Casualty Actuaries in Reinsurance
Observations on Medical Malpractice
James D. Hurley, ACAS, MAAA
May 20, 2008
This document is incomplete without the accompanying discussion; it is confidential
and intended solely for the information and benefit of the immediate recipient hereof.
© 2008 Towers Perrin
Observations on Medical Malpractice
 Financial results
 Reinsurance issues
 What’s different . . . or not?
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Observations on Medical Malpractice
 Financial results impacted by . . .
 1990’s
— modest loss trends
— favorable reserve development
— relatively high investment returns
— expansion
— slippage in pricing
 2000’s
— loss trends pick up
— unfavorable reserve development
— investment returns turn
— rates adjusted
Continued . . .
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Observations on Medical Malpractice (cont.)
 2003  2006
— rates/prices tight
— tort reform
— loss trends
— investment returns stabilize
 2007  20??
— rates reduced
— tort reforms “+“
— loss trends
— investment returns “return” (some)
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Observations on Medical Malpractice
180%
160%
140%
120%
100%
80%
60%
40%
20%
Combined
Source: A.M. Best’s Aggregates and Averages
© 2008 Towers Perrin
Investment Gain
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
0%
Operating
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Observations on Medical Malpractice
Medical Malpractice - Occurrence
Direct
3,000,000
180.0
160.0
140.0
2,000,000
120.0
100.0
1,500,000
80.0
1,000,000
Loss Ratio
Premium Earned (thousands)
2,500,000
60.0
40.0
500,000
20.0
0
0.0
1998
1999
2000
2001
2002
Premiums Earned
2003
2004
2005
2006
2007
Loss Ratio
Source: Compilation of Best Data
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Observations on Medical Malpractice
1,000,000
250.0
800,000
200.0
600,000
150.0
400,000
100.0
200,000
50.0
0
Loss Ratio
Premium Earned (thousands)
Medical Malpractice - Occurrence
Ceded
0.0
1998
1999
2000
2001
2002
Premiums Earned
2003
2004
2005
2006
2007
Loss Ratio
Source: Compilation of Best Data
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Observations on Medical Malpractice
Medical Malpractice - Occurrence
Net
2,000,000
180.0
140.0
1,500,000
120.0
100.0
1,000,000
80.0
Loss Ratio
Premium Earned (thousands)
160.0
60.0
500,000
40.0
20.0
0
0.0
1998
1999
2000
2001
2002
Premiums Earned
2003
2004
2005
2006
2007
Loss Ratio
Source: Compilation of Best Data
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Observations on Medical Malpractice
Medical Malpractice - Occurrence
Loss Ratios
250.0
200.0
150.0
100.0
50.0
0.0
1998
1999
2000
2001
2002
Direct
2003
Ceded
2004
2005
2006
2007
Net
Source: Compilation of Best Data
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Observations on Medical Malpractice
Medical Malpractice - Claims-Made
Direct
10,000,000
160.0
140.0
120.0
100.0
6,000,000
80.0
4,000,000
60.0
Loss Ratio
Premium Earned (thousands)
8,000,000
40.0
2,000,000
20.0
0
0.0
1998
1999
2000
2001
2002
Premiums Earned
2003
2004
2005
2006
2007
Loss Ratio
Source: Compilation of Best Data
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Observations on Medical Malpractice
Medical Malpractice - Claims-Made
Ceded
3,500,000
180.0
160.0
140.0
2,500,000
120.0
2,000,000
100.0
1,500,000
80.0
Loss Ratio
Premium Earned (thousands)
3,000,000
60.0
1,000,000
40.0
500,000
20.0
0
0.0
1998
1999
2000
2001
2002
Premiums Earned
2003
2004
2005
2006
2007
Loss Ratio
Source: Compilation of Best Data
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Observations on Medical Malpractice
7,000,000
140.0
6,000,000
120.0
5,000,000
100.0
4,000,000
80.0
3,000,000
60.0
2,000,000
40.0
1,000,000
20.0
0
Loss Ratio
Premium Earned (thousands)
Medical Malpractice - Claims-Made
Net
0.0
1998
1999
2000
2001
2002
Premiums Earned
2003
2004
2005
2006
2007
Loss Ratio
Source: Compilation of Best Data
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Observations on Medical Malpractice
Medical Malpractice - Claims-Made
Loss Ratios
180.0
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
1998
1999
2000
2001
2002
Direct
2003
2004
Ceded
Net
2005
2006
2007
Source: Compilation of Best Data
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Observations on Medical Malpractice
14,000,000
160.0
12,000,000
140.0
120.0
10,000,000
100.0
8,000,000
80.0
6,000,000
60.0
4,000,000
Loss Ratio
Premium Earned (thousands)
Medical Malpractice - Occurrence and Claims-Made
Direct
40.0
2,000,000
20.0
0
0.0
1998
1999
2000
2001
2002
Premiums Earned
2003
2004
2005
2006
2007
Loss Ratio
Source: Compilation of Best Data
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Observations on Medical Malpractice
4,500,000
200.0
4,000,000
180.0
160.0
3,500,000
140.0
3,000,000
120.0
2,500,000
100.0
2,000,000
80.0
1,500,000
Loss Ratio
Premium Earned (thousands)
Medical Malpractice - Occurrence and Claims-Made
Ceded
60.0
1,000,000
40.0
500,000
20.0
0
0.0
1998
1999
2000
2001
2002
Premiums Earned
2003
2004
2005
2006
2007
Loss Ratio
Source: Compilation of Best Data
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Observations on Medical Malpractice
Medical Malpractice - Occurrence and Claims-Made
Net
9,000,000
140.0
120.0
7,000,000
6,000,000
100.0
5,000,000
80.0
4,000,000
60.0
Loss Ratio
Premium Earned (thousands)
8,000,000
3,000,000
40.0
2,000,000
20.0
1,000,000
0
0.0
1998
1999
2000
2001
2002
Premiums Earned
2003
2004
2005
2006
2007
Loss Ratio
Source: Compilation of Best Data
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Observations on Medical Malpractice
Medical Malpractice - Occurrence and Claims-Made
Loss Ratios
200.0
180.0
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
1998
1999
2000
2001
2002
Direct
2003
2004
Ceded
Net
2005
2006
2007
Source: Compilation of Best Data
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Observations on Medical Malpractice
 Reinsurance Issues
 Reinsurance attestation
— risk transfer
— NAIC survey
 Proposed rule – New Jersey
— reporting requirements
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Observations on Medical Malpractice
 Market needs  some divergence
— start-ups
– capacity
– avoid early “knock-out”
— mature companies
– clash
– ECO/EPL
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Observations on Medical Malpractice
 What’s different . . . or not?
