© 2008 Towers Perrin Casualty Actuaries in Reinsurance Observations on Medical Malpractice This document is incomplete without the accompanying discussion;

© 2008 Towers Perrin

Casualty Actuaries in Reinsurance

Observations on Medical Malpractice

This document is incomplete without the accompanying discussion; it is confidential and intended solely for the information and benefit of the immediate recipient hereof.

James D. Hurley, ACAS, MAAA

May 20, 2008

© 2008 Towers Perrin 2

S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt


Financial results

Reinsurance issues

What’s different . . . or not?




Financial results impacted by . . . 1990’s

—modest loss trends

—favorable reserve development

—relatively high investment returns

—expansion

—slippage in pricing 2000’s

—loss trends pick up

—unfavorable reserve development

—investment returns turn

—rates adjustedContinued . . .



Observations on Medical Malpractice (cont.) 2003 2006

—rates/prices tight

—tort reform

—loss trends

—investment returns stabilize 2007 20??

—rates reduced

—tort reforms “+“

—loss trends

—investment returns “return” (some)


S:\people\Hurlj\Presentations\2008\20080520 CARe (p).pptSource: A.M. Best’s Aggregates and Averages





Source: Compilation of Best Data

Medical Malpractice - Occurrence

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pre

miu

m E

arn

ed (

tho

usa

nd

s)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Direct

Lo

ss R

atio

Premiums Earned Loss Ratio






0

200,000

400,000

600,000

800,000

1,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pre

miu

m E

arn

ed (

tho

usa

nd

s)

0.0

50.0

100.0

150.0

200.0

250.0

Ceded

Lo

ss R

atio







0

500,000

1,000,000

1,500,000

2,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pre

miu

m E

arn

ed (

tho

usa

nd

s)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Net

Lo

ss R

atio






Medical Malpractice - OccurrenceLoss Ratios

0.0

50.0

100.0

150.0

200.0

250.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Direct Ceded Net





Medical Malpractice - Claims-Made

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pre

miu

m E

arn

ed (

tho

usa

nd

s)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Direct

Lo

ss R

atio







0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pre

miu

m E

arn

ed (

tho

usa

nd

s)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Ceded

Lo

ss R

atio







0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pre

miu

m E

arn

ed (

tho

usa

nd

s)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Net

Lo

ss R

atio






Medical Malpractice - Claims-MadeLoss Ratios

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Direct Ceded Net





Medical Malpractice - Occurrence and Claims-Made

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pre

miu

m E

arn

ed (

tho

usa

nd

s)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Direct

Lo

ss R

atio







0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pre

miu

m E

arn

ed (

tho

usa

nd

s)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Ceded

Lo

ss R

atio







0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pre

miu

m E

arn

ed (

tho

usa

nd

s)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Net

Lo

ss R

atio






Medical Malpractice - Occurrence and Claims-MadeLoss Ratios

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Direct Ceded Net




Reinsurance Issues Reinsurance attestation

—risk transfer

—NAIC survey Proposed rule – New Jersey

—reporting requirements




Market needs some divergence

—start-ups

– capacity

– avoid early “knock-out”

—mature companies

– clash

– ECO/EPL




What’s different . . . or not? rules rates results capacity other?



What’s different . . . or not? “Rules”

Florida proposed SB 1660 consumer protection laws apply to insurance more rigorous requirements on experience rating

individual physicians and schedule rating generally ALAE/DCC shall be part of insurer’s “rate base” only

to extent they do not exceed “. . . the national average for such expenses, as determined by the office, for the prior calendar year . . .”

Requires (apparently) a Florida income statement policies effective on/after October 1, 2007, rates

shall be 25% less than rates at October 1, 2004




Florida proposed SB 1660 (cont.) insurer/self-insurer or RRG filing a proposed rate

change

—must give notice to public

—any insured can request a hearing within 30 days (any consumer may participate)

—public counsel has standing to request hearing

—med mal rates cannot be based on experience for 2003 and prior




Colorado SB 164 (proposed 2008) “guts” the non-economic cap “. . . no rate shall be held to be inadequate unless

surplus falls below . . .” company action level RBC

Similar RBC related proposals in Rhode Island, D.C.

