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

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

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

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

6. Source: Conning & Company 200 0 (400) (600) (800) (200) Estimated Medical Malpractice Reserve Position All Years Total: $(1.7) billion

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

8. 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 $10,600,000 1997 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

9. 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 $23,500,000 2000-2001 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

10. 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

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

12. 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

13. 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)

14. 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

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

16. Managed Care E&O Average Per Enrollee Per Year (PEPY) $0.00 $1.00 $2.00 $3.00 By No. of Enrollees Cost PEPY 200020012002 2000 $0.93$0.43$0.35$0.44 2001 $1.52$0.49$0.68$0.41 2002 $1.71$2.04$1.60$0.81 25,000-350,001-1,000,001-5,000,001

17. Managed Care E&O

18. 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

19. Medical Malpractice – Physician Markets

21. 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

22. Territory 1 1A 2 3 4