SPECIALTY MED MAL INSURERS:
HOW DO THEY STACK UP?
2005 CAS Spring Meeting
Pointe South Mountain Resort
Phoenix, Arizona
May 17, 2005
Presenter: Ken Quintilian, FCAS, MAAA
Obligatory Caveat
Results of
presenter’s company
should not be
deemed typical…
What Makes Med Mal Specialty
Companies Different?
• Dominated by mutuals
• Business model is direct operation by
insureds
• Customer focus is core of mission
• Results in different priorities and
operational characteristics
Major Differences Between
Specialists And Commercials
• Mission / Priorities (Success Metrics)
• Operations (Performance)
How Does Their Mission
Impact Success Metrics?
• Customers are the owners
• Different priorities than a stock
company
• Profit and dividends are not fundamental
goals
• Overarching goal: long-term availability
and affordability of product for core
customer base
What Does It Mean For The
Bottom Line?
• Stable & strong earnings less important
• Stable & reasonable pricing the greatest
concern
• Margins can be narrower than for
commercials
• Solvency & capacity, not profitability,
serve as constraints against underpricing
• Tolerance of cycles (and losses) is
greater
What Does This Mean For
Competition?
• Commercials can be outdone even with
identical pricing and results
• The same loss ratio can be a failure for
commercials, a success for specialists
Compare Recent Experience Of
Two Big Med Mal Companies
• St. Paul (Commercial)
• MLMIC (Specialist)
Similarities
• Major market shares in their respective
territories
• Comparable premium volume
• Strong penetration of traditional provider
market
• Both enjoyed strong profitability in the 1990’s
• Both took heavy losses in early to mid 2000’s
Differences
• The cycle was too severe and the losses
too adverse for St. Paul: they exited the
market entirely
• MLMIC (like many other mutuals at this
time) wound down both profitable and
unprofitable non-core ventures
• Although adverse development and
inadequate regulatory rate relief have
continued in its core market, MLMIC has
not reduced writings in this missioncritical area
But Do Specialists Actually Outperform
Commercials? If So, Why?
Using many standard metrics, they seem to
(on average!)
• Less diversification, “stick to their knitting”
• Dominant in core niche – economy of
scale
• Customer loyalty high – acquisition
economies
• Core expertise (e.g., claim defense) hard
to match
Total Med Mal Industry vs. Specialty Underwriters
Expense Ratio (to NPW)
30%
27.4%
26.5%
19.8%
25.2%
24.7%
24.7%
19.7%
20%
17.7%
17.8%
16.6%
15.9%
15.2%
14.8%
14.6%
10%
0%
2000
2001
P/C Industry
Source: Milliman; A.M. Best A&A
2002
Med Mal Industry
2003
2004
Specialists
Commercial vs. Specialty Med Mal Underwriters
Components of Expense Ratio (to NPW)
Commission & Brokerage Expense
Other Acquisition Expense
General Expense
Taxes
Total Underwriting Expense
Based on 2004 Best Aggregates and Averages (2003 data)
Med Mal
Total
Med Mal
Specialty
Med Mal
Commercial
4.6%
3.2%
6.2%
2.2%
16.3%
2.4%
2.8%
6.4%
2.5%
14.0%
10.4%
4.5%
5.8%
1.5%
22.1%
Total Med Mal Industry vs. Specialty Underwriters
Loss & LAE Ratio (to NPE)
132.2%
123.4%
121.0%
125%
119.8%
110.0%
110.1%
108.7%
102.7%
96.2%
100%
75%
50%
25%
0%
2000
2001
2002
Med Mal Industry
Source: Milliman; A.M. Best A&A
2003
Specialists
2004
Total Med Mal Industry vs. Specialty Underwriters
Combined Ratio after Dividends
175%
150%
155.0%
142.5%
133.8%
129.7%
137.5%
138.2%
123.9%
133.3%
117.5%
113.8%
125%
131.7%
117.6%
100%
75%
50%
25%
0%
1999
2000
2001
Med Mal Industry
Source: Milliman; A.M. Best A&A; Best Review & Preview
2002
Specialists
2003
2004
Total Med Mal Industry vs. Specialty Underwriters
Operating Ratio
136.0%
129.6%
121.6%
121.3%
125%
105.9%
105.2%
100.1%
96.2%
100%
79.5%
75%
50%
25%
0%
2000
2001
2002
Med Mal Industry
Source: Milliman; A.M. Best A&A
2003
Specialists
2004
Total Med Mal Industry vs. Specialty Underwriters
Net Investment Gain (to NPE)
38.0%
40%
31.7%
30%
27.9%
21.4%
19.0%
18.6%
20%
15.9%
15.6%
12.8%
10%
0%
2000
2001
2002
Med Mal Industry
Source: Milliman; A.M. Best A&A
2003
Specialists
2004
Commercial Casualty Composite vs.