Other states debating/changing “rules” California (all lines) Ohio – file annually Missouri – recent legislation requires new “rules” Illinois – fully documented filings



What’s different . . . or not? “Rates”

Percentage of Rate Changes in Survey by Range*

*October 2007 Medical Liability Monitor

0.91.40.00.00.0<-30.0%

2.31.30.00.00.0-29.9 to -20.0

6.55.12.10.00.0-19.9 to -10.0%

21.015.18.44.72.3-9.9 to -0.1%

53.146.624.013.220.30.0%

8.222.629.322.513.1+0.1 to +9.9%

5.95.628.534.931.4+10.0 to +24.9%

0.52.36.514.826.8+25.0 to +49.9%

0.40.00.73.73.7+50.0 to +69.9%

0.60.00.64.11.1+70.0 to +99.9%

0.6%0.0%0.0%2.2%1.2%> +100%

20072006200520042003Range

0.91.40.00.00.0<-30.0%

2.31.30.00.00.0-29.9 to -20.0

6.55.12.10.00.0-19.9 to -10.0%

21.015.18.44.72.3-9.9 to -0.1%

53.146.624.013.220.30.0%

8.222.629.322.513.1+0.1 to +9.9%

5.95.628.534.931.4+10.0 to +24.9%

0.52.36.514.826.8+25.0 to +49.9%

0.40.00.73.73.7+50.0 to +69.9%

0.60.00.64.11.1+70.0 to +99.9%

0.6%0.0%0.0%2.2%1.2%> +100%

20072006200520042003Range



What’s different . . . or not? “Rates”

Comments on the survey “repositioning” changes? number of rate increases down by 50% 50% show “no change”; 30% reflect decreases opportunity to get class/territory right manual changes; not collected

—tracking and balanced?



28%

8%

27%

90%

2%

88%

17%

71%

2006

27%12%7%-1%-12%-7%6%12%16%Net Income

10%4%2%0%-3%0%2%2%5%FIT

24%17%22%26%17%31%34%36%48%Net Investment Income

84%99%110%123%145%136%125%119%120%Adjusted Combined

6%1%0%0%2%3%5%6%6%Policy Holder Dividends

78%98%109%122%143%133%120%114%115%Combined Underwriting

18%16%17%18%18%22%22%22%22%Underwriting Expense

61%82%93%105%126%111%98%92%93%Loss & LAE

200720052004200320022001200019991998

Financial Ratios to Net Premiums Earned

28%

8%

27%

90%

2%

88%

17%

71%

2006

27%12%7%-1%-12%-7%6%12%16%Net Income

10%4%2%0%-3%0%2%2%5%FIT

24%17%22%26%17%31%34%36%48%Net Investment Income

84%99%110%123%145%136%125%119%120%Adjusted Combined

6%1%0%0%2%3%5%6%6%Policy Holder Dividends

78%98%109%122%143%133%120%114%115%Combined Underwriting

18%16%17%18%18%22%22%22%22%Underwriting Expense

61%82%93%105%126%111%98%92%93%Loss & LAE

200720052004200320022001200019991998

Financial Ratios to Net Premiums Earned

26

What’s different . . . or not? “Results”



27

What’s different . . . or not? “Capacity”

0.61 0.59

0.67

0.89

1.261.21

1.16

1.04

0.87

0.72

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

Rat

io o

f D

irec

t P

rem

ium

Wri

tten

to

Su

rplu

s

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Direct Premium Written to Surplus



28


0.520.48

0.57

0.73

0.90 0.90 0.910.86

0.73

0.58

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Ra

tio

of

Ne

t P

rem

ium

Wri

tte

n t

o S

urp

lus

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Net Premium Written to Surplus



29


1.761.67

1.78

2.03

2.45 2.44

2.322.21

1.96

1.68

0.00

0.50

1.00

1.50

2.00

2.50

Rat

io o

f N

et L

oss

an

d L

AE

Res

erve

to

Su

rplu

s

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Net Loss and LAE Reserve to Surplus



What’s different . . . or not? “Other”

Market composition reduced “commercial” presence specialty companies

—non-physician directed

—physician directed

Investment income volatile stock market interest rates impact of leverage

Start-ups how do they play?

Documents

© 2008 Towers Perrin Casualty Actuaries in Reinsurance Observations on Medical Malpractice This document is incomplete without the accompanying discussion;