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© 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
Observations on Medical Malpractice
Financial results
Reinsurance issues
What’s different . . . or not?
© 2008 Towers Perrin 3
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
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 . . .
© 2008 Towers Perrin 4
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
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)
© 2008 Towers Perrin 5
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).pptSource: A.M. Best’s Aggregates and Averages
Observations on Medical Malpractice
© 2008 Towers Perrin 6
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
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
© 2008 Towers Perrin 7
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
Medical Malpractice - Occurrence
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
Premiums Earned Loss Ratio
© 2008 Towers Perrin 8
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
Medical Malpractice - Occurrence
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
Premiums Earned Loss Ratio
© 2008 Towers Perrin 9
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
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
© 2008 Towers Perrin 10
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
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
Premiums Earned Loss Ratio
© 2008 Towers Perrin 11
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
Medical Malpractice - Claims-Made
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
Premiums Earned Loss Ratio
© 2008 Towers Perrin 12
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
Medical Malpractice - Claims-Made
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
Premiums Earned Loss Ratio
© 2008 Towers Perrin 13
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
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
© 2008 Towers Perrin 14
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
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
Premiums Earned Loss Ratio
© 2008 Towers Perrin 15
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
Medical Malpractice - Occurrence and Claims-Made
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
Premiums Earned Loss Ratio
© 2008 Towers Perrin 16
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
Medical Malpractice - Occurrence and Claims-Made
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
Premiums Earned Loss Ratio
© 2008 Towers Perrin 17
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Source: Compilation of Best Data
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
© 2008 Towers Perrin 18
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Reinsurance Issues Reinsurance attestation
—risk transfer
—NAIC survey Proposed rule – New Jersey
—reporting requirements
© 2008 Towers Perrin 19
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
Market needs some divergence
—start-ups
– capacity
– avoid early “knock-out”
—mature companies
– clash
– ECO/EPL
© 2008 Towers Perrin 20
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
Observations on Medical Malpractice
What’s different . . . or not? rules rates results capacity other?
© 2008 Towers Perrin 21
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
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
© 2008 Towers Perrin 22
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
What’s different . . . or not? “Rules”
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
© 2008 Towers Perrin 23
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
What’s different . . . or not? “Rules”
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
© 2008 Towers Perrin 24
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
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
© 2008 Towers Perrin 25
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
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?
© 2008 Towers Perrin 26
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
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”
© 2008 Towers Perrin 27
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
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
© 2008 Towers Perrin 28
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
28
What’s different . . . or not? “Capacity”
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
© 2008 Towers Perrin 29
S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt
29
What’s different . . . or not? “Capacity”
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
© 2008 Towers Perrin 30
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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?