Reinsurance Boot Camp on Pricing Techniques Aug 2007 Medical Malpractice Leonard Chung, FCAS Transatlantic Reinsurance Co

Some Unique Issues on Physicians Professional Liability Reinsurance Pricing Clash Cover Clash Cover XPL XPL Tort Reforms Tort Reforms Recent Market Trend Recent Market Trend

Source of Significant Clash Claims High Concentration in a geographic area High Concentration in a geographic area Clash among claims against Drs, corps, and hospitals when they are all insureds Clash among claims against Drs, corps, and hospitals when they are all insureds Exasperated by the trend of more Drs working in groups Exasperated by the trend of more Drs working in groups

Treatments of Clash in Reinsurance Contract Definition: Claims against more than one risk(insured) due to same event (usually interpreted as one claimant) Definition: Claims against more than one risk(insured) due to same event (usually interpreted as one claimant) XOL covers inures to the benefit of Clash covers XOL covers inures to the benefit of Clash covers Trigger: Trigger: Option (1) the first claim report date, regardless of CM or Occ policies, even though the XOL piece is policy attaching Option (1) the first claim report date, regardless of CM or Occ policies, even though the XOL piece is policy attaching Problem: when clash among claims in years when clash layer varies Problem: when clash among claims in years when clash layer varies Solution: Interlocking clause-wt avg retention and limit Solution: Interlocking clause-wt avg retention and limit Option (2) claims stay at respective policy year or loss year and Event total recovery is proportionally distributed to each year based on the Ground-up amount Option (2) claims stay at respective policy year or loss year and Event total recovery is proportionally distributed to each year based on the Ground-up amount

Interlocking Clause Example An Event with 3 claims from 3 report years An Event with 3 claims from 3 report years Rep Yr Loss Amt XOL Cover Clash Limit Clash Retention Losses Net of XOL Recovery % of Total Net Evt Loss Clash Recovery after Interlocking 20041M2.5Mx500K4M500,000500,00029% K2.25Mx750K4M750,000250,00014% 20063M2Mx1M4M1,000,0001,000,00057% Total1,750,000 Wt Avg 4M821,429928,571

Charges for Clash Cover Explicit charge as % of premium net of XOL premium Explicit charge as % of premium net of XOL premium Included in XOL rate (swing or flat with a load) Included in XOL rate (swing or flat with a load) Included in XOL cession Included in XOL cession

Analysis of Clash Cover Losses Experience Rating: Experience Rating: -Development-probably similar to XOL claim development since 2 nd claim could be interpreted as xs losses -Development is unstable: Most recent diagonal of Triangles often get restated due to reassignment of 1 st defendant -may need to make adjustment for change in geographic concentration of the book of business and the percentage of insureds belonging to groups (with separate corporate limits) Exposure Rating Methods: Exposure Rating Methods: A) Interpret 2nd claim as an excess claim when the corporation has a separate limit: using ILF. B) Interpret multiple claims as random event: use simulation.

Clash Layer Exposure Rating Example A Assumptions All policy limits are 3M All policy limits are 3M ILFs from 1M: 2M=1.30, 3M=1.45, 4M=1.55 ILFs from 1M: 2M=1.30, 3M=1.45, 4M=1.55 XOL layer 2Mx1M; Clash layer 3Mx1M, rated as 1stM Prem XOL layer 2Mx1M; Clash layer 3Mx1M, rated as 1stM Prem All multiple-claim events come from the claim against the corporate’s limit All multiple-claim events come from the claim against the corporate’s limit 35% of the exposure from phys insureds belonging to groups with separate corporate limits 35% of the exposure from phys insureds belonging to groups with separate corporate limitsCalculation: 2 nd claim=1Mxs3M FGU Clash layer loss/Subj Prem=( )/1.0xELRx35%

Clash Exposure Rating Example B Simulation: Simulation:Assumptions: Average claims per Event=3.0 -Poisson distribution with a parameter=3 -Each claim has same size of loss distribution cap at XOL attachment point

Sources of Significant XPL -States where most Drs buy low limits and state laws allow collection beyond policy limits: FL, TX -Primary companies’ strategy in defending claims -post judgment penalty

