Yu Lei & Joan T. Schmit

Abstract

Medical malpractice insurance is a highly specialized and risky business, and over the past three decades the market has experienced three dramatic periods of rising prices and shrinking supply. In response to such volatility, many medical care providers have turned to physician-owned and physician-run entities as their insurers. Regulators and rating agencies, however, have expressed concern about the geographic and business-risk concentration of these entities, encouraging diversification across state lines and lines of business. This article hypothesizes that physician-directed insurers are inherently more conservative and better informed than non-physician-directed insurers, calling into question the value of diversification, which may erode their informational advantage. An analysis of insurer loss-reserving practices supports this hypothesis: physician-directed insurers are more likely to over-reserve and less likely to under-reserve than non-physician-directed insurers, and when they do under-reserve, their errors are smaller. The article also finds that rapidly growing insurers have exhibited risky reserving practices. These results, the authors argue, are important for regulators and rating agencies when assessing the riskiness of medical malpractice insurers.

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