CAS Annual Meeting
EMERGING ISSUES IN MEDICAL MALPRACTICE
THE ROLE OF THE ACTUARY IN
ALTERNATIVE INSURANCE MARKETS
November 16, 2004
Richard B. Lord, FCAS MAAA
Milliman, Inc.

Risk Retention Group


Liability insurance company formed under the Risk Retention Act (RRA)
Company owned by it’s members
 RRA: Federal law passed in 1981 for products liability
 Liability Risk Retention Act
Amendments (LRRA) of 1986: broadened RRA for medical professional liability

Risk Retention Group
 Risk retention group (RRG) domiciled in a state
 Governed by Federal law
 Able to write business in any state
 Primary regulatory enforcement by state of domicile

Number of Risk Retention
Groups
180
160
140
120
100
80
60
40
20
0
1988 1991 1994 1997 2000 2003
Year
Source: Risk Retention Reporter

2,500
Annual RRG Premium
($Millions)
2,000
1,500
1,000
500
0
1988 1991 1994 1997 2000 2003
Year
Source: Risk Retention Reporter

25
20
15
10
5
0
45
40
35
30
Medical Malpractice Risk
Retention Groups by Type
Hospital
Nursing Home
Physician
Other
2003 2004
Year
Source: Risk Retention Reporter

Medical Malpractice RRG
2004 Premium ($Millions)
$206
19%
$41
4%
$90
8%
$725
69%
Hospital
Nursing Home
Physician
Other
Source: Risk Retention Reporter

Why Form a Risk Retention
Group (Advantages)
 Availability/Affordability
 Possible stability across insurance market cycles
 Niche market
 Selective underwriting
 Loss control/risk management

 Initial rate development
 Economic feasibility study
– Expected case
– 90 th percentile case
 Statement of opinion on loss reserves
 Ongoing rate evaluation

Risk Retention Group
Funding
 Initial capital contribution
 Rate development

 Expected Loss and LAE Pure premium
 Contribution to policyholder surplus
 Management fee
 Other expenses:
– Auditing
– Actuarial
– Federal income tax

Pure Premium Development
 Primary Data Sources:
– Entities being underwritten
 Secondary Data Sources:
–
–
Insurance carrier rates filed in state
Industry studies
– State insurance department data collection programs
– Other insureds in the state

Development of Pure Premium
 Primary Data Collection
– Claims Listing:

Occurrence Date

Report Date

Paid Loss

Loss Reserve

Defense Costs
– Exposure Counts

By Category

By Year

Feasibility Study
 Pro forma Income Statement
 Pro forma Balance Sheet
 Leverage Ratios
– Premium to Surplus
– Reserves to Surplus

Pro Forma Income Statement
Year 1 Year 2 Year 3 Year 4 Year 5
1. Net Premium
2. Expenses
3. PY Ultimate Loss and ALAE
4. Underwriting
Profit: (1)-(2)-(3)
5. Investment
Income
6. Federal Income
Tax
7. Net Profit After-
Tax: (4)-(5)-(6)

Pro Forma Balance Sheet
Assets
1. Cash and
Investments
Liabilities
2. Unpaid Loss and
ALAE
Capital & Surplus
3. Beginning of Year
Capital
4. Capital Paid in
5. Unassigned Surplus:
(1)-(2)-(3)-(4)
6. Total Capital &
Surplus: (3)+(4)+(5)
Year 1 Year 2 Year 3 Year 4 Year 5

Pro Forma Leverage Ratios
1. Net Premium
2. Capital
3. Premium to
Capital Ratio: (1)/(2)
4. Unpaid Loss and
ALAE
5. Reserve to
Capital Ratio: (4)/(2)
Year 1 Year 2 Year 3 Year 4 Year 5

 Statutory annual financial statement loss and ALAE reserve opinion
 Requirements vary by state

Risk Retention Group
Concerns
 Volume of premium vs. limits of losses
 Emerging phenomenon
 Insolvency rate vs. P/C insurer
 No guaranty fund coverage except perhaps for policyholders in state of domicile