1. Casualty Loss Reserve Seminar Current Issues and Trends in Medical Malpractice This document is incomplete without the accompanying discussion; it is confidential and intended solely for the information and benefit of the immediate recipient hereof. Edward Wrobel Gail Tverberg September 12, 2006

2. 2 Overview Observations on financial results – Edward Wrobel Malpractice tort reforms and their impact on loss data – Gail Tverberg Significant risk and uncertainty in medical malpractice loss reserving – Bill Burns Observations and trends – Edward Wrobel Closing/questions

3. Observations on Financial Results Edward Wrobel

4. 4 Observations on Financial Results Source: A.M. Best’s Aggregates and Averages

5. 5 Observations on Financial Results Source: A.M. Best’s Aggregates and Averages

6. 6 Observations on Financial Results Source: A.M. Best’s Aggregates and Averages

7. 7 Observations on Financial Results Source: A.M. Best’s Aggregates and Averages

8. 8 Observations on Financial Results Source: A.M. Best’s Aggregates and Averages

9. 9 Observations on Financial Results Source: A.M. Best’s Aggregates and Averages

10. 10 Observations on Financial Results Source: A.M. Best’s Aggregates and Averages

11. 11 Net Loss & DCC Schedule P - Part 2 Occurrence and Claims Made Ultimate Loss at Different Valuation Points Source: A.M. Best

12. 12 Financial results impacted by... 1990s —modest loss trends —favorable reserve development —relatively high investment returns —expansion —slippage in pricing 2000s —loss trends pick up —unfavorable reserve development —investment returns decline —rates adjusted Observations on Financial Results

13. Malpractice Tort Reforms and Their Impact on Loss Data Gail E. Tverberg

14. 14 Overview State Reforms by Year Federal Reforms Impacts of Tort Reforms on Loss Data Industry Calendar Year Data

15. 15 State Reforms by Year - 2003 Tort reforms in several large states Florida: $500K physician / $750K hospital non-economic damage (NED) cap Idaho: $250K NED cap Ohio: Variable NED cap to $1M; collateral source offset Oklahoma: $300K NED cap for obstetrics Texas: $250K NED cap; mandatory periodic payments; joint and several liability changes West Virginia: $250K - $500K NED cap

16. 16 State Reforms by Year - 2004 Tort reforms in several smaller states, and enhancements to previous reforms in larger states Florida: Cap on attorney fees Massachusetts: Reduction in pre-judgment interest Mississippi: $500K NED cap Nevada: Enhancements to $350K NED cap; attorney fee cap; periodic payments Ohio: Reduction in pre-judgment interest; NED cap lowered to $250K - $500K Oklahoma: $350K NED cap enhancements; changes to joint and several liability

17. 17 State Reforms by Year - 2005 More tort reforms – not as significant as in 2003 Alaska: $250K - $400K NED cap Connecticut: Weak package, including small reduction in prejudgment interest Georgia: $350K NED cap; joint and several liability changes; venue changes Illinois: $500K physician, $1M hospital NED cap Missouri: $350K NED cap; joint and several liability changes; collateral source; venue South Carolina: $350K NED cap; joint and several liability changes Many states: Evidence of apology not admissible in court

18. 18 State Reforms by Year – 2005 (cont’d.) Other 2005 changes New Jersey: Mandatory offer of $5,000 deductible; premium subsidy; reporting requirements Pennsylvania: Joint and several liability reforms overturned Wisconsin: $350K NED cap overturned

19. 19 State Reforms by Year - 2006 Very few reforms in 2006 Florida: Joint and Several Liability Reform Wisconsin: $750K NED cap (to replace $350K cap struck down in 2005)

20. 20 Federal Tort Reform Federal NED cap legislation introduced each year 2006 legislation patterned after Texas legislation Filibuster threatened Failed to get 60 votes needed to invoke cloture

21. 21 Impact of Tort Reforms on Loss Data Legislation states when a given reform is effective Injuries after xx/xx/xxxx Accident year basis Often used on non-economic damage caps or changes in statute of limitations Suits filed after xx/xx/xxxx Similar to report year basis For example, may be used on change in prejudgment interest rate, or change in periodic payment requirement

22. 22 Impact of Tort Reforms on Loss Data (cont’d.) Claims paid after xx/xx/xxxx Rarely see this for true tort reforms – more often, for other changes Example – collect closed claim data after given date; new disciplinary procedures for physicians after a given date Legislation is generally a package of reforms Different parts may have different reform effective dates

23. 23 Impact of Tort Reforms on Loss Data (cont’d.) Actual impact on loss data seems to differ from theoretical Indirect impacts as well as direct Typical impacts Large jump in claims reported and claims paid —Occurs shortly after legislation is passed, before it becomes effective —Purpose: avoid the new law Drop in claims reported after effective date —Empty pipeline —Wait to see how new legislation will work out May bounce back

24. 24 Impact of Tort Reforms on Loss Data (cont’d.) True reforms Will have a long-term effect May reduce annual trend rate May need to be tested in court to be fully effective Indirect impact on jurors May result from hearing about need for legislation Thus, possible to have some effect in states without reforms

25. 25 Change in National Practitioner Databank Payments States with 2003 Tort Reforms Compared to Other States (in millions) Average Annual Payments 2000 to 20032004 to 2005% Change States with Reforms Florida $317.2$264.3-17% Idaho 6.8 8.4 23% Ohio 180.9 132.3-27% Oklahoma 34.3 40.3 17% Texas 245.7 219.1-11% West Virginia 38.8 18.3-53% Subtotal $823.8$682.7-17% US Total $4,188.2 $4,164.1 -1% US Total ex 2003 Reform States $3,364.3 $3,481.4 3%

26. 26 Florida – AM Best Page 14 Data ($ millions)

27. 27 Texas – AM Best Page 14 Data ($ millions)

28. Observations on Trends Edward Wrobel

29. 29 Frequency Generally flat to down Exposure base considerations? Severity Following surge in late 1990s/early 2000s, leveling off? Heavily influenced by jurisdiction Some tort-reform driven, some not Other factors? Impact on reserving Observations on Trends

30. 30 Medical Malpractice Source: 1990 St. Paul Filing +18% +31% +16% +15% +12%

31. 31 Medical Malpractice Source: 1990 St. Paul Filing +18% +31% +16% +15% +12% +3% +1% +7% +6%

32. 32 St. Paul-Hospitals Frequency

33. 33 St. Paul-Hospitals Severity

34. 34 St. Paul-Hospitals Pure Premium

35. Questions?