CAS Ratemaking Seminar
Non-Medical Professional Liability Pricing
Denise Olson, FCAS, MAAA
March 13, 2001
Page 1
Typical Rating Factors
• Step Rate - How close to maturity is the risk?
• State - Which state carries the most exposure for
the risk? What unique issues exist?
• Claims History - individual risk
• Size of Firm - How is each marginal exposure
increase rated?
• Area of Practice - e.g. Plaintiff Lawyer or Defense
Lawyer - are they complementary
Page 2
Step Rate
• Does the firm have a retroactive date or is it a
completely new firm?
• How are changes in firms over time handled?
• Are there predecessor firms?
Page 3
State
• Statute of Limitations - can impact step rates
• State economic situation - some Areas of Practice
are very tied to the economy
• Tort reforms
• Other law differences - e.g. Real Estate Attorney
Page 4
Claims History
• Long tail can make severity less reliable than
frequency
• Claims staff needs clear understanding of impact
of reported incidents
• Impact on underwriting of claims that close
without payment or with little expense
Page 5
Size of Firm
• How does a marginal increase in exposure effect
the rate?
• Size of Firm discounts
Page 6
Size of Firm
Average
Selected
% under
Exposures Incurred
Avg
deductible
in Interval
Freq. Deductible (Lognormal)
1.0
2.85%
3,639
31.4%
2.3
2.62%
4,842
35.9%
4.4
2.20%
7,539
43.4%
7.4
1.74%
9,912
48.1%
13.8
1.13%
17,339
57.8%
28.0
0.69%
35,000
69.3%
Page 7
Size of Firm
Ground up
Freq per
Incurred Claim Incremental Incremental Additional
Frequency
Ct
claim ct
Exposures Exposure
4.15% 0.042
0.042
1.0
4.15%
4.09% 0.094
0.053
1.3
4.04%
3.88% 0.170
0.076
2.1
3.65%
3.36% 0.248
0.078
3.0
2.59%
2.69% 0.371
0.124
6.4
1.93%
2.24% 0.627
0.256
14.2
1.80%
Page 8
Size of Firm
Average
Freq per LN(Freq
Exposures Additional per Add'l
in Interval Exposure Expos)
1.0
4.15%
(3.183)
2.3
4.04%
(3.208)
4.4
3.65%
(3.311)
7.4
2.59%
(3.652)
13.8
1.93%
(3.950)
28.0
1.80%
(4.018)
Page 9
Size of Firm
Exposures
1.0
2.3
4.4
7.4
13.8
28.0
Fitted
Actual
Freq per Frequency
per Atty
Atty
3.78%
4.15%
3.70%
4.09%
3.58%
3.88%
3.41%
3.36%
3.09%
2.69%
2.51%
2.24%
Page 10
Size of Firm
Exposures
1.0
2.0
5.0
10.0
15.0
25.0
Implied
Fitted
Cumulative Exposure
Discount
Freq
0.0%
3.78%
-1.6%
3.72%
-6.3%
3.55%
-13.4%
3.28%
-19.8%
3.04%
-30.7%
2.62%
Page 11
Area of Practice
• Differs from some businesses in that firms may
practice in several areas
• Interactions are important
• Determination of percentage for each grouping is
important (Billings, # Hours)
• How to determine differences in pure premiums?
Page 12
Area of Practice - Example
Firm 1
Area 1
Area 2
Area 3
% of Work Premium
25%
413
50%
675
25%
375
100%
1,463
Current
Surcharge
10.0%
-10.0%
0.0%
-2.5%
Page 13
Area of Practice - Example
Book # Attys Premium
Area 1
22
36,300
Area 2
45
60,750
Area 3
33
49,500
100 146,550
% of
Current
Premium Surcharge
25%
10.0%
41%
-10.0%
34%
0.0%
100%
-2.3%
Page 14
Area of Practice - Example
Book
Area 1
Area 2
Area 3
Losses
38,720
56,700
42,900
138,320
# Attys
22
45
33
100
Experience
Pure
Premium
1,760
1,260
1,300
1,383
Written
Pure
Premium
1,650
1,350
1,500
1,466
Page 15
Area of Practice - Example
Book
Area 1
Area 2
Area 3
Experience
Pure
Premium
1,760
1,260
1,300
1,383
Indicated Indicated
Written
New
Rate
Pure
Change Surcharge
Premium
24.3%
6.7%
1,650
-11.0%
-6.7%
1,350
-8.2%
-13.3%
1,500
-5.6%
1,466
Overall Rate Change:
-5.60%
Page 16
Area of Practice - Example
Book # Attys
Area 1
22
Area 2
45
Area 3
33
100
Indicated
New Total
New
New Pure
Pure
Surcharge Premium Premium
24.3%
1,760
38,720
-11.0%
1,260
56,700
-8.2%
1,300
42,900
1,383 138,320
New Base Rate = 1,500 x (1-5.6%) =
1,416
Page 17
Area of Practice - Example
Area 1 Experience Breakdown
# Attys Losses
Book
11 18,586
Area 1 - Pure
6,846
4
Area 1 w/Area 2
7 13,288
Area 1 w/Area 3
22 38,720
Experience
Indicated
Pure
Premium Surcharge
19.3%
1,690
20.9%
1,711
34.1%
1,898
24.3%
1,760
Page 18
Area of Practice - Example
Area 1 Experience Breakdown
Book
# Attys Losses
Area 1 - Pure
11 18,586
Area 1 w/Area 2
4
6,846
Area 1 w/Area 3
7 13,288
22 38,720
Loss Ratio Loss Ratio
without
with
breakout
breakout
96.0%
100.0%
97.2%
100.0%
107.9%
100.0%
100.0%
100.0%
Page 19
Emerging Issue Multi-Disciplinary Practices
Brought about by:
• The desire to provide one-stop
shopping to clients
• To eliminate communication problems
between professionals
• To leverage support structure and
marketing
Page 20
Examples:
• Law Firm specializing in advising municipalities
issuing tax-exempt bonds hires financial
professionals
• Accounting Firm sets up subsidiary entities - a
broker/dealer and an insurance agency
• Accounting firm specializing in medicare billing
hires Nurses
Page 21
Examples:
• Law firm specializing in environmental issues
hires Engineers
• Accounting firm that specializes in Business
Brokerage has CPAs obtain Real Estate Agents
license
• Multi-disciplinary Practices (MDPs)
• Info-tech Consulting firms providing Webhosting
services
Page 22
What does the product look like?
• What Policy form is being used?
– Limits / Deductibles
– Conflict of Interest issues
– If endorsed, what is primary?
• How will the policy be underwritten?
• Is stacking of limits possible?
Page 23
Pricing Implications
• Different rating bases
– per revenue $ or commission receipt $
– per professional
– per transaction
• Different loss distributions - what ILFs to use?
Page 24
Pricing Implications
• Simple approach:
– 1 Attorney and 1 Accountant set up shop together
– Billings from Accounting practice brings rate to
$1,500
– Rate for attorney: $1,800
– Total Price: $3,300
Page 25
Pricing Implications
• Complications:
– Reduction in risk due to experts working together
– Increase in exposure due to inability to use
comparative negligence by other professionals as a
defense
– How will predecessor firm coverage be handled?
– What if the attorney is also a CPA? (What standard of
care applies?)
Page 26