1. Concurrent Session: Medical Malpractice 2002 CAS Seminar on Reinsurance June 3 Peter Schultheiss, FCAS Zurich NA

2. 2 Actuarial Quiz - Part 2B $325 million represents which of the following: A: April’s Powerball prize - nominal value B: The largest 2001 Medical Professional jury verdict C: The 1990 GDP of Guyana Select the correct answer: 1 - A only 2 - B only 3 - C only 4 - A and B only 5 - A, B and C

3. 3 Trends in Medical Professional Liability Long Term Care - Customers out of focus Physicians and Surgeons: - Means vs. medians and defense expense - Credible class shifts Hospital Professional: - Deep pockets - some examples - Severity, frequency, success rates and time to settlement- Increased limit factor considerations plus state/account variation What the future holds?

4. 4 Long Term Care Customers Out of Focus On 1/28/2000 the CEO of IHS finished a project The deal closed that day had nothing to do with IHS or its patients The CEO purchased a $1 million dollar painting, carried as an asset on the company books Within a week, the company filed for Chapter 11 protection Wall Street Journal - 5/24/02

5. 5 LTC - Customers Out of Focus Pre through early 1990’s Industry characterized by small to medium firms with few locations operating on local to regional basis Non-profits predominate

6. 6 LTC - Customers Out of Focus Early to mid 1990’s Aging of population seen as business growth opportunity Financially oriented management companies form large regional to national chains acquiring smaller firms Highly leveraged acquisition and growth Attractive operating margins from medicare/medicaid reimbursement Loose enforcement of billing regulations and hospital care overlap

7. 7 LTC - Customers Out of Focus Mid 1990’s - 2000 Balanced budget acts - severe reduction in medicare/medicaid reimbursement Unattractive margins reverse leverage impacts Reduced cash flow Cost cutting and high employment adversely impact labor pool quality Patient’s rights - adverse development of tort climate Aging of jury pool with the public personally affected Try the facility - punitive damages

8. 8 LTC - Customers Out of Focus Loss Cost Trend = 24.5% Source: AON Risk Consultants - 2/28/02

9. 9 LTC - Customers Out of Focus Trend Components Loss cost trend of 24.5% : 90% confidence of 7.3% Loss cost trend of 21.5% based on 1996 - 2001 90% confidence of 3.3% Frequency trend of 9.6% Severity trend of 13.5%

10. 10 LTC - Customers Out of Focus States in the Forefront Leaders - Texas and Florida Southeast including Alabama, Mississippi, Georgia and Arkansas Other states are not far behind including California

11. 11 Physicians and Surgeons Current Trends Physicians limits cap awards - not viewed as deep pockets relative to institutions Limits remain low with more than 55% purchasing $1 million of coverage Long term trend is 6.4%, but 9.2% since 1995 A survey of recent rate filings indicated 2% to 5% is being used Median trends are outpacing mean trends Changes are not equal by class: -watch the gatekeepers -some favorable trends in special situations

12. 12 Physicians and Surgeons Severity Trend Source: PIAA

13. 13 Physicians and Surgeons Means vs. Medians Source: PIAA

14. 14 Physicians and Surgeons Credible Class Shifts

15. 15 Hospital Professional Current Trends Hospitals are viewed as having very deep pockets Impacted by medicare/medicaid cutbacks and HMO’s with some similarities to long term care Severity trend is +13.6% since 1993 and + 14.9% since 1995 based on Jury Verdict Data Our data indicates total limits trend to be 4 to 5 points less Frequency flat, however, plaintiff success rates are up 2% a year Speed to trial initiatives have reduced large case settlement time by 12 months on average Jury awards are roughly twice the final demand on average

16. 16 Hospital Professional Current Trends - continued Plaintiff lawyers receive 30% to 40% in contingent fees. Overall defense is 18.5% of indemnity and 9.5% of indemnity when the settlement is greater than $1 million 11% of verdicts against hospitals are greater than $10 million Large awards can occur anywhere - need to recognize frequency of large cases by territory Lower average severity territories imply higher coefficients of variation than higher average severity territories 25% of brain injury verdicts are greater than $12 million 25% of childbirth verdicts are greater than $7.5 million Mixed results of Patient Compensation Funds

17. 17 Hospital Professional Deep Pockets

18. 18 Medical Professional Liability Jury Verdict Data - Mean vs. Median Trends Source: Jury Verdict Research

19. 19 Medical Professional Liability Jury Verdict Data - Time to Trial Source: Jury Verdict Research

20. 20 Hospital Professional Account Variation

21. 21 Hospital Professional Limited Expected Values and CV’s

22. 22 Hospital Professional Patient Compensation Funds Indiana - Voluntary Kansas - Mandatory Louisiana - Voluntary Nebraska - Voluntary New Mexico - Voluntary Pennsylvania - Mandatory South Carolina - Voluntary Wisconsin - Mandatory

23. 23 What the future holds? The Bad Company failures will continue until pricing practices are corrected Nebraska cap was struck down California cap is bypassed in certain situations LTC litigation spreading to other states Precedent setting cases and jury outrage makes it hard to control costs HMO’s are vulnerable

24. 24 What the future holds? The Good Rate increases are accelerating in 2002 Congress approved during 2000 - 2001 $5 billion in Medicare spending for nursing home patients Some abatement seen in 2000 - 2001 large loss growth rate arena The situation is now viewed as a crisis in a number of jurisdictions Tort reform introduction implemented in Pennsylvania Federal reform is under consideration

25. 25 Trends in Medical Professional Liability Long Term Care - Customers out of focus Physicians and Surgeons: - Means vs. medians and defense expense - Credible class shifts Hospital Professional: - Deep pockets - some examples - Severity, frequency, success rates and time to settlement- Increased limit factor considerations plus state/account variation What the future holds?