Strategies for
Handling
Pandemic
Actuarial Issues

By Amy Buttell

For Medical Professional Liability (MPL) industry actuaries, the COVID-19 pandemic created several vexing challenges related to the critical actuarial functions of loss reserving and pricing. The complex environment around these issues spans the five-year period from 2019 to 2023, and likely beyond. There are three distinct time periods within this span that actuaries need to account for: loss reserving for the pre-COVID years 2019 and prior; loss reserving for the pandemic years of 2020 and 2021; and, finally, pricing for 2022 and beyond.

The COVID-19 pandemic prompted an exceptionally problematic sequence of events that created more questions than answers within the typical actuarial methods for calculating loss reserving and pricing. Waves of COVID infections, court closures, suspensions in non-emergent procedures and more upended the patterns that MPL industry actuaries have depended on for decades in making their projections.

While actuaries are accustomed to exercising their professional judgment to resolve financial challenges, these questions represent areas that are so aberrational that some experienced perspectives may be helpful. To that end, we’ve consulted with four well-known and respected actuaries: Chad Karls, Consulting Actuary at Milliman; Alison Milford, Senior Consultant at Willis Towers Watson; Tim Mosler, Principal and Consulting Actuary at Pinnacle Actuarial Resources; and Bill Burns, Vice President of Research and Analytics at the MPL Association.

Before COVID, the MPL industry was moving into a period of firmer pricing. This firming was driven by a deterioration in operating results due to a decade of soft pricing coupled with rising claim severity, driven in part by nuclear verdicts. However, once COVID-19 struck—the official World Health Organization Pandemic declaration came on March 11, 2020—all bets were off. The Trump Administration declared a nationwide state of emergency just a few days later, and states began to implement shutdowns affecting schools, businesses, non-essential travel, and more.

For the MPL industry, shutdowns affected the courts in virtually all jurisdictions. Court activity was severely restricted in many jurisdictions, halting jury trials, although the length of court closures varied significantly by jurisdiction. That put at least a temporary hold on claim settlement activity, though the length of the hold was quite variable, depending on government policies in different jurisdictions. In 2020, 34 states suspended in-person proceedings statewide, while 16 states suspended those proceedings on the local level. In addition to suspending in-person proceedings, many state and federal courts restricted or ended jury trials, granted extensions for court deadlines, and encouraged or required teleconferences and videoconferences in lieu of in-person hearings.

In addition, the unprecedented environment left plaintiff and defense attorneys and their clients without any guide to settlement discussions, dampening settlement activity. These issues bring up two important questions and another related question:

• How are actuaries accounting for the slowdown, i.e., what actuarial methods are they using?
• Should the methods differ for occurrence vs. claims-made reserves?
• If rumors are true that plaintiff attorneys faced with staff shortages are focusing attention on claims above $3 million, how should that be handled in terms of reserves?

Actuarial Methods. “This pre-COVID period is far and away the one that I’m the most concerned about,” said Mosler. “I feel like the industry as a whole is reserving pretty optimistically for these periods.” He identifies two separate issues in terms of accounting for slowdowns and specific actuarial methods to be used in these cases. The first issue is a slowdown in the rate of claims being paid; the second is whether there is a slowdown in establishing reserves on open claims.

Traditional actuarial methods that rely exclusively on payments have been significantly impacted by slowdowns in the courts. Methods that rely on payments and case reserves are expected to be more accurate. “If it’s possible to conclude that there isn’t a slowdown in establishing case reserves, then it is possible to rely on reported losses (paid plus case reserves) in the traditional loss development method rather than paid losses alone,” he continued. “This is a pretty common approach in MPL both before and after the pandemic because there is information in those case reserves that actuaries can rely on.”

Paid data can still be used, but with adjustments. The Berquist-Sherman method very directly adjusts for slowdowns in payments, Mosler noted. The method relies on restating history to a consistent rate of closure that is appropriate for this situation.

Mosler utilizes this method on indemnity and defense costs separately because in many cases, while indemnity payments have slowed dramatically, defense payments have not. “Putting them together can result in too much of a slowdown,” he added, “so it’s more accurate to look at the components separately rather than combining them.”

