Current Issues In Medical Malpractice Insurance Carolyn L. Greene - Willis Re Inc. John H. Mize - Tillinghast April 2002 This document was designed for discussion purposes only and is not intended to present detailed information on our analysis and findings. It is incomplete, and not intended to be used, without the accompanying oral presentation and discussion. S:\People\Mizej\Presentations\CAS Mtg 04152002.ppt Current Issues in Medical Malpractice Insurance Overview Financial Results Underlying Trends Primary Marketplace Reinsurance Marketplace Input on Renewals Opportunities for Actuaries 2 Financial Results 3 Current Issues in Medical Malpractice Insurance M edical M alpract ice Rat ios - Cal. Y r. 200% 150% 100% 50% 2 0 98 1 9 96 1 1 9 94 9 92 1 9 90 1 9 88 1 9 86 1 9 84 1 9 82 1 9 80 1 9 78 1 9 76 9 1 00 0% Loss & LA E Source: Best’s Aggregates and Averages 4 Current Issues in Medical Malpractice Insurance M edical M alpract ice Rat ios - Cal. Y r. Loss & LA E 00 2 0 98 1 9 96 1 9 94 1 9 92 1 9 90 1 9 88 1 9 86 1 9 84 1 9 82 1 9 80 1 9 78 9 1 1 9 76 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% U /W Expense Source: Best’s Aggregates and Averages 5 Current Issues in Medical Malpractice Insurance M edical M alpract ice Rat ios - Cal. Y r. U /W Expense 2 0 98 1 9 96 1 9 94 1 9 92 1 9 90 1 9 88 1 9 86 1 9 84 1 9 82 1 9 80 1 9 78 1 9 76 9 1 Loss & LA E 00 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% D ividend Source: Best’s Aggregates and Averages 6 Current Issues in Medical Malpractice Insurance M edical M alpract ice Rat ios - Cal. Y r. U /W Expense D ividend 2 0 98 1 9 96 1 9 94 1 9 92 1 9 90 1 9 88 1 9 86 1 9 84 1 9 82 1 9 80 1 9 78 1 9 76 9 1 Loss & LA E 00 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Com bined Source: Best’s Aggregates and Averages 7 Current Issues in Medical Malpractice Insurance M edical M alpract ice Rat ios - Cal. Y r. 00 2 0 98 1 9 96 1 9 94 1 9 92 1 9 90 1 9 88 1 9 86 1 9 84 1 9 82 1 9 80 1 9 78 9 1 1 9 76 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Com bined Source: Best’s Aggregates and Averages 8 Current Issues in Medical Malpractice Insurance M edical M alpract ice Rat ios - Cal. Y r. Com bined 00 2 0 98 1 9 96 1 9 94 1 9 92 1 9 90 1 9 88 1 9 86 1 9 84 1 9 82 1 9 80 1 9 78 9 1 1 9 76 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Invest m ent Gain Source: Best’s Aggregates and Averages 9 Current Issues in Medical Malpractice Insurance M edical M alpract ice Rat ios - Cal. Y r. Com bined Invest m ent Gain 00 2 0 98 1 9 96 1 9 94 1 9 92 1 9 90 1 9 88 1 9 86 1 9 84 1 9 82 1 9 80 1 9 78 9 1 1 9 76 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Oper at ing Source: Best’s Aggregates and Averages 10 Underlying Trends 11 Current Issues in Medical Malpractice Insurance One Year Loss Reserve Development to Premium 6.2% 10% 0% -10% -7.5% -20% -30% -40% -26.3% -33.7% -50% 1997 1998 1999 2000 Calendar Year 12 Current Issues in Medical Malpractice Insurance U.S. Median Medical Liability Awards and Settlements $ in Thousands 800 700 600 Settlements Awards 500 400 300 200 1993 1994 1995 1996 1997 1998 1999 Source: Jury Verdict Research 13 Current Issues in Medical Malpractice Insurance Claim Frequency per 100 Physicians 20.00 18.00 16.00 14.00 15.2 14.2 13.8 13.4 16.5 16.0 14.3 15.1 15.5 15.6 12.00 10.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: St. Paul Physicians & Surgeons 2000 Year-End Update 14 Current Issues in Medical Malpractice Insurance Observations: Trends Frequency relatively flat - but more concentrated mix? $1 million limits severity trend: 5% to 8% Higher trends for long-term care Greater frequency of shock losses 15 Primary Marketplace 16 Current Issues in Medical Malpractice Insurance Market Drivers Poor financial performance Physicians - price competition/use of reserve redundancies Hospitals - pricing discipline/aggregate maintenance Investment yields Loss of capacity St. Paul leaves marketplace PHICO, Frontier, PIE, etc. - Gone MIIX financial troubles More to come? 17 St. Paul – Major Markets State Share SC AR NE SD ND NV IA MN WV LA DC DE NC KS GA 50.4% 50.0% 47.4% 42.2% 39.9% 39.5% 32.9% 38.8% 30.7% 27.0% 26.7% 26.4% 24.6% 22.9% 20.8% Average 34.7% Position 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 Source: CCS 18 Current Issues in Medical Malpractice Insurance Market Drivers Poor financial performance Physicians - price competition/use of reserve redundancies Hospitals - pricing discipline/aggregate maintenance Investment yields Loss of capacity St. Paul leaves marketplace PHICO, Frontier, PIE, etc. - Gone MIIX financial troubles More to come? 19 Current Issues in Medical Malpractice Insurance Current Status of Medical Malpractice Market - Primary Physicians Premiums almost uniformly on the up-swing Driven by losses, investment income, elimination of balance sheet conservatism, and reinsurance costs 15% or larger increases in filed rates common Reduction in discounts - material but tough to quantify Issue is affordability more than availability Hospitals At last - excess insurers listen to actuaries! Focus on specific and aggregate attachments Large premium increases combined