing that bad," Smith said. "Somewhere along the way, somebody needs to do a study on (investments)."
Financial reports from the Mississippi Department of Insurance show St. Paul's investments are not so sheltered from the vicissitudes of the stock market as some would believe.
In pointing blame at jury awards, tort reform advocates often tout a safe investment habit of insurance companies - squirreling away 80 percent of their savings in bonds and fixed interest rate securities.
St. Paul did put half of its $13.4 billion in cash and invested assets into bonds in 2001. And it showed a 7 percent gain in that category.
The company, however, sank about a third of those assets in common stock and saw the value in that category drop $418.2 million in 2001, or a 9 percent decline.
Gerald Wages, an executive with Tupelo-based North Mississippi Health Services, also is board chairman for Reciprocal of America's hospital insurance group. The Virginia-based insurer isn't suffering nearly so much from investments as the tort climate, he said.
Last year, Reciprocal's investment income of $20 million was down only slightly from $24 million in 2000. But it paid out $155 in claims for every $100 of policy income, said Wages, who pointed out that medical malpractice rates have risen 163 percent in Mississippi in the last three years versus 80 percent in Virginia, a state with caps on damages.
"I can tell you that caps make a difference," Wages said.
St. Paul response
St. Paul disagrees that investment practices should shoulder most of the blame for the medical liability crisis.
"We certainly have heard those allegations before from the trial lawyers, and it's absolutely ridiculous," company spokeswoman Andrea Wood said. "It's total and absolute nonsense."
Wood points to the $980 million loss St. Paul sustained on medical malpractice business alone in 2001.
"The profitability in that line of business has been very poor," she said. "That's the reason we're exiting the business."
In a June 24 story, The Wall Street Journal also pointed to competitive practices that worsened the medical malpractice environment. Actuaries raised premiums in the 1980s, counting on costs to soar. But more than 30 states placed caps on malpractice awards and limited St. Paul's exposure. Between 1992 and 1997, the company legally released $1.1 billion in excess reserves to its income statement, a practice that helped fatten its bottom line while fooling other companies into believing medical malpractice was a more lucrative business than it was.
A rapidly deteriorating medical malpractice environment caught St. Paul and others off guard in the last few years. The American Medical Association lists 12 states - Mississippi among them - as crisis states where the risk of large verdict awards made insurance costly.
Wood rebuts the investment argument with some staggering loss-ratios. In 1999, St. Paul paid out $101 for every $100 in premiums it collected. In 2000, the payout soared to $360 for every $100, and in 2001 the ratio remained three times break-even at $308.
"It certainly was a competitive environment and we were part of the market," St. Paul's Wood said. "One thing I want to make clear is the losses escalated faster than we could project. We first started to see a spike in the mid-1990s. At first we thought it was an anamoly. It wasn't until late in the '90s and last year that we decided this was a trend.
"And we don't see any end to the losses growing."
Mississippi's insurance commissioner acknowledges the role a declining stock market played in putting the state in a high-cost environment. But the Legislature can't control that variable, he said.
"Of any of these issues the Mississippi Legislature can control," Dale said, "it's the legal climate."
