In an earlier article – "Did Investments Affect Medical Malpractice Premiums?" – we analyzed the impact of asset allocation on premiums charged by medical malpractice companies. The article analyzed the correlation between investment yields, economy and equity prices on premiums; we found no correlation between the premiums and the investments of an insurance company or the economy.

However, the article did not explicitly address the market impact on strictly the investment gain of medical malpractice companies. In this note, we analyze if investment gain declined during the recent bear market.

An analysis of income statements from NAIC filings indicates that, contrary to conventional wisdom, the decline in interest rates and equity prices did not correspond with a decline in investment gain. Using NAIC terminology, earned investment income is a value exclusive of realized capital losses or gains; investment gain is a value inclusive of realized capital gains. We are asking “Did medical malpractice companies raise premiums because they had come to expect a certain percentage gain that was not achieved due to market conditions?” The following charts show the investment gain for medical malpractice companies and their sources.

Over the last six years, the investment gain of medical malpractice companies has not declined. While the amount of gain medical malpractice companies receive from equities declined, the bond rally caused by the decline in interest rates and realized in the form of capital gains has more than offset this decline.

To put these values into perspective, we compared investment gain to premiums and expenses. In the following graph, we see expenses (including losses and loss adjustment expenses) growing faster than premiums while investment gains remain relatively constant. From this, we conclude that investments did not precipitate the current crisis.