 rules
 rates
 results
 capacity
 other?
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What’s different . . . or not?  “Rules”
 Florida  proposed SB 1660
 consumer protection laws apply to insurance
 more rigorous requirements on experience rating
individual physicians and schedule rating generally
 ALAE/DCC shall be part of insurer’s “rate base” only
to extent they do not exceed “. . . the national
average for such expenses, as determined by the
office, for the prior calendar year . . .”
 Requires (apparently) a Florida income statement
 policies effective on/after October 1, 2007, rates
shall be 25% less than rates at October 1, 2004
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What’s different . . . or not?  “Rules”
 Florida  proposed SB 1660 (cont.)
 insurer/self-insurer or RRG filing a proposed rate
change
— must give notice to public
— any insured can request a hearing within 30 days
(any consumer may participate)
— public counsel has standing to request hearing
— med mal rates cannot be based on experience
for 2003 and prior
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What’s different . . . or not?  “Rules”
 Colorado  SB 164 (proposed 2008)
 “guts” the non-economic cap
 “. . . no rate shall be held to be inadequate unless
surplus falls below . . .” company action level RBC
 Similar RBC related proposals in Rhode Island, D.C.
 Other states debating/changing “rules”
 California (all lines)
 Ohio – file annually
 Missouri – recent legislation requires new “rules”
 Illinois – fully documented filings
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What’s different . . . or not?  “Rates”
Percentage
Changes2004
in Survey2005
by Range*
Range of Rate2003
2006
> +100%
2007
1.2%
2.2%
0.0%
0.0%
0.6%
+70.0 to +99.9%
1.1
4.1
0.6
0.0
0.6
+50.0 to +69.9%
3.7
3.7
0.7
0.0
0.4
+25.0 to +49.9%
26.8
14.8
6.5
2.3
0.5
+10.0 to +24.9%
31.4
34.9
28.5
5.6
5.9
+0.1 to +9.9%
13.1
22.5
29.3
22.6
8.2
0.0%
20.3
13.2
24.0
46.6
53.1
-9.9 to -0.1%
2.3
4.7
8.4
15.1
21.0
-19.9 to -10.0%
0.0
0.0
2.1
5.1
6.5
-29.9 to -20.0
0.0
0.0
0.0
1.3
2.3
<-30.0%
0.0
0.0
0.0
1.4
0.9
*October 2007 Medical Liability Monitor
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What’s different . . . or not?  “Rates”
 Comments on the survey
 “repositioning” changes?
 number of rate increases down by 50%
 50% show “no change”; 30% reflect decreases
 opportunity to get class/territory right
 manual changes; not collected
— tracking and balanced?
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What’s different . . . or not?  “Results”
Financial Ratios to Net Premiums Earned
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Loss & LAE
93%
92%
98%
111%
126%
105%
93%
82%
71%
61%
Underwriting Expense
22%
22%
22%
22%
18%
18%
17%
16%
17%
18%
Combined Underwriting
115%
114%
120%
133%
143%
122%
109%
98%
88%
78%
Policy Holder Dividends
6%
6%
5%
3%
2%
0%
0%
1%
2%
6%
120%
119%
125%
136%
145%
123%
110%
99%
90%
84%
48%
36%
34%
31%
17%
26%
22%
17%
27%
24%
5%
2%
2%
0%
-3%
0%
2%
4%
8%
10%
16%
12%
6%
-7%
-12%
-1%
7%
12%
28%
27%
Adjusted Combined
Net Investment Income
FIT
Net Income
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What’s different . . . or not?  “Capacity”
Direct Premium Written to Surplus
Ratio of Direct Premium Written to Surplus
1.30
1.26
1.20
1.21
1.16
1.10
1.00
1.04
0.90
0.89
0.87
0.80
0.70
0.60
0.72
0.67
0.61
0.59
1998
1999
0.50
0.40
0.30
0.20
0.10
0.00
2000
2001
2002
2003
2004
2005
2006
2007
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What’s different . . . or not?  “Capacity”
Net Premium Written to Surplus
1.00
Ratio of Net Premium Written to Surplus
0.90
0.90
0.90
0.91
0.86
0.80
0.73
0.70
0.73
0.60
0.58
0.57
0.50
0.52
0.48
0.40
0.30
0.20
0.10
0.00
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
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What’s different . . . or not?  “Capacity”
Net Loss and LAE Reserve to Surplus
2.50
Ratio of Net Loss and LAE Reserve to Surplus
2.45
2.44
2.32
2.21
2.00
2.03
1.96
1.78
1.76
1.68
1.67
1.50
1.00
0.50
0.00
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
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What’s different . . . or not?  “Other”
 Market composition
 reduced “commercial” presence
 specialty companies
— non-physician directed
— physician directed
 Investment income
 volatile stock market
 interest rates
 impact of leverage
 Start-ups
 how do they play?
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