1. IABA Annual Meeting The New Medical Malpractice Crisis: A Historical Perspective August 4, 2012 Arthur R. Randolph, II, FCAS, MAAA, CPCU, ARM, ARe Senior Consulting Actuary Experience the Pinnacle Difference! 1

2. Agenda  MPL Claim Characteristics  Evolution of the MPL Insurance Market  Financial Results  Claims-Made vs. Occurrence Coverage Form 2

3. MPL Claim Characteristics  Long-tailed coverage  Low frequency  High severity  Long reporting lags  Time between claim occurrence and claim reporting  Injury may not be discovered for years  Statute of limitations  Long settlement lags  Time between claim reporting and claim settlement  Claim complexity – appropriate case reserves  Significant discovery period  Physician reputational risk – duty to defend  Plaintiffs’ bar and “turtle” court systems 3

4. Evolution of the MPL Insurance Market  Late 1970s  Most private insurers exit the market  Availability crisis  Response: Emergence of physician-owned insurers (“bedpan” mutuals)  Capacity increases  Initial tort reforms enacted 4

5. Financial Results 5 *includes policyholder dividends Source: AM Best

6. Evolution of the MPL Insurance Market (cont.)  1980s  Significant rate increases (20%+) following prolonged soft market  Affordability crisis  Reduced reinsurance capacity  Second round of tort reforms  Second wave of “bedpans” enter market – price competition  Form changed from “occurrence” to “claims-made”  Mid to late decade trends  Declining inflation  Loss cost trends subside  Frequency declines 6

7. Financial Results (cont.) 7 *includes policyholder dividends Source: AM Best

8. Claims-Made vs. Occurrence Coverage Form  Advantages of claims-made  No “pure” IBNR – benefits ratemaking and reserving  Shorter projection horizon  Changes in underlying trends are not exacerbated  Disadvantages of claims-made  Pricing and reserving of purchased and “free” tail coverage (DD&R)  Reduced investment income 8

9. Evolution of the MPL Insurance Market (cont.)  1990s  Loss cost trends remain stable/low during early years  Favorable reserve development  Significant investment income  Market flooded by new entrants  Increased capacity  Downward pressure on pricing  Later part of the decade marked by rising claim trends and inadequate reserves 9

10. Financial Results (cont.) 10 *includes policyholder dividends Source: AM Best

11. Evolution of the MPL Insurance Market (cont.)  2000 – 2003  Loss cost trends pitch upward – primarily severity  Unfavorable reserve development  remain stable/low during early years  St. Paul exited the market – represented 50% of the market share in some states  Large rate increases  2004 – 2006  More appropriate matching of risk to premium  New wave of tort reforms – non-economic damage caps  Frequency plummets 11

12. Evolution of the MPL Insurance Market (cont.)  2007 – today  Reserve releases  Frequency flattens out  Severity still increasing  Darlings of the P&C industry  Return of substantive investment income  Premium volume decreasing  Rate reductions  Physician group acquisitions  Shifts from private practice to employment 12

13. Financial Results (cont.) 13 *includes policyholder dividends Source: AM Best

14. Financial Results (cont.) 14 Source: AM Best

15. Financial Results (cont.) 15 Source: AM Best

16. Financial Results (cont.) 16 Source: AM Best

17. Financial Results (cont.) 17 Source: AM Best

18. Financial Results (cont.) 18 Source: AM Best

19. Financial Results (cont.) 19 Source: AM Best

20. Financial Results (cont.) 20 Source: AM Best

21. Financial Results (cont.) 21 Source: AM Best

22. Questions / Comments Arthur R. Randolph, II, FCAS, MAAA, CPCU, ARM, ARe (770) 587-0351 arandolph@pinnacleactuaries.com Visit us at pinnacleactuaries.compinnacleactuaries.com Experience the Pinnacle Difference! 22 Editorial contributor: Kwame A. Davis, FCAS, MAAA Towers Watson