with retention increases 20 Current Issues in Medical Malpractice Insurance Current Status of Medical Malpractice Market - Primary Long term care General deterioration in loss experience - with a few very bad jurisdictions Historically large rating credits Heavy underwriting, large premium increases and new/higher retentions For-profit vs. Not-for-profit Some opportunistic pricing? Flight to alternative markets 21 Reinsurance Market 22 Current Issues in Medical Malpractice Insurance General Reinsurance Overall Results no better than primary market Top twenty reinsurers, 2000 combined ratio 114.2% versus 113.8% for 1999 U.S. reinsurers reported a 141.6% combined ratio for 2001 Enough is enough – adequate pricing or let business go 23 Current Issues in Medical Malpractice Insurance Domestic Reinsurers Twelve Months Ended December 31, 2000 1999 Combined Ratio 2000 Combined Ratio 9/30/2001Co mbined Ratio American Re-Insurance Company 115.3% 117.1% 136.1% Converium Reinsurance (NA) Inc. 107.6% 116.7% 111.8% Employers Reinsurance Group 116.2% 117.0% 132.0% Everest Reinsurance Company 103.3% 103.2% 115.6% NAC Re (XL Re) 146.5% 173.3% 117.3% Odyssey America Reinsurance Corporation 129.8% 104.8% 113.7% Swiss Re American Corporation 109.5% 121.4% 176.3% Transatlantic Re 106.4% 100.4% 116.7% 24 Current Issues in Medical Malpractice Insurance Reinsurance Considerations Field of domestic reinsurers has been reduced by two-thirds from a decade ago: 120 stand-alone companies operated, 30 remain with most linked to global partners The five largest reinsurers control over 38% of the estimated $125B market To compete reinsurers must have many times the capital formerly required, A.M. Best: “the price of reinsurers’ admission, driven by market forces, is moving toward $1B of Surplus” 25 Current Issues in Medical Malpractice Insurance A Sampling of Consolidations in the Reinsurance Arena Overseas Partners: Reliance Re X.L. Capital: NAC Re/Global Capital Re/Mid-Ocean Re Fairfax Holdings: Odyssey/TIG/Sphere Drake Partner Re: Winterthur/SAFR US Gerling Global: Constitution Re Trenwick: Chartwell/Lasalle Re Folksamerica: USF Re Employers Re: Kemper (GE)/Frankona Re Berkshire Hathaway: General Re/Cologne Re Swiss Re: M&G/Underwriters Re Munich Re: American Re 26 New Equity Capital New Market Entrants Issuer Axis Specialty Ltd. Allied World Assurance Company Endurance Specialty Insurance Ltd. Montpelier Arch Capital DaVinci Reinsurance Ltd. Irsh Re Amount $ 1,600 $ 1,600 $ 1,200 $ 1,000 $ 763 $ 500 $ 356 Total New Market Entrants $ Domicle Bermuda Bermuda Bermuda Bermuda Bermuda Bermuda Dublin Sponsor(s) Marsh Capital Chubb/ AIG/ Goldman Sachs Aon Corp./ Zurich Financial Services White Mountains Arch/Walburg/Helman & Jordan Renaissance Re/ State Farm Scor Group 7,019 Existing Markets Issuer Swiss Re ACE Limited XL Capital IPC Re St. Paul Companies Hartford Amount $ 1,800 $ 1,100 $ 712 $ 547 $ 500 $ 450 Total Existing Markets $ 5,109 Total New & Existing Markets $ 12,128 27 Input on Renewals 28 Current Issues in Medical Malpractice Insurance Renewals – General Lack of clarity on reinsurers position. Changed wordings, requests for more information, restructuring of programs, general uncertainty Capacity available but at a price Negotiations tougher and longer Reinsurers taking strong position on pricing Must have good information, good loss history, good presentation with good story Back to technical trending and pricing approach Everyone is a lead with their own list of “pet” issues Late pricing and extended negotiations created bottle-necks Greater consideration of alternative options by clients with predictable loss exposure 29 Current Issues in Medical Malpractice Insurance 2002 Reinsurance Renewals – Specific Rate increases, depends on loss history More swing plans-high minimum/maximum Tighter terms across the board Accelerated premium payments Annual terms instead of continuous Caps on liability Focus on “balance” in layers Increased use of inner aggregate and loss corridors 30 Current Issues in Medical Malpractice Insurance 2002 Reinsurance Renewals – Specific (continued) Limits reduced, no free capacity Premium caps Reduced scope of line covered Excess cessions increased ILFs Reduce/remove profit sharing Territorial concerns Reduce ceding commission Few, if any, multi-year programs Increased communication between primary carrier and reinsurers 31 Opportunities for Actuaries 32 Current Issues in Medical Malpractice Insurance Opportunities for Actuaries Actuarial evaluations - now “required” for renewals Hospitals Large physician groups Large long term care entities Assistance in evaluating excess/reinsurance proposals Captive feasibility studies Actuarial evaluations Financial forecasts 33 Current Issues In Medical Malpractice Insurance Carolyn L. Greene - Willis Re Inc. John H. Mize - Tillinghast April 2002 This document was designed for discussion purposes only and is not intended to present detailed information on our analysis and findings. It is incomplete, and not intended to be used, without the accompanying oral presentation and discussion. S:\People\Mizej\Presentations\CAS Mtg 04152002.ppt