From Milford’s perspective, there is no easy answer to the question of how to account for the slowdown. “While slower resolution was observed in many jurisdictions, it was not observed in all,” she noted. “And even in jurisdictions where there were clearly some slower settlement patterns, the slowdown was often not consistent across all report years.

“This inconsistency by year makes it difficult to rely on broad-brush actuarial adjustment processes typically used to adjust data to a consistent settlement level,” she continued. “Actuaries will need to assess if there is a distortion in the data, and, if there is, what level of distortion is present and how each coverage year might be impacted.”

Specifically, she noted that because of the maturity of these pre-pandemic coverage years, it might make sense to make targeted year-by-year adjustments to development patterns. “Using projections of frequency and severity, based on pre-pandemic levels and trend could be a reasonable option if there is no reason to believe there has been a change in frequency or severity levels. In areas impacted more by social inflation, historical severity levels may be less appropriate for recent years,” Milford added.

For Karls, there is no doubt that the basic actuarial development methods are distorted, so that using these methods without adjustment would result in a biased answer. Therefore, these methods would need to have an adjustment factor built or be given less weight, he said.

“For these reasons, I like the frequency/severity methods,” Karls continued. “The frequencies are relatively known, and the severities are what we’re estimating. I’ve been discounting the severities that we’ve been seeing in 2020 and 2021, and really going back to 2018 and 2019. This sounds pretty basic, but it is a better approach than relying on a development method.”

Karls has seen the defense costs slow, but not nearly to the degree that claim closures slowed down. “Ultimately, the average defense cost is going to be higher because the meter ran while claims didn’t progress,” he added.

Digging deeper into defense costs, Karls said one interesting finding is that deposition costs, on average, are slightly lower than what they were pre-pandemic. Deposition costs are, in fact, the single most costly event for the defense because while trials are more expensive individually, claims don’t go to trial all that often. He attributes the decline to the fact that even after the worst of the pandemic has passed, approximately 20% of all depositions are done virtually, which reduces travel costs. Judges are pressuring defense and plaintiff lawyers to settle because their dockets are so backed up, he noted.

Occurrence vs. Claims-made Reserve Differences. Because the vast majority of MPL business is written on a claims-made basis, the issue for this business boils down to judgment about what is happening to claim severities, Karls noted. “We know how many claims there are,” he continued. “While there is some uncertainty in terms of what proportion of those claims will involve an indemnity payment and which ones won’t, that proportion tends to be pretty stable.”

What’s hard to pin down is the severity, he said, adding, “From a loss perspective, what the closure of the courts and the lack of trials did was curtail settlements. There is no greater motivation in my mind for a settlement to occur than a pending trial date. We didn’t have any trials for virtually 18 months, which took that very large motivator away. Claims and claims closing both slowed down. In particular, I’m most concerned that large claims slowed down more so than smaller ones. As an industry, I think we might be sitting on a higher proportion of large claims that are about to settle as the courts open back up.”

Milliman collected data on the amount of trial hours by month that offers some revealing insights into the revival of claims activity. That data show that claims activities involving the courts is virtually back to where it was pre-pandemic, as seen in Figure 1. What’s not accounted for, however, are the missing 18 months when activity all but halted.

In terms of occurrence versus claims-made reserves, Mosler distinguished between two time lags:

1. The time lag that occurs between when an MPL incident is reported and when a claim is made
2. The time lag that occurs between the claim being filed and the claim being closed

Essentially, reserves are set up because a claim isn’t paid as soon as it is filed. Occurrence reserves involve both the reporting lag and the settlement lag. “The question then becomes if there is a difference in the reporting lag and whether someone who has had a bad health outcome is actually going to take longer to file a claim,” he said. “In a majority of recent analyses, I haven’t seen evidence of a slowdown in claim reporting. It’s possible that there was one in 2020, but generally indications are that it is caught up by now.”

In the final analysis, Mosler noted that in most cases the same adjustment can be made for claims made as for occurrence.

