CAS Ratemaking Seminar COM-21 Medical Malpractice Pricing Jeff Donaldson, FCAS, MAAA The Doctors’ Company

2 Introduction u Claims-Made Product u Pure Premium Method u Pricing for Purchased Tail Coverage u Pricing for Free Tail Coverage u Class Pricing u Other Ratemaking Issues

3 Claims-Made Product u Covers claims reported to the company during policy period u Restricted to claims with occurrence dates on or after the Retroactive Date u Prior Acts : claims with accident dates prior to policy effective date u Coverage Trigger : Incident vs. Demand

4 Claims-Made Product u Tail Coverage : covers all claims reported subsequent to policy expiration for claims which occurred between retro date and expiration date u Free Tail Coverage provided upon Death, Disability, or Retirement

5 Pure Premium Method u Report Year losses stratified by Lag u Lag is defined as report year minus accident year u L(i,j) = losses from report year “i”, lag “j”

6 Pure Premium Method

7 u 1st Year Claims-Made Policy

8 Pure Premium Method u 2nd Year Claims-Made Policy

9 Pure Premium Method u Mature Claims-Made Policy

10 Pure Premium Method u Tail Policy effective Year1

11 Pure Premium Method u Exposures generated by report year and lag combination)

12 Pure Premium Method u Report year losses developed and trended u Adjusted losses divided by exposures u Generates a point estimate of pure premium by lag using the experience of all policies (advantage over loss ratio method)

13 Pure Premium Method - Example u Step Factor Calculation u Pure Premium by Lag

14 Purchased Tail Pricing u Assume 5% loss trend applied to report year losses u Losses stated as percent of mature losses for report year0

15 Purchased Tail Pricing

16 Purchased Tail Pricing u Tail pure premium = 124% x Mature pure premium u Tail Premium should not be 124% of Mature premium for two reasons: –longer payout –claims-made premium includes load for free tail coverage

17 Free Tail Pricing u Loaded as % of premium or loss u Model Parameters: –age distribution –inception year distribution for current insureds –mortality, disability, and retirement rates

18 Free Tail Pricing u Model Parameters: –lapse rates –eligibility requirements –pure premium –pure premium trend –discount rate

20 Class Pricing u Recognized medical specialties u Grouped for ratemaking purposes u Many different class plans and relativities used in industry u Some specialties sub-divided based upon underwriting criteria

21 Class Pricing u Check for heterogeneity within classes and specialties u Test for heterogeneity –Poisson assumption –Mean = Variance ?

22 Heterogeneity Test - Example

23 Heterogeneity Comparisons

24 Other Ratemaking Issues u Coverage Triggers (Demand vs. Incident) u Mass Torts (e.g. pedicle screws, breast implants, Fen Phen) u Tort Reform u Corporate Vicarious Liability u Impact of Managed Care