The Medical Professional Marketplace and The Buyer’s Response to It Jack Jensen HealthCare Practice Leader Casualty Actuarial Society Boston, MA November 11, 2002

Table of Contents I. Scary Movie Slides II. Buyer’s Response Slides

Source: A.M. Best’s Medical Malpractice All Lines Medical Malpractice Combined Ratio Continues to Climb

Data Source: A.M. Best Company Combined Ratios by Coverage Line

Source: Conning & Company (400) (600) (800) (200) Estimated Medical Malpractice Reserve Position All Years Total: $(1.7) billion

Source: Jury Verdict Research Medical Malpractice Claim Severity is Increasing $1,000,000 $500,000

Source: Jury Verdict Research & West Law Sample Large Awards $27,570,327 $23,530,746 $19,275,466 $18,924,000 $15,700,000 $15,317,000 $15,000,000 $14,460,000 $12,381,670 $11,500,000 $10,800,000 $10,600, Queens County, NY Boone County, KY Queens County, NY Dade County, FL LA County, CA Oakland County, MI Philadelphia County, PA Cuyahoga County, OH US District, HI Kings County, NY Cook County, IL Medical Malpractice Severity is Increasing

Source: Jury Verdict Research Sample Large Awards: $269,000,000 $108,000,000 $100,000,000 $75,000,000 $60,686,150 $55,439,270 $49,594,684 $41,444,531 $32,676,410 $31,100,000 $30,000,000 $23,500, Dallas County, TX Bronx County, NY Philadelphia County, PA Nassau County, NY Los Angeles County, CA Cook County, IL Philadelphia County, PA Kings County, NY TX Escambia County, FL New Haven, CT Cuyahoga County, OH Medical Malpractice Severity is Increasing

Medical Malpractice Premiums “In Play” St. Paul$ 534 million PHICO 135 Frontier 59 Travelers 28 MIIX 185 SCPIE 151 TIG 100 $1.192 billion of premiums in need of a new home

Institutional Provider Markets United StatesBermudaEuropean AIGAWACSwissRe AceEnduranceHannoverRe ArchXLLondon Market BerkleyStarr ChubbAce CNA ERC One Beacon Zurich Axis Green - CAT Excess Only Red - New Markets

Response of Medical Malpractice Insurers Underwriting discipline is now the focus Withdrawal of capacity Reduction in offered capacity Continued pricing increases INCREASED DEPENDENCY ON ACTUARIAL REVIEWS Increased self-insured retentions Limitations in coverage

Buyer’s Response (Institutional) Dramatically Increased Risk Retained Formalization of Risk Retention Vehicles · Trusts · Captives (est. 24 new Marsh HC captives in 2002) · RRG’s and Pooling Vehicles Focus on Carrier Credit Quality Channeled Physician Programs (See Physician Response)

Increased Risk Retention (Institutional) 1. Disappearance of primary risk transfer coverage in some venues 2. Much higher primary per claim retentions. 3. Loss of aggregate stop loss protection. 4. If aggregate stop survives then imposition of surviving retentions (aka maintenance deductible). 5. Inner Aggregate Deductible on first layer excess policies. 6. Retro Rating (swing plans) on first excess coverage. 7. Quota Share Excess participation by insured or its captive. Challenge: How to fit the client’s consulting actuary’s loss projection model into these more complex retention schemes

Managed Care Organizations Primary E&O Markets Here Chubb AIG BCS (limited) Gone TIG CNA Steadfast St. Paul Farmers Some PIAA’s

Managed Care E&O Average Per Enrollee Per Year (PEPY) $0.00 $1.00 $2.00 $3.00 By No. of Enrollees Cost PEPY $0.93$0.43$0.35$ $1.52$0.49$0.68$ $1.71$2.04$1.60$ , ,001-1,000,001-5,000,001

Managed Care E&O

Actuarial Challenge for MCO’s Akin to Mid 70’s on Provider Side Retained Risk has gone from small to humongous Historical claims data resides with carriers (or if with insureds, often not in a data base) How to make a loss pick even if perfect historical data exists if: · “class action” threats generate a sea change in liability dynamics · ERISA protections are eroding · Industry itself is changing its approach to utilization controls

Medical Malpractice – Physician Markets

Physician Response I. Looking to Government: JUA’s or Similar (NH, RI, WV, SC, MS) II. Looking to Hospitals: Hospital Sponsored PIAA Programs (drying up) Hospital Deductible Payment Programs On-Call Hospital Risk Assumption Hospital Owned Captive Channeling Hospital Investment in RRG arrangements III. Looking to Managed Care Organizations: Neither physicians nor MCOs appear to be motivated to move forward in the channeled med-mal arena IV. Looking to Physician Specialty Organizations: RRG’s and similar poolings

Territory 1 1A 2 3 4