C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S CAS 2004 Seminar on Ratemaking The Medical Malpractice Insurance Crisis

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S CAS 2004 Seminar on Ratemaking This medical malpractice crisis didn’t occur overnight.

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S CAS 2004 Seminar on Ratemaking

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S

Historical Results Medical Malpractice Industry – Loss + LAE Ratios Loss + LAE Ratios 1985 : 149.3% 2001 : 131.1% 1989 : 73.2%

Historical Results Medical Malpractice Industry – Expense Ratios Loss + LAE Ratios Expense +Dividend Ratios

Historical Results Medical Malpractice Industry – Combined Ratios Loss + LAE Ratios Expense + Dividend Ratios Combined Ratios

Historical Results Medical Malpractice Industry - Combined Ratios Combined Ratios 1985 : 163.5% 2001 : 153.3% 1989 : 89.1%

Historical Results Medical Malpractice Industry – Investment Ratios Investment Ratios Combined Ratios 1992 : 51.5% 2002 : 12.4%

Historical Results Medical Malpractice Industry – Operating Ratios Investment Ratios Operating Ratios Combined Ratios 1985 : 126.1% 2001 : 134.3%

Historical Operating Results Medical Malpractice Industry vs. P/C Industry Investment Ratios Combined Ratios Medical Malpractice Industry P/C Industry Operating Ratios

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S Recap of Issues Leading to the Current Crisis Intense competition during the 90s soft market Loss experience worsened Rising medical inflation Investment returns declined Prior year reserve redundancies depleted Reinsurance market hardened Reduced capacity

States in Crisis Source: American Medical Association

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S The Situation in Pennsylvania CAT Fund (Mcare Fund) Established 1975 Originally covered $1 million xs $200,000 Funded on a pay-as-you-go basis Unfunded liability of $2+ billion Sins of past become burdens of current providers Through recent legislation is being phased out by raising underlying limits – fund now covers $500,000 xs $500,000.

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S The Situation in Pennsylvania Malpractice limits of $1.2 million (recently changed to $1.0 million) required to practice Availability Problem Insolvency of four major carriers between 1990 and 1998 PHICO, PIC, PIE, AHSPIC Withdrawal of St. Paul MIIX and Princeton non-renewed PA physicians in 2002

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S The Situation in Pennsylvania Recent Legislative Changes Tort Reforms (Do NOT include limits on non- economic damages) Insurance Reforms Reduction of required primary limits to $1m Phase out of Mcare Fund Mcare abatement for physicians Patient Safety Reforms

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S 1996 — Top 20 Writers Company/Group 1St. Paul Group 2CNA Insurance Group 3MLMIC — NY 4Medical Protective Company 5Health Care Indemnity Inc. 6Doctors Company Insurance Group 7Illinois State Medical Exchange 8AIG 9MMI Companies Group 10PIE Mutual Insurance Co. Rank AM Best Rating A+ A A- A A B+ A++ A E Early ‘98

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S 1996 — Top 20 Writers Company/Group 1St. Paul Group 2CNA Insurance Group 3MLMIC — NY 4Medical Protective Company 5Health Care Indemnity Inc. 6Doctors Company Insurance Group 7Illinois State Medical Exchange 8AIG 9MMI Companies Group 10PIE Mutual Insurance Co. Rank AM Best Rating A+ A A- A A B+ A++ A E Early ‘98 GONE FROM THE MARKET

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S MLMIC — NY 1996 — Top 20 Writers Company/Group 1St. Paul Group 2CNA Insurance Group 3 4Medical Protective Company 5Health Care Indemnity Inc. 6Doctors Company Insurance Group 7Illinois State Medical Exchange 8AIG 9MMI Companies Group 10PIE Mutual Insurance Co. Rank AM Best Rating A A- A A B+ A++ Early ‘98 DOWNGRADED MLMIC — NY B Medical Protective Company A (neg) Doctors Company Insurance Group A-