Treatments of XPL in Reinsurance Contract Included in regular losses(80%, 90%, 100%), but provide extra limits (e.g. 4Mx1M for policies with limits up to 2M) Included in regular losses(80%, 90%, 100%), but provide extra limits (e.g. 4Mx1M for policies with limits up to 2M) A separate limit on XPL per claim A separate limit on XPL per claim Added to the per Event section Added to the per Event section Watch out for Treatment of ALAE when it is pro rata Watch out for Treatment of ALAE when it is pro rata

Charges for XPL Cover A flat, or swing rate, usually coincide with XOL cover A flat, or swing rate, usually coincide with XOL cover

Analysis of XPL Cover Losses Development Development -case reserve development not likely -most development due to IBNR Trend beyond policy limits Trend beyond policy limits Exposure Rating Exposure Rating Do not apply it as a load on XOL exposure rating when limit profile is changing Do not apply it as a load on XOL exposure rating when limit profile is changing Why? Why?

Some Common features in recent tort reforms Cap on non-economic damages Cap on non-economic damages Cap on Legal fees/Contingent fees Cap on Legal fees/Contingent fees Collateral source offsets Collateral source offsets Limitation on joint and several liability Limitation on joint and several liability Requiring Plaintiffs to Certify merit of claims Requiring Plaintiffs to Certify merit of claims Restrict qualification on expert witness Restrict qualification on expert witness Restrict venue of suit (e.g. PA) Restrict venue of suit (e.g. PA) Eliminate post judgment penalty if carriers tender policy limit within a time period (e.g. FL) Eliminate post judgment penalty if carriers tender policy limit within a time period (e.g. FL)

Estimating Effect of Tort Reforms Difficult to anticipate effect on losses due numerous combinations of features and different legal environment Difficult to anticipate effect on losses due numerous combinations of features and different legal environment Use Ground-up loss experience to detect early signs Use Ground-up loss experience to detect early signs Look at both severity and frequency Look at both severity and frequency

Major features in Texas tort reform Non-economic losses for Claims filed after 9/1/03 is capped at 250K per claimant for all Drs and providers combined Non-economic losses for Claims filed after 9/1/03 is capped at 250K per claimant for all Drs and providers combined Allow offering party to recover litigation cost from other party if final judgment is within 20% of the rejected offer Allow offering party to recover litigation cost from other party if final judgment is within 20% of the rejected offer Passed state constitution Passed state constitution

A Texas Carrier Untrended Sch P Year Ult Sev Freq/ OL EP ULR on OL EP ULR %81%114% %92%137% %79%142% %75%134% %70%103% %92%101% %111%101% %47%39% %54%46% %77%72%

Major features in Florida tort reform For action accrued on/after 9/15/03, Non economic damage cap:500K per claimant, 500K per Dr, max recoverable from all cap at 1M; Cap is lower for emergency care, higher for other hospitals activities For action accrued on/after 9/15/03, Non economic damage cap:500K per claimant, 500K per Dr, max recoverable from all cap at 1M; Cap is lower for emergency care, higher for other hospitals activities Bad faith law: Safe harbor for insurer to tender policy limit, measured from date suit is filed Bad faith law: Safe harbor for insurer to tender policy limit, measured from date suit is filed Nov 2004 passed: reduced atty fees to 20% of 1 st 250K and 10% of settlement thereafter Nov 2004 passed: reduced atty fees to 20% of 1 st 250K and 10% of settlement thereafter

A Florida Carrier Untrended Sch P Year Ult Sev Freq/ OL EP ULR on OL EP ULR %46%118% %41%104% %41%100% %54%124% %56%108% %58%88% %69%84% %56%58% %71%69% %68%66%

Tort Reforms do’nt always improve (Re)insurance companies results Legal system may allow plaintiff to circumvent caps Legal system may allow plaintiff to circumvent caps Constitutional challenge Constitutional challenge accompanied with rate decreases accompanied with rate decreases

Recent Market Trend and Implication on Reinsurance Pricing Decreasing Frequency Decreasing Frequency Severity continues to go up Severity continues to go up Rate level Erosion Rate level Erosion Higher Retention Higher Retention