Milford noted that in relation to settlement activity, the process for assessing the level of distortion related to the pandemic slowdown would be similar for claims-made and occurrence coverage forms. “However, for business written on an occurrence basis there are added uncertainties regarding how frequency will develop given the period of reduced patient contact during the pandemic-related shutdowns as well as the future uncertainty with respect to the impact of that period of reduced contact on patient acuity,” she said.

“Anecdotally, thus far there has not been a material impact on post-2020 frequency related to delayed care associated with the shutdowns and potentially extending longer than mandated shutdowns due to fears regarding returning to normal in-person interactions,” she added.

Plaintiff’s Attorneys Aim Higher. The US labor shortage is a well-known trend that is affecting many industries. Economists cite COVID-related phenomena (early retirements, deaths, illnesses, fears, childcare shortages, reduced immigration, etc.) as reasons behind this trend, which doesn’t look to abate any time soon. There’s speculation that a shortage of plaintiffs’ attorneys has motivated the plaintiffs’ bar to focus their attention on claims of $3 million and higher, up from $1 million. If it is indeed true that the plaintiffs’ bar is shifting their focus to higher claims, this too could impact claims reserving.

While Milford hasn’t heard about rumors consistent with this narrative, she is cognizant of the tendency for the plaintiff’s bar to focus on higher-revenue claims. “My sense is that re-focus was more attributed to the higher relative cost to bring these types of claims,” she said.

Like Milford, Mosler hadn’t heard about this alleged plaintiff attorney staff shortage, but he believes it makes sense. “Actuaries, attorneys, accountants, and IT are four areas where there is a lot of turnover, and where there’s a lot of potential for remote work,” he continued. “Lots of professionals are quitting and finding jobs that are more convenient, and it can cause issues.”

“Considering the idea of a $3 million claim limit, I think this will initially seem like a good thing for physicians. The last thing a physician wants is to have their personal assets at risk in a lawsuit. A higher limit gives greater protection. But, it’s important to also consider that the higher limit could make a lawsuit more likely and lead to a higher premium than there was at the $1 million limit that many physicians have currently,” he said. “For the hospital that insures physicians, they have the same concern about the higher cost. The difference is that the higher limit may not give them any additional protection as many hospitals have a high self-insurance retention.”

Mosler noted that if this trend turns out to be due to a capacity shortage that is eventually resolved, the affected years will negatively affect trend lines and make it more difficult for actuaries to project the future in terms of whether there will be fewer high-value claims going forward or not.

Karls agrees with the premise that plaintiff’s attorneys have gotten more particular over time in terms of the types of cases they bring for all sorts of reasons. “I do believe that plaintiff’s attorneys are very good underwriters of claims in that they know what cases to bring and what cases not to bring.”

During the acute years of the COVID-19 pandemic, there was a drop-off in reported claims due to the decrease in healthcare provided during this period. This was particularly evident in 2020. Healthcare spending, including prescriptions, dropped by 1.5% in 2020, driven by lower healthcare utilization. This is the first-time overall health spending declined in recorded history.

Out-of-pocket and private-insurance spending also declined in 2020 for the first time, although overall health spending increased, fueled by federal government relief efforts. Although increases in telemedicine utilization helped offset some of the decline in healthcare access due to the pandemic, one in four adults surveyed reported delaying or foregoing care because of COVID-19.

This unprecedented drop-off in healthcare led to a decline in MPL claims, especially in 2020, but also in 2021. What methods, then, should actuaries use to estimate reserves for these years?

According to Burns, “Actuaries prefer consistency in the data, but occasionally, we are thrown curve balls such as asbestos, natural catastrophes, or the financial crisis. COVID represents the most significant event to impact the MPL industry since the crisis of the early 2000’s. Consequently, actuaries now have to reach into their toolbox to determine which methods to use to come up with reasonable estimates of the losses for the COVID-impacted years of 2020 and 2021.”

Milford noted that while there was initial concern that delayed claims from this period would ultimately work their way into the system as claims and lawsuits, that hasn’t been the case. “As the 2020 report year has seasoned and claim frequency has remained at the lower levels, there is recognition that in many jurisdictions the 2020, and in some cases 2021, frequency was lower than it had been,” she said.

