1Page CAS Ratemaking Seminar Non-Medical Professional Liability Pricing Denise Olson, FCAS, MAAA March 13, 2001

2Page Typical Rating Factors Step Rate - How close to maturity is the risk?Step Rate - How close to maturity is the risk? State - Which state carries the most exposure for the risk? What unique issues exist?State - Which state carries the most exposure for the risk? What unique issues exist? Claims History - individual riskClaims History - individual risk Size of Firm - How is each marginal exposure increase rated?Size of Firm - How is each marginal exposure increase rated? Area of Practice - e.g. Plaintiff Lawyer or Defense Lawyer - are they complementaryArea of Practice - e.g. Plaintiff Lawyer or Defense Lawyer - are they complementary

3Page Step Rate Does the firm have a retroactive date or is it a completely new firm?Does the firm have a retroactive date or is it a completely new firm? How are changes in firms over time handled?How are changes in firms over time handled? Are there predecessor firms?Are there predecessor firms?

4Page State Statute of Limitations - can impact step ratesStatute of Limitations - can impact step rates State economic situation - some Areas of Practice are very tied to the economyState economic situation - some Areas of Practice are very tied to the economy Tort reformsTort reforms Other law differences - e.g. Real Estate AttorneyOther law differences - e.g. Real Estate Attorney

5Page Claims History Long tail can make severity less reliable than frequencyLong tail can make severity less reliable than frequency Claims staff needs clear understanding of impact of reported incidentsClaims staff needs clear understanding of impact of reported incidents Impact on underwriting of claims that close without payment or with little expenseImpact on underwriting of claims that close without payment or with little expense

6Page Size of Firm How does a marginal increase in exposure effect the rate?How does a marginal increase in exposure effect the rate? Size of Firm discountsSize of Firm discounts

7Page Size of Firm

8Page Size of Firm

9Page Size of Firm

10Page Size of Firm

11Page Size of Firm

12Page Area of Practice Differs from some businesses in that firms may practice in several areasDiffers from some businesses in that firms may practice in several areas Interactions are importantInteractions are important Determination of percentage for each grouping is important (Billings, # Hours)Determination of percentage for each grouping is important (Billings, # Hours) How to determine differences in pure premiums?How to determine differences in pure premiums?

13Page Area of Practice - Example

14Page Area of Practice - Example

15Page Area of Practice - Example

16Page Area of Practice - Example

17Page Area of Practice - Example

18Page Area of Practice - Example

19Page Area of Practice - Example

20Page Emerging Issue - Multi-Disciplinary Practices Brought about by: The desire to provide one-stop shopping to clientsThe desire to provide one-stop shopping to clients To eliminate communication problems between professionalsTo eliminate communication problems between professionals To leverage support structure and marketingTo leverage support structure and marketing

21Page Examples: Law Firm specializing in advising municipalities issuing tax-exempt bonds hires financial professionalsLaw Firm specializing in advising municipalities issuing tax-exempt bonds hires financial professionals Accounting Firm sets up subsidiary entities - a broker/dealer and an insurance agencyAccounting Firm sets up subsidiary entities - a broker/dealer and an insurance agency Accounting firm specializing in medicare billing hires NursesAccounting firm specializing in medicare billing hires Nurses

22Page Examples: Law firm specializing in environmental issues hires EngineersLaw firm specializing in environmental issues hires Engineers Accounting firm that specializes in Business Brokerage has CPAs obtain Real Estate Agents licenseAccounting firm that specializes in Business Brokerage has CPAs obtain Real Estate Agents license Multi-disciplinary Practices (MDPs)Multi-disciplinary Practices (MDPs) Info-tech Consulting firms providing Webhosting servicesInfo-tech Consulting firms providing Webhosting services

23Page What does the product look like? What Policy form is being used?What Policy form is being used? –Limits / Deductibles –Conflict of Interest issues –If endorsed, what is primary? How will the policy be underwritten?How will the policy be underwritten? Is stacking of limits possible?Is stacking of limits possible?

24Page Pricing Implications Different rating basesDifferent rating bases –per revenue $ or commission receipt $ –per professional –per transaction Different loss distributions - what ILFs to use?Different loss distributions - what ILFs to use?

25Page Pricing Implications Simple approach:Simple approach: –1 Attorney and 1 Accountant set up shop together –Billings from Accounting practice brings rate to $1,500 –Rate for attorney: $1,800 –Total Price: $3,300

26Page Pricing Implications Complications:Complications: –Reduction in risk due to experts working together –Increase in exposure due to inability to use comparative negligence by other professionals as a defense –How will predecessor firm coverage be handled? –What if the attorney is also a CPA? (What standard of care applies?)