Medical Malpractice Insurers Pay Higher Dividends to California Doctors After Proposition 103

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Insurance Lobbyists Mislead Congress on Dividend Issue

Santa Monica, CA — California’s major medical malpractice insurers paid dramatically higher dividends in the years immediately after the passage of Proposition 103 in 1988 than in the years prior to enactment of the state’s insurance reform initiative, according to a new analysis by the Foundation for Taxpayer and Consumer Rights (FTCR). Insurance industry data compiled by the AM Best Company show that four of the largest medical malpractice insurers in California paid higher dividends to their physician-policyholders in the six years after Proposition 103 than in the six years prior. Graphs illustrating the change in dividend payments after Proposition 103 are available on FTCR’s website: Graph 1 Graph 2

“Regulation requires insurance companies to be more honest with their policyholders’ money,” said Douglas Heller, a consumer advocate with FTCR. “Before regulation, insurers could keep excess premiums as profits or add to their surplus, but in a regulated environment excess premium gets returned to the policyholders. Under Proposition 103, not only did premiums drop for physicians, companies gave more money back to doctors in the form of dividends than had been returned prior to regulation.”

    Average Dividend Paid to Policyholders
    1983-1988 1989-1994
    Norcal Mutual 12.9% 31.2%
    Doctors Company 2.1% 12.6%

    10.6% 14.3%
    MIEC 9.4% 42.4%
    Average 8.7% 25.1%

Proposition 103, enacted by California voters in November of 1988, required insurance companies, including medical malpractice insurers, to rollback rates by 20%, imposed a temporary rate freeze and forced insurers to justify their rates to the state’s insurance commissioner, among other provisions. The law remains in effect and continues to impose cost controls on insurance companies.

A recently updated study by FTCR shows that Proposition 103, not California’s malpractice caps law, was responsible for stabilizing California doctors’ malpractice premiums. The updated study is available on FTCR’s website.

Insurance Company Lobbyists Mislead Congress

Testifying before Congress and state legislatures, representatives of the insurance industry have stated that Proposition 103 did not have an effect on physicians’ premiums. Larry Smarr, head of a malpractice insurers’ lobbying group, told Congress:

    To satisfy the requirements of Prop 103, NORCAL was specifically permitted to declare a one-time 20% return of premium for policyholders insured between November 8, 1988 and November 8, 1989 as a dividend by March 31, 1992. NORCAL was not required to roll back its rates as a result of Prop 103. As NORCAL was already paying dividends exceeding 20% per year during the period in question, no additional monies were returned to policyholders as a result of Prop 103. The experience of other California physician owned companies, such as The Doctors’ Company and the Medical Insurance Exchange of California, was similar to that of NORCAL. [Smarr Testimony before the United States House of Representatives Committee on Energy and Commerce Subcommittee on Health, February 27, 2003]

In fact, the data show, the companies dramatically increased their dividend payments to policyholders after the passage of Proposition 103. NORCAL, the company that has served as Smarr’s primary example, more than doubled its average annual dividend to policyholders after Proposition 103, while The Doctors’ Company, which paid no dividends between 1983 and 1985 and only 4.6% in 1988, returned as much as 25.2% of physicians’ premiums after Proposition 103. The Medical Insurance Exchange of California (MIEC) dividends averaged 42.4% of premiums in the years after Prop. 103, far more than the 9.4% average prior to enactment of the reforms.

“Clearly, insurers returned more money to doctors after Prop 103, which is exactly what insurance regulation promises. Insurance company lobbyists want Congress to believe that California’s malpractice caps saved doctors money and insurance reforms had no effect, but industry data prove just the opposite,” said Heller.


Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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