That being said, “Severity levels are volatile, especially in places where getting claims to resolution has been disrupted, creating a higher than usual level of uncertainty,” she added. “The methods used for 2020 and 2021 would likely not vary materially from typical actuarial methods and models, but care will be needed to assess what the level of distortion is and how to adjust for it.”

Milford said that modifications could be made explicitly through adjustment to patterns or implicitly through the selection process recognizing which methods would be most impacted. “Using a frequency/severity approach can help to inform the process if it is deemed reasonable to assume the severity levels have remained relatively stable,” she concluded.

Mosler’s perspective on this period involves parsing out the impact of a decline in the volume of care on claims. “Even if no care was provided by doctors in 2020, that would still not create a zero claims year. That would have a far lesser effect on 2020 and a far greater effect on the subsequent years than most would expect. This is because of the claims-made nature of most physician policies.

“For physician claims, an approximation I like to use is this: 25% of the losses are reported in the year that they occur, 25% of the losses in the second year, 25% of the losses in the third year, and then, finally, the remaining 25% of losses over the next three years,” he continued. “So, 2020 won’t be lower by an amount proportional to the decrease in health services provided because about 75% of the claims that were reported in 2020 were from incidents that occurred in 2019, 2018, and earlier.”

Due to the way claim reporting tends to stagger, the drop in claims in 2020 should provide some benefit in 2021, 2022, and maybe into 2023, in terms of fewer claims, due to the decline in medical services provided. “In MPL, the length of time it takes for claims to close means that we like to rely on methods that give weight to long-term averages,” Mosler said. “In other words, we like to rely on older years to project newer years. This is a situation where we should do less of that.”

This is a situation in which the frequency/severity model can work well, he added, saying, “We can respond to this aberration by trusting the frequency and understanding that the severity is uncertain. So, claims counts will look lower because of the pandemic. Using older years to predict severity is not without its issues. There were various situations in which providers and healthcare institutions had immunity, but no one necessarily has total confidence that immunities will hold up. Perhaps immunity can be used as a tool to negotiate a more favorable settlement since the plaintiff has the risk of going to trial and getting nothing because of that immunity. This may have a downward effect on overall severity.”

Ultimately, Mosler believes that relying on more responsive methods is the best idea, with frequency/severity being a good default choice because it incorporates a drop in care counts, if there is one. “That being said, I do have clients that have more claims in 2020 and 2021 than in earlier years, so a decline in claims is not a universal experience,” he added.

While there is no doubt that the pandemic is far from over, with nearly 400 deaths a day and 60,000 cases reported daily in late January, the acute phase of COVID has ended, at least for now. However, actuaries and MPL insurers need to determine how risks should be priced going forward, regardless of the role that COVID-19 plays in healthcare and MPL.

Two factors loom large in this calculation:

• Pricing risks going forward
• The departure of physicians from the workforce that’s occurring at the same time as an increase in advance practice clinicians assuming duties previously undertaken by physicians

Pricing risks going forward. The pricing issue is the biggest challenge that the industry faces, in Karls’ opinion. “Practically speaking, we’ve been significantly discounting the experience of 2020 and 2021, which, by and large, were favorable years,” he said. “We know there are fewer claims, but does that signify a new normal? I’m not banking on that, particularly with a return in claim severity that we are likely to see.”

Karls noted that the tort reform pendulum seems to be swinging in the other direction, toward the plaintiff side, which is a factor that needs to be taken into consideration when pricing. Another contributing factor is the general macro-economic inflationary environment.

“I don’t believe that MPL severities walk in lockstep with general inflation,” he said. “They don’t—they are much more sporadic, but there is definitely an upward pressure on claim severities.”

Milford is extremely cautious about risk pricing going forward, saying, “Actuaries will need to exercise extreme caution when reviewing the data to assess the level of distortion.” Just because frequency was lower during the pandemic doesn’t mean that lower level will continue. Lower frequency levels can result in distortions to severity, so the resulting higher or lower severity, likewise, may not be indicative of a trend.

“Projecting lower frequency observed post-pandemic to continue going forward may not be prudent,” she added. “Severity levels also need to be reviewed with care as distorted frequency levels can result in distortions to severity. Projections may need to either place greater weight on experience from pre-pandemic coverage years, using care to reflect potential distortions from slower resolution times if applicable, or adjust the post-pandemic coverage years to a ‘normal’ level prior to giving those years consideration in the pure premium projection process.”

