March 10, 2005 Gail E. Tverberg, FCAS, MAAA Pitfalls in Evaluating Proposed Tort Reforms CAS 2005 Ratemaking Seminar Session Call-2

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 2 Outline Introduction Frequently Used Reforms Ten Pitfalls Conclusion

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 3 Introduction Little in actuarial literature regarding tort reforms CAS Loss Reserve Seminar Sessions in 1987, 1989 —Gail Tverberg – Tort Reform Impact on Malpractice Reserves —Phil Miller – ISO Closed Claim Data Analysis 1998 CAS Paper by Allen Klein & Jason Israel – ISO —The Analysis of the Effect of Tort Reform Legislation on Expected Liability Insurance Losses Contingencies – November/December 2003 —Richard Biondi & Arthur Gurevitch – The Evidence Is In: Noneconomic Damage Caps Help Reduce Malpractice Insurance Premiums

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 4 Frequently Used Reforms Caps on non-economic loss Collateral source offsets Limitations on joint-and-several liability Punitive damage restrictions Periodic payments Frivolous suit penalties Limitations on attorneys’ fees Immunity statutes

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 5 Frequently Used Reforms (Continued) Legislation usually includes multiple provisions Evaluate entire package Changes in pre-judgment interest Establishment of pre-trial hearing panels Establishment of state-operated funds to handle certain claims Changes to the statute of limitation or statute of repose Mandatory mediation

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 6 Pitfall #1 Not Adequately Understanding the Proposed Reform Obtain copy of legislation —Read carefully —Compare to existing statutes Talk to someone familiar with practices in state —Existing statute may have been declared unconstitutional —Existing statute not enforced —Reasons for current legislation

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 7 Pitfall #2 Thinking Economic Loss Is a Uniquely Defined Amount Life expectancy of impaired lives Adjustment for inflation Adjustment for discounting Quality of care Wage loss of injured individuals not in the labor force Wage loss of caregivers

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 8 Pitfall #3 Expecting Too Much of Closed Claim Data Problem of 0s and blanks Quality of economic loss data that is provided Matching multiple claims

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 9 Florida Closed Claim Database–Excluding Multiples CountIndemnity ($Mil.) Econ Loss ($Mil.) Non-Econ ($Mil.) Econ + Non Econ. Total Average Indemnity Econ. Loss/ Indemnity Econ > 0, Non Econ > 01,255$343$440$271$711$273,192128% Econ > 0, Non Econ = $282,592185% Econ = 0, Non Econ > 01, $228,4830 Econ = 0, Non Econ = 01, $201,7170 Total4,6581, ,234$236,81155%

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 10 Pitfall #4 Misunderstanding the Phase-In Implications of the Reform Count awards after certain date —Affects open claims on past report years Suits filed after certain date —Similar to claims made coverage Claims arising from medical injuries after date —Accident year basis Impact of reform can change over time Up or down

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 11 Pitfall #5 Missing Indirect Impacts Impact on settlements likely different than awards If easier, quicker to file, likely more claims If changes in contingency fees, attorneys may be less willing to accept small claims State excess funds may handle claims differently than primary insurer

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 12 Pitfall #6 Expecting a State Fund to Behave Like a Private Insurance Company Funding may be pay-as-you-go Expenses, profit margins, FIT often lower May be more willing to settle Employees often less experienced

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 13 Pitfall #7 Missing Additional Expense Resulting from the Reform Pre-Trial Hearing Panels —Need to present case twice —Potential for delays Patient Compensation Funds —Additional layer of expenses Higher policy limits —May be indirect result of high ($2 Million) caps —Changes what is an appropriate settlement Features to make program balanced —Example: Requiring pre-notification of insureds about rate increase; having rate hearings; and prior approval

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 14 Pitfall #8 Forgetting the Difference between Anticipated Indemnity Savings and Expected Change to Current Rates Legislators don’t think like actuaries —Indemnity savings means rate decrease Need to consider adequacy of current rates Also components of rates other than indemnity

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 15 Pitfall #9 Failing to Consider Differing Impacts by Policy Limit and by Direct Insurer vs. Reinsurer Policy limits of hospitals ($20 million +) generally much higher than individual physicians ($1 or $2 million) Size of losses varies also Legislators often mandate uniform rate adjustments for caps —Not equitable Reinsurer often provides excess of loss coverage —Rate rollbacks do not affect reinsurer —Reinsurer gets greatest benefit of cap

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 16 Pitfall #10 Special Considerations for One Line / One State Insurers and Self-Insurers How optimistic should one line/one state insurer be in estimating reform benefit? If overcharge, can give excess back as dividends If undercharge, may be financially impaired Companies generally provider-owned —If excess premiums are collected, funds remain in provider- owned company —One goal of company is to provide a market Given these considerations, insurers are often cautious in recognizing savings from reforms Competition a consideration also – encourages recognition of reform benefit

S:\People\tverbeg\Presentations\2005 Ratemaking Seminar 17 Conclusion Need to evaluate any proposed reform carefully Be aware of 10 pitfalls Be careful to explain difference between savings from proposed reforms and indicated reduction to current rate level Pitfalls discussed relate only to actuarial issues Other types of studies also have pitfalls Example – estimating number of iatrogenic injuries caused by negligence Area for further analysis