Medical Malpractice Claims and the Impact of Social Inflation

Using insurance company annual statement data, the “Medical Malpractice Claims-Made Social Inflation and Loss Development Report” estimates that in the decade ending in 2021, between $2.4 and $3.5 billion, or 8 to 11 percent, of all medical malpractice losses incurred by physician-focused insurers stemmed from social inflation.

The Doctors Company engaged Moore Actuarial Consulting, LLC, to determine the degree of social inflation, if any, that is present in the U.S. medical malpractice claims-made market for physicians. Social inflation occurs when an insurer’s average claim amount grows faster than the overall inflation rate. When that happens, insurers are forced to increase their rates and/or decrease coverage to keep up.

The study examined loss development factors (LDFs), a standard actuarial metric, across more than a decade for physician-focused medical malpractice insurers. In theory, these factors should change little except for random variation. Instead, they have been rising. The study used the increase in LDFs to estimate the impact of social inflation. In addition, the study examined data from the National Practitioner Data Bank (NPDB)—a federal dataset that collects information on, among other things, malpractice payments—and the study showed that the pace of settlements larger than $1 million has accelerated. Large settlements are a significant driver of social inflation.

Top Study Takeaways

• There is evidence of social inflation in the physicians’ medical malpractice marketplace, but it is not as dramatic as in other lines of business, such as commercial auto liability. NPDB data showed some evidence of social inflation, and its trends were roughly consistent with trends in annual statement data, though more muted.

• The evidence in the annual statement data points to an acceleration beginning around the year 2012, with a more drastic acceleration around 2017.

• Annual statement data indicate that the impact of social inflation is estimated to be between $2.4 billion and $3.5 billion over the past 10 years, or 8 to 11 percent of all incurred losses in that period for the scope of companies analyzed.

• Marketplace realities such as changes in the medical marketplace, the impact of COVID-19 on claims behavior, and changes in the reserving philosophies of major medical malpractice writers limit the ability to more precisely identify and quantify social inflation.

• Restrictions on noneconomic damages in medical malpractice may be mitigating social inflation. Typical explanations for social inflation cite the growing ability of the plaintiff’s bar to coax enormous awards from sympathetic juries. Even the threat of such awards affects negotiations. States that cap noneconomic damages reduce the impact of that phenomenon. States that relax caps or remove them are likely to realize sharp rises in claim severity as well as a change in the variety of medical malpractice claims.