Brian Alvers, ACAS, MAAA Aon Re Services Midwestern Actuarial Forum Fall 2003 September 24, 2003...

Brian Alvers, ACAS, MAAAAon Re Services

Midwestern Actuarial ForumFall 2003

September 24, 2003

Medical Malpractice: State Of The Line

Business Climate And Liability Tort Reform

Section 1

Industry Analysis

Section 2

Reinsurance And DFA Considerations

Section 3

Agenda

Section 1

Business Climate And Liability Tort Reform

1

Medical Malpractice Crisis

Insurers Increasing Loss Costs Inadequate Loss Reserves Poor Investment Results Hardened Reinsurance Market

Insureds Availability Problems Affordability Problems

Aon Re Inc.Copyright 2003

2

Insurer Actions Taken

Base Rate Increases Reduction Of Schedule Credits Reduction Of Other Discounts (e.g., Claims-Free) Reduction In Limits Offered Increase In SIRs For Excess Business Exit States/Territories With Poor Experience Exit Line Of Business


3

Insured Actions Taken

Physician Owned/Operated Insurers Self-Insurance, Captives Limit Services Retire Early Move To Other State/Territory Practice Defensive Medicine


Medical Malpractice Business ClimateYear 2002

In CrisisCrisis BrewingNo Crisis

Source: AMA Member Communications - July 17, 2002

4Aon Re Inc.Copyright 2003

5

Medical Malpractice Business ClimateYear 2003

In CrisisCrisis BrewingNo Crisis

Source: AMA Member Communications - July 9, 2003


6

States Actions Taken

Florida SB 2-D Passed Still Needs Governor’s Signature

Michigan HB 4980 and SB 633 Proposed

Texas Proposition 12 Approved


7

Florida SB 2-DCaps On Non-Economic Damages

$500K From Individual Doctors/Defendants, Not To Exceed $1M From All Doctors/Defendants Regardless Of Number Of Claimants

$750K For A Single Hospital, Not To Exceed $1.5M From All Hospitals

$150K Cap For Emergency Room Physicians


8

Florida SB 2-DRates Reflecting Savings

Med Mal Insurance Rates Approved On Or Before 7/1/2003 Remain In Effect Until A New Rate Filing Is Made Reflecting Savings Under The New Act

New Filing No Later Than 1/1/2004

The New Rate To Apply To Policies Effective Or Renewed After Effective Date Of The Act (8/14/2003)

Requires Insurers To Provide A Refund


9

Michigan HB 4980 And SB 633

Identical Bills Proposed From House And Senate

Make It Easier To Recover Economic And Non-Economic Damages Based On “Loss Of Opportunity”

Currently, Recovery Can Not Be Had Unless The “Loss Of Opportunity” Is Greater Than 50%


10

TexasProposition 12

Constitutional Amendment Capping Non-Economic Damages In Jury Awards To $250K In Cases Against Doctors And Health Care Providers

Approved By A 51% To 49% Margin On 9/13/2003

Only 10% Voter Turnout


11

States With “No Crisis”

California, Colorado $250K Non-Economic Damages Cap

Louisiana $500K Total Damages Cap

Indiana $1.25M Total Damages Cap

Wisconsin $410K, $500K For Minors

New Mexico $600K Cap Excluding Punitive Damages


12

States “In Crisis”

FL, TX Reform Passed

NY, IL, PA, NJ, GA, NC, WA, CT, KY, OR, AR, WY No Caps

OH, WV, NV, MS Various Caps $250K to $500K

Missouri $557K Cap $250K Non-Economic Damages Cap Vetoed By Governor


13

Are Caps The Answer?

Weiss Ratings, Inc. (www.WeissRatings.com) No Far More Important Factors Median Annual Payment Up More In States With Caps

(48.2% Versus 35.9% From 1991 To 2002)

The PIAA (www.thepiaa.org) Says Weiss Makes Numerous Errors In Assumptions Total Claim Payouts Increased 52.8% In Cap States Versus

100.1% In Non-Cap States


14


GAO Report (GAO-03-702) Losses Appear To Be Primary Driver Of Medical

Malpractice Rate Increases No Clear Policy Recommendations Other Factors Cause Increases Lack Of Comprehensive Data

Especially Economic Versus Non-Economic


15


Caps May Precipitate More Doctors Being Named In Suits To Obtain Multiple Recoveries

Reinsurers Not Factoring In Reduction In Claim Cost Just Too Early To Tell Little Impact On Modeling For A Couple Of Years Same True For Many Insurers