Med Mal And Workers Comp Specialists
Admitted Assets to NPW Ratio
700%
684.8%
563.0%
571.1%
600%
489.7%
510.9%
511.9%
500%
395.4%
407.6%
364.1%
400%
353.2%
354.9%
316.6%
302.7%
322.7%
280.8%
300%
200%
100%
0%
1999
2000
Commercial Casualty Lines
Source: A.M. Best QAR Summaries
2001
Med Mal Specialists
2002
2003
Workers' Comp Composite
Commercial Casualty Composite vs.
Med Mal And Workers Comp Specialists
Unassigned Surplus to NPW Ratio
210.7%
200%
170.2%
147.4%
150%
127.0%
113.9%
94.4%
100%
109.7%
104.6%
101.4%
86.9%
74.9%
77.3%
72.6%
58.4%
55.2%
50%
0%
1999
2000
Commercial Casualty Lines
Source: A.M. Best QAR Summaries
2001
Med Mal Specialists
2002
2003
Workers' Comp Composite
Commercial Casualty Composite
vs. Med Mal Specialists
Return on Policyholder Surplus
13.1%
15%
10.9%
9.2%
10%
2.0%
5%
1.4%
0%
- 1.3%
-5%
- 4.6%
- 5.6%
- 7.5%
-10%
-15%
- 17.6%
-20%
1999
2000
Commercial Casualty Lines
2001
2002
2003
Med Mal Specialists
5 Year Average:
3.1%
-1.9%
10 Year Average:
8.2%
5.6%
Source: A.M. Best QAR Summaries
Total Med Mal Industry vs. Specialty Underwriters
Policyholder Dividends (to NPE)
10%
9.9%
8.9%
8%
7.4%
6.0%
6.0%
6%
5.4%
3.7%
4%
4.3%
3.8%
4.1%
3.9%
3.3%
3.1%
3.3%
2%
1.3%
1.7%
0.5% 0.4%
0.4%
0%
1995
1996
1997
1998
1999
Med Mal Industry
Source: Towers/Perrin; A.M. Best A&A
2000
2001
Specialists
2002
2003
2004
Commercial Casualty Composite
vs. Med Mal Specialists
Ceded to Gross Written Premium
56.4%
55.5%
55.2%
60%
54.8%
50%
40%
30%
23.4%
20.1%
19.9%
18.4%
20%
10%
0%
2000
2001
Commercial Casualty Lines
Source: A.M. Best A & A
2002
2003
Med Mal Specialists
There Are Limits To Their Skill Set
• Branching out has been unsuccessful
historically for these specialists
• Retrenchment a few years ago arose in
part from realization of their limitations
• Specialists struggle, as do commercials,
to compete with the pricing of selfinsureds and captives
In Summary…
• Med Mal specialty companies know their turf
• This skill shows up in their better-than-average
results
• These results satisfy policyholders but would
challenge stockholders
• So niche companies usually out-compete
commercial stock companies on core business
• This advantage cannot easily be extended to
other states or lines
• Captives and self-insurance are a stiff competitor
for both specialists and commercials
SPECIALTY MED MAL INSURERS:
HOW DO THEY STACK UP?
2005 CAS Spring Meeting
Pointe South Mountain Resort
Phoenix, Arizona
May 17, 2005
Presenter: Ken Quintilian, FCAS, MAAA