Non-Medical
Professional Liability
Denise Olson, FCAS, MAAA
CNA Pro
Non-Medical Professional
Liability
Errors and Omissions / Malpractice
 Usually involves breach of contract,
misrepresentation, negligence fraud
 Damages - typically economic, no punitives
 Examples: Lawyers, Accountants,
Architects & Engineers, Design
Professionals, Actuaries, Real Estate Agents
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Non-Medical Professional
Liability
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Coverage is typically claims made
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Claims are covered in the year first reported
Cleaner due to coverage issues - when did the
cause accrue?
Shortens the tail considerably
Expenses can be inside or outside the limit
 Defense of claims is a primary coverage
benefit
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Non-Medical Professional
Liability - Considerations
Coverage provisions
 Book profile
 Limit and Deductible profiles
 How does the Limit apply (excess of
deductible)
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Non-Medical Professional
Liability - Other Unique Features
Classifications - Not all lawyers are equal
 Exposure Base - What is appropriate can
vary
 Claims handling is a key consideration
 Very little industry data available
 State variations can be important
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Non-Medical Professional
Liability - Pricing Issues
Extended Reporting Period
 Step Rating
 Retroactive Dates
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Step Rate
Definition & Purpose
 Graphical Representation of Area covered
in each step
 Determination of Proper Step Rates
 Other Uses for Analysis
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Definition & Purpose
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Step is the level of maturity of the policy
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Step 1 (sometimes called Step 0) is the first
year after retroactive date
Retroactive date is set for date after which prior
acts will be covered
Adjusts for fact that policies with more
recent retroactive dates will have fewer and
possibly less severe claims
1st Policy Effective date: 1/1/1995
Annual policies thereafter
Retroactive Date: 1/1/1995
O ccurrence
Policy Year
Year
1995 1996 1997 1998 1999 2000 2001
1995
1996
1997
1998
1999
2000
2001
Shaded Area is Covered
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Step 7
Step Rate Graph
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Amount covered by each policy increases
with each year after the retroactive date
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Rates need adjustment to account for
increasing exposure
Evaluation of Step Rate Factors
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Two main methods of handling
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Ultimate incurred loss ratio analysis by Step
Step Rate Relativity Analysis based on losses
only
Ultimate Incurred Loss Ratio
Separate premium data by step
 Split losses by applicable policies
 Adjust for varying degrees of deductible
and limit (basic limits) and mix of business
 Use loss ratio differentials to determine if
current factors are appropriate
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Ultimate Incurred Loss Ratio
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Advantages
Occurrence dates are
irrelevant
If only relativity
adjustments are
needed, this is simpler
Data quality issues are
less likely to occur
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Disadvantages
Step Rate calculation
changes can’t be tested
Need to match losses
by policies
Low volume of data at
lower steps usually
Loss Only Method
Separate incurred loss data by lag
 Determine % of incurred losses by step
 Adjust for varying deductibles, limits, and
sizes of firm
 Develop to ultimate
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Loss Only Method
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Advantages
Premium data not
needed
Can use for ERP
analysis
Can use to develop
step rates without
experience
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Disadvantages
Mix of business may
still be an issue
Occurrence dates are
needed and must be
fairly accurate
More complex
Loss Only Method - Example
Used Lawyers E&O Data
 Current Rating Method
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Average Number of Years Experience - capped
Same whether full prior acts or not
Base Rate multiplied by number of attorneys
New Approach
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Each Attorney rated individually
Base rates then added
Loss Only Method - Example
Pull all available data
 Check data for accuracy of occurrence dates
 Separate by Accident Year and Lag
 Make adjustments for differences between
incurred lag pattern and ultimate lag pattern
 Select step factors
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Loss Only Method - Example
Data errors: Sampling performed
 Approximately 30% of all claims are
miscoded by occurrence date
 Assumed that most errors set claims made
date as occurrence date
 Adjusted Step 1 selection to reflect data
errors
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Loss Only Method - Example
Adjusting for Ultimate Values
 Claims with larger lags tend to have higher
ultimate claim amounts due to delay
 Due to large amounts - newer years will
have less loss in the higher steps
 Development is not as great as straight loss
analysis
Loss Only Method - Other uses
Can use results for Extended Reporting
Period pricing
 Use losses by lag expected
 Discount to current
 Treated like an occurrence policy without
new claims possible
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