Section 2

Industry Data Analysis

16

Industry Data Analysis

Industry 2002 Schedule P (OneSource) Parts 1-4F Sections 1 (Claims-Made) And 2 (Occurrence)

Develop Industry Losses And DCC To Ultimate

Use Paid, Incurred Loss Development Methods

Compare Ultimate Losses To Earned Premium


17

80%

90%

100%

110%

120%

130%

140%

1992 1994 1996 1998 2000 2002

Lo

ss a

nd

DC

C R

atio

Industry Loss and DCC Ratio


18


Exposure Number Of Licensed Physicians Pros:

Easy To Get (Medical Marketing Services, Inc.) Reasonable Estimate Of Exposure

Cons: What About Hospitals? What About Tail And DDR? What About Trend To Self-Insurance?


5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

1992 1994 1996 1998 2000 2002

$ P

er

Ph

ys

icia

n

80%

90%

100%

110%

120%

130%

140%

Lo

ss

an

d L

os

s E

xp

en

se

Ra

tio

19


Loss and DCC Ratio

Loss Per Physician

Premium Per Physician


20


1994 – 1998 Loss Per Physician Increased 36% Premium Per Physician Decreased 4%

Exponential Trend In Losses Per Physician Trend Rate = 6.82% R2 = 98.4% Actual Trend Rate Higher, As Denominator Is

Licensed Physicians, Not Insured Physicians Generally Assume 7.5% - 10%


21

Peer Company Analysis – Top 20 WritersCapital Adequacy


Net Leverage% NPW Surplus NPW / Surplus (NPW + Net Liab.) / Surplus 2002 BCAR

Company Rating Med Mal 12/31/2001 12/31/2002 12/31/2001 12/31/2002 12/31/2001 12/31/2002 Score

Lexington Insurance Company A++ 16% 1,746,113 1,763,654 0.5 1.1 1.7 3.0 179.8

State Volunteer Mutual Insurance Co. A 100% 137,176 129,287 0.7 1.0 3.8 4.7 173.1Continental Casualty Co A 4% 4,700,064 5,115,932 0.7 1.4 4.3 5.3 170.5Truck Insurance Exchange A 26% 300,614 275,557 2.6 2.7 5.7 6.6 160.1St. Paul Fire & Marine Ins Co. A 3% 4,142,586 4,925,779 1.2 0.9 4.3 3.3 156.8NORCAL Mutual Insurance Company A 100% 268,032 222,214 0.6 0.8 2.7 3.3 148.0Evanston Insurance Co A 24% 230,889 313,850 1.6 1.8 4.7 5.0 141.8Medical Protective Company A 99% 408,215 401,726 0.8 1.3 3.2 4.7 137.1

Health Care Indemnity, Inc. A- 100% 583,763 482,536 0.4 0.7 2.4 3.3 183.9American Physicians Assurance Corp A- 74% 176,819 163,466 1.1 1.4 4.6 5.4 138.8Medical Assurance Company Inc A- 96% 172,841 193,335 1.0 1.2 4.7 5.1 137.6Pronational Insurance Co. A- 96% 175,874 196,955 0.8 0.8 3.9 3.8 137.6Doctors Company Insurance Group A- 97% 383,965 341,412 0.8 1.2 3.0 4.5 129.6MAG Mutual Insurance Company A- 97% 158,558 142,978 0.7 1.0 3.0 4.3 103.5

FPIC Insurance Group B++ 89% 107,914 126,610 1.4 1.1 5.2 5.5 125.4

ISMIE Mutual Insurance Company B+ 100% 241,406 170,517 0.7 1.3 4.0 6.6 87.0

Medical Liability Mutual Insurance Co. B 96% 1,428,745 933,042 0.4 0.8 2.6 4.8 71.2

Princeton Insurance Company B- 64% 141,602 107,239 1.7 1.1 7.3 9.7 73.3

MCIC VT Inc RRG NR-1 96% 10,114 10,352 2.0 2.4Physicians Reciprocal Insurers NR-4 99% 68,559 73,110 2.0 2.1 13.1 12.2

Source: AM Best And The National Association Of Insurance Commissioners

22

Peer Company Analysis – Top 20 WritersEarnings Adequacy (5-Year Average)



