Medical Professional Liability for Physicians–
Current Actuarial Challenges
Midwestern Actuarial Forum
September 24, 2003
Kevin Dyke, FCAS, MAAA
American Physicians Assurance Corporation
Topics to be Covered
Company Background
Coverage overview
Tort reform
Capacity Shrinking
Retention
Frequency/severity trends
Investment income
Occurrence coverage
Free tail (DD&R) pricing and reserving
American Physicians At a Glance
Founded in 1975 as Michigan Physicians
19th largest medical professional liability
insurance provider in U.S.*
Headquartered in East Lansing, MI
Focused on solo practitioners and small
physician groups
A- rated by AM Best and S&P
Completed IPO in December 2000
American Physicians Assurance
Corporation is a subsidiary of APCapital
(NASDAQ: ACAP)
*Source: Thomson Financial/OneSource
Coverage Overview
Coverage variations
Occurrence
Claims made
Tail
Hybrid products (e.g. Prepaid tail)
Physicians rated by class, territory,
specialty, number/types of procedures
Death Disability and Retirement
Free coverage in event of above
Vesting periods for retirement
Tort Reform
Pending or enacted legislation at both the federal
and state levels.
Benchmark is California’s MICRA reforms
Key is $250,000 cap on non-economic damages
Average premiums are lower in California than in other
states
Common provisions
Limiting non-economic damages
Statutes of limitations/repose
Caps on attorney fees
Pitfalls
Many attempts at previous tort reform have been
overturned by the courts as unconstitutional.
Need to monitor conservative/liberal tendencies of
courts.
Tort Reform (cont)
Quantifying tort reform
Ask the experts (claims)
Select lower trend factors
Rate selection < Rate indication
Adjust step factors - earlier steps will be
affected more than others
Wait for results to emerge
Courts have overturned tort reform in the
past
Ohio is on it s 3rd attempt at tort reform.
Capacity Shrinking
Carriers exiting markets (some by choice)
St. Paul exited line in 2001.
American Physicians exited Florida in 2002
MIIX, PHICO, PIE, Legion, Frontier, Reliance
Some new capital entering market
RRGs being formed by physician groups and hospitals
Insurance companies being formed in KY, FL, NV
Actuarial challenges
Who picks up the pieces?
Existing carriers already facing capacity constraints
due to rate increases
Prior acts coverage on insolvent/exiting markets
Rate Changes Impacting Retention
Carriers out in front of rate changes
may suffer from retention woes
Most research and modeling for
personal lines companies
Actuarial needs to monitor retention
to ensure mix of business not
materially changing
May also want to develop diagnostic
tests on new and renewal business
(e.g. frequency)
Physicians Loss Trends
Conning and Co. trends
Frequency flat or declining
Severity increasing 50% from 1997-2001
American Physicians average trends vary by state
and policy limit
Frequency trend is flat
Michigan requires only 200K/600K limits. Severity
trends are modest (3-4%)
Patient compensation funds limit severity trend to
direct writer (e.g. IN, NM)
States with $1M/$3M limits have trends in the 6-8%
range
Need to monitor on both a traditional coverage
year basis and on a calendar (settlement) year
basis
Investment Income
Tort reform opponents say stock market
losses have led to insurer losses
Quite the reverse – insurers invested in
bonds at higher interest rates and have
achieved greater returns than stock
market
Pricing considerations
Monitor investment yields net of capital gains
Rising cash positions
Need about 4% additional rate for every 100
basis points reduction in interest rate.
Peer Investment Returns
7.00%
6.80%
6.60%
6.40%
6.20%
6.00%
5.80%
5.60%
5.40%
5.20%
5.00%
Investment Yield
Investment Yield
excl Realized
Cap Gains
Bond Yield
2001
2002
Bond Yield excl
Realized Cap
Gains
Only fixed income investments are considered.
Source: Thomson Financial OneSource, Internal analysis
Cash Position Growing…
Cash and Short Term Assets as a % of Fixed
Income Investments - Peer Group
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02
Source: Thomson Financial OneSource, Internal analysis
Occurrence coverage
During the soft market, carriers were
offering both occurrence and claims
made products
Industry wide, occurrence represents
25-30% of total med mal premium.
Often pricing on occurrence
products were less than 5% above the
mature claims made rate
Now, carriers are scaling back their
occurrence offerings.
Why not occurrence?
Both frequency and severity
unknown for years
Years pass before a difficult risk and
can be identified
Longer investment horizon -> more
investment income but greater
interest rate risk
Occurrence Challenges (cont)
Difficulty in predicting ultimate losses  more
uncertainty in the company loss reserves
Development methods highly leveraged in loss
development factor
Claims made 12 months – ultimate: less than 2.0
Occurrence 12 months – ultimate: greater than 7.0
Frequency/severity approaches highly dependent on
ultimate severity
Carriers have traditionally understated severity
Hypothesis: Less incentive for doctor to report
claims under occurrence than under claims made
Do doctors report more slowly on
occurrence covers?
Report and Settlement Lag Analysis
Incidents from 1987 - 2000
11
Years from initial report to settlement
10
9
Occurrence
8
7
6
5
4
3
2
1
0
0
1
2
Source: American Physicians internal data
3
4
5
6
7
8
9
Years from incident to initial report
10
11
12
13
14
Contrast with claims made…
Report and Settlement Lag Analysis
Incidents from 1987 - 2000
11
Years from initial report to settlement
10
9
Occurrence
8
Claims Made
7
6
5
4
3
2
1
0
0
1
2
Source: American Physicians internal data
3
4
5
6
7
8
9
Years from incident to initial report
10
11
12
13
14
Lag Observations
Medical malpractice claims have a long
tail. Reporting can occur 15-20 years
following the incident (e.g. birth related).
Average settlement lags longer than report
lags
Physicians under occurrence policies
report slightly later than those under
claims made policies
But…the gap is narrowing in recent years.
DD&R Coverage
Provides “free” coverage for claims
reported after a physician dies, becomes
disabled, or retires.
Free tail at retirement typically requires a
vesting period (e.g. 5 years).
Cost of coverage typically included as an
expense in calculating the target loss ratio
(commonly 5%).
Cost vary by entry age but fairness
considerations dictate a flat charge to all
physicians
DD&R Reserve
NAIC requires companies to maintain a
reserve for the promised future benefits.
Actuarial calculation of DD&R reserve
( PV of future benefits –
PV of future premiums )
Assumptions required for
Retention
Premium trend
Loss cost trend
Mortality, morbidity, retirement
Similar to a pension funding model
DD&R Reserve (cont)
Actuarial considerations
Declining retention  less insureds are
vested for retirement benefits
Age of doctors displaced by existing
markets  older doctors require higher
accruals
Early retirement
Be careful using % of unearned
premium to accrue DD&R reserve 
Rate increases will increase the
adequacy of the UPR