Mosler noted that there are several schools of thought on this issue. “One school of thought is only to look at 2019 and prior because there aren’t enough claims in 2020 and 2021. The other is to include those years. At the end of 2019, we really thought there was a clear upward trend in loss costs where frequency was stable or rising, while severity was clearly going up. You can go back and trend that forward to 2023 rates. Or, you can give some weight to 2020 and 2021, depending on how they look. If you have the same number of claims that you would have expected based on prior experience, then perhaps they should be considered because it’s information on what claims cost that we don’t want to lose.”

When it comes to pricing, Mosler notes that the problem with being overly conservative on pricing is that you lose doctors. “If your physicians can get a better deal somewhere else where the actuaries were more optimistic on pricing, they will go there,” he continued. “While the MPL business isn’t as competitive as it used to be, it’s still competitive. There’s much more capacity than there are doctors to insure. Many MPL insurers have significant surplus, which means it makes sense to take a risk the other way with a rate that’s a bit too low rather than a rate that’s too high, which risks losing the physician. Given how much capacity there is and how strong the surplus is, I expect many MPL insurers are not going to be that aggressive in terms of higher rates.”

The way Burns sees it, “Pricing is trickier than reserving because (in pricing), you have to both look back to see where you were and look forward to see where you are going. The actuarial pricing (ratemaking) process starts with loss development, so many of the same methods/adjustments made in the reserving process will likely have to be implemented in the pricing process. We then have to determine what might/will be different going forward and make appropriate assumptions. It is important that the actuaries communicate with their underwriters to make sure everyone is working under similar assumptions.”

Physician retirements and increases in advance practice clinicians. Whether by retirement, burnout, or career changes, physicians and other providers are leaving the workforce, leading to well-known shortages. In fact, in 2021, 117,000 physicians left the workforce, while 52% of active physicians are 55 or older and heading toward retirement.

The increase in advance practice clinicians—physicians assistants and nurse practitioners—is helping fill the gap created by physician departures and retirements. More than half of primary care practitioner roles are filled by these advance practice clinicians as of 2021. In addition, the number of nurse practitioners grew by 235% between 2004 and 2021, while the number of physician’s assistants grew by 79% during that same period.

Mosler noted that it’s impossible to quantify physician burnout within actuarial methods. “Much still depends on what the plaintiff’s lawyers are going to do. We’re also still going to see some benefit from the fact that less care was provided in 2020 and 2021, although some of that will be offset by the fact that patients may be less healthy from getting less care.”

In terms of physicians departing from the profession or retiring, the ones who are left are likely to experience higher premiums. “We can start with the fact that when doctors leave, the quality of care decreases. When fewer physicians are there to provide the care, we can probably expect more claims, but fewer physicians to be sued,” he said.

For Karls, the major questions are how and whether the scope of practice is increasing for advance practice clinicians, whether they have a larger following of patients, and whether the level of acuity of care the patients are receiving is increasing. “What hasn’t changed, for the most part, is how the industry prices these ancillary providers,” he said. “The industry tends to charge a percentage of the rate they would charge for a physician providing the same services.

“My concern is that we don’t have enough data to arrive at an approach that’s more accurate and reasonable than this ballpark type of approach,” he continues. “Given that, say, a nurse practitioner today is doing more than a nurse practitioner did 15 years ago, but we are using the same model that we used then, clearly the industry’s pricing approach needs to be reviewed.”

Karls isn’t surprised that the use of advance practice clinicians is increasing since large healthcare organizations are trying to provide care in the most cost-effective manner possible, which often means using nurse practitioners and physician’s assistants instead of physicians. And clearly, as their use expands, their scope of practice tends to expand too.

Milford hasn’t observed significant pricing movements in the MPL space for ancillary practitioners. “Anecdotally, there recently seems to be more discussion of claims involving ancillary professionals,” she said. “If true, it needs to work its way into experience before conclusions can be drawn. As such, the question of whether these professionals are being priced correctly remains unresolved at the moment, since the story is still developing.”