% NPW Pre-Tax Return on CombinedCompany Rating Med Mal ROR PHS Ratio

Lexington Insurance Company A++ 16% 24.4% 8.9% 97.1

State Volunteer Mutual Insurance Co. A 100% 0.0% 1.9% 134.7Continental Casualty Co A 4% -1.2% 1.0% 123.1Truck Insurance Exchange A 26% -6.4% -12.3% 108.6St. Paul Fire & Marine Ins Co. A 3% 6.5% 10.5% 117.8NORCAL Mutual Insurance Company A 100% 2.1% -1.6% 122.7Evanston Insurance Co A 24% 9.4% 11.6% 98.8Medical Protective Company A 99% 15.9% 14.4% 106.0

Health Care Indemnity, Inc. A- 100% 9.4% 5.4% 114.1American Physicians Assurance Corp A- 74% -8.1% -6.3% 126.2Medical Assurance Company Inc A- 96% 10.4% 5.9% 111.0Pronational Insurance Co. A- 96% -8.1% 7.5% 134.2Doctors Company Insurance Group A- 97% 0.2% 0.8% 115.3MAG Mutual Insurance Company A- 97% 3.0% -0.1% 120.9

FPIC Insurance Group B++ 89% 4.4% 3.1% 110.2

ISMIE Mutual Insurance Company B+ 100% 0.7% -0.9% 131.1

Medical Liability Mutual Insurance Co. B 96% -6.3% -0.8% 136.7

Princeton Insurance Company B- 64% -9.8% -9.6% 130.6

MCIC VT Inc RRG NR-1 96% -1.8% 111.7Physicians Reciprocal Insurers NR-4 99% 5.7% 10.2% 120.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

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Peer Company Analysis – Top 20 WritersAverage Increase In Net Leverage = 28%



Year-End 2001

Year-End 2002

A++ A- B++ Or LowerAM Best Rating

Net Leverage = (NPW + Net Liabilities) / Surplus

A

24Aon Re Inc.Copyright 2003

Remaining Medical Malpractice Writers Are Capital Constrained

Opportunity To Sell In Hard Market Hampered By Poor Capital Adequacy As Measured By A.M. Best

Poor U/W Results Reduced Reported Surplus Net Capital Required To Support Rating Increasing

Substantially Rising Net Premiums Through Increased Market Share And

Rising Rates “Excessive Growth” Compounding Increased Required Capital Assumed Reserve Deficiency

A.M. Best Capital Adequacy Issues

Section 3

Reinsurance And DFA Considerations

25

Reinsurance Market Dynamics

Past Results Reflect Inadequate Primary Rates Significant Increase In Severity And Frequency Severity Increases Have Greater Effect On Excess

Reinsurers Reinsurance Market Response

Reinsurers Require Projected U/W Profit 12% - 18% ROE Perform Extensive Actuarial Analysis

Huge Concern Over Severity Trend, Reserves Restricted Capacity May Increase Rate At Renewal Despite Rate Increases And

Exposure Reduction By Cedant


26

Reinsurance Market Dynamics

Reinsurer Focus Points Quality Of Business Plan/Underwriting Discipline Purchasing Philosophy Of Buyer

Cedants Extremely Leveraged Higher Primary Rates, Surplus Down Pressure On Rating (AM Best, S&P) Pressure On Capital Adequacy (BCAR, S&P CAR, RBC) But Reinsurers Will Not Do Quota Share Consider Non-Traditional, Structured Program, And/Or

Lower Excess Of Loss Retention


27

Reinsurance ConsiderationsIn Medical Malpractice

Take Into Account Effective Rate Action Not Just Base Rate Increases Change In Schedule Credits/Debits Change In Increased Limits Factors

Take Into Account Changes In Exposure Limit And Attachment Profile State/Territory Mix Classification/Specialty Mix

Docs: OB/GYN, Cardiac Surgeons, Neurosurgeons Hospitals: Teaching Versus Not, Size, Rural/Urban

Coverage Not Just Per Claim (Per Doctor) Watch Out For Clash, ECO/XPL


28

DFA ConsiderationsIn Medical Malpractice

Split ALAE Only From Indemnity And ALAE Claims Could Be 80/20 Split

Lognormal Works Very Well For Severity Both Indemnity And ALAE Watch For Clustering

Correlation Indemnity And Settlement Lag Indemnity And ALAE

Don’t Forget Parameter Uncertainty Coefficient Of Variation Worst Of All 10-Year Schedule P Lines


Brian Alvers, ACAS, MAAA Aon Re Services Midwestern Actuarial Forum Fall 2003 September 24, 2003...

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