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S 1996 — Top 20 Writers Company/Group 11Physicians Reciprocal Group 12Princeton Insurance Companies 13MIIX Group 14Frontier Insurance Group 15Norcal Mutual Insurance Company 16ProAssurance 17PHICO Ins. Co. 18SCPIE 19ProMutual 20Farmers Insurance Group Rank AM Best Rating NR-4 A- A A A A Early ‘98

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S 1996 — Top 20 Writers Company/Group 11Physicians Reciprocal Group 12Princeton Insurance Companies 13MIIX Group 14Frontier Insurance Group 15Norcal Mutual Insurance Company 16ProAssurance 17PHICO Ins. Co. 18SCPIE 19ProMutual 20Farmers Insurance Group Rank AM Best Rating NR-4 A- A A A A Early ‘98 GONE FROM THE MARKET

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S 1996 — Top 20 Writers Company/Group 11Physicians Reciprocal Group 12Princeton Insurance Companies 13MIIX Group 14Frontier Insurance Group 15Norcal Mutual Insurance Company 16ProAssurance 17PHICO Ins. Co. 18SCPIE 19ProMutual 20Farmers Insurance Group Rank AM Best Rating NR-4 A- A A A A Early ‘98 Princeton Insurance Companies B- ProAssurance A- SCPIE B DOWNGRADED

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S M EDICAL M UTUAL Liability Insurance Society of Maryland Medical Mutual Payout Year Indemnity (In millions) ALAE (In millions) $ 39.6$ 16.3 $ 33.9$ 15.6 $ 32.7$ – 31 $ 32.4$ 15.9 $ 33.5$ 15.2 $ 37.9$ 15.3 $ 25.9$ 13.3 $ 28.2$ 12.2 $ 35.7$ 13.8 $ 24.7$ 14.1 $ 75.7$ 17.6

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S 223, , , , , ,042 Medical Mutual Liability Insurance Society of Maryland Average Indemnity Paid per Claims Closed with Indemnity

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S M EDICAL M UTUAL Liability Insurance Society of Maryland 1998– ,26869 $54.6 Million 1994– ,23544 $31.7 Million % Change: 4%57% 72% Report Year Physician Exposures Number of Claims Dollar Amount Paid (INCREASE) Closed Claims of $400,000 or More. NOTE: 4 Report Years at End of 5 Years (INCREASE)

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S Percent* of Paid Claims with Indemnity Payment >=$1M *As a percentage of Paid Claims with Indemnity Payment, Data as of 2/15/04

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S Selection of Recent Cases with High Economic Damages INJURY ALLEGED ECONOMIC DAMAGES 37 YOM alleging total disability due to headaches Birth-related damages, CP Birth-related damages, brain injury Birth-related damages, CP 5-month-old, brain injury, CP Birth-related damage, profound retardation 73 YOM, quadriplegia Birth-related damages, CP 38 YOF, reflex sympathetic dystrophy $ 15.4 Million $ Million $ 19.4 Million $ 22.4 Million $ 33.6 Million $ 17.4 Million $ 5.0 Million $ 10.2 Million $ 3.9 Million

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S “Among the malpractice claims we studied, the severity of the patient’s disability, not the occurrence of an adverse event or an adverse event due to negligence, was predictive of payment to the plaintiff.” Source: “Relation between Negligent Adverse Events and the Outcomes of Medical Malpractice Litigation,” by T.A. Brennan, C.M. Sox, and H.R. Burstin; New England Journal of Medicine, 12/26/96. M EDICAL M UTUAL Liability Insurance Society of Maryland

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S % of Claims Closed with Paid Indemnity Projected Ultimate % Paid Report Year Projected Ultimate Average of RangeIncrease % 25% 26% 25% 22% 23% 20% 27.0%+22.7% 22.0%

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S Summary-Insurance Company Perspective Capacity has left the market; Capital is stressed for those left standing Severity is the driving force Companies cannot afford to underprice, but uncertainty prevails Continued need for tort reforms Continued external pressures to slow down rate increases

C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S C R I S I SC R I S I S CAS 2004 Seminar on Ratemaking The Medical Malpractice Insurance Crisis