Profitability of the Medical Malpractice and General Liability Lines

GGD-87-67: Published: Jul 13, 1987. Publicly Released: Jul 22, 1987.

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Pursuant to a congressional request, GAO reviewed the property and casualty insurance industry's profitability, specifically medical malpractice and general liability insurance.

GAO found that: (1) although insurance underwriting losses have occurred over a 10-year period, the insurance industry has offset aggregate losses with investment gains; (2) underwriting losses resulted, in part, from the industry's cash-flow pricing strategy, which sacrificed underwriting gains to attract more business; (3) profitability estimates for medical malpractice and general liability depend on the adequacy of the reserves for future claim payments and whether those reserves are discounted to reflect their present value; and (4) the industry's reported rate of return on net worth was conservative because it based the rate on undiscounted reserves. GAO developed profitability estimates which show that, from 1975 through 1985, the: (1) medical malpractice line incurred losses when the reserves were valued at their full estimated payout, but was profitable when the reserves were discounted to present values; and (2) general liability line was profitable under all but one estimate, which assumed that the reserves were not discounted.

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