Captive Reserving Strategies
Susan Beutel
Senior Director, Claim & Litigation Counsel, Ascension
Daniel Nash
National Healthcare Practice Leader, Zurich North America
Robert Bartolone
National Director, Healthcare Claims, Zurich North America
December 5, 2013
INTERNAL USE ONLY
Purpose
Reserves should be an accurate reflection of the value or exposure
presented by a given set of claims.
Accurate reserve valuation leads to appropriate pricing of
reinsurance and the appropriate financial rating of captive.
• How does an reinsurer evaluate and set reserves?
• How does a captive evaluate and set reserves?
• When does an reinsurer evaluate and set reserves?
• When does a captive evaluate and set reserves?
INTERNAL USE ONLY
12/5/2013
Reserve Evaluation-How
Risk Neutral Number (RNN)
 Reserve to our reasoned estimate of the most likely outcome if
the case is tried to verdict.
 The RNN reflects an objective assessment of liability and
damages and a realistic range of probable verdicts.
 RNN reflects the amount at which we should be neutral as to
whether we settle or try the case to verdict.
 The risk neutral number equates to our indemnity reserve, but it
is not our settlement target
INTERNAL USE ONLY
12/5/2013
Reserve Evaluation-How
RNN Weighting (subjec t to exposure should total 100%)
Estimate of Damages
Past Medicals
Future Medicals
Wages
Pain & Suffering
Loss of Consortium
TOTAL:
$
LOW
MEDIUM
HIGH
25%
50%
25%
-
$
"ESTIMATED VALUE" OF TOTAL DAMAGES AWARD:
(i.e., "probability-weighted" average value of the range)
-
$
-
$
-
$
-
INFORMATION FULL VALUE:
Probability of plaintiff verdict:
Apportionment of negligenc e:
Plaintiff's %
Reinsured's %
Codefendant's %
RISK NEUTRAL VALUE:
INTERNAL USE ONLY
12/5/2013
Reserve Evaluation-Case Study
Liability
• 56 yr old male admitted w/ complaints of chest pain (8 out of 10) subsequent to 5 hour
stretch of doing yard work.
• No prior hx of cardiac problems and successfully passed a recent stress test; patient had
several cardiac risk factors.
• Normal EKG; no cardiac enzyme test administered. Physician indicated that full cardiac
workup was done in the notes. Given the patient’s symptoms, our ER nurse felt that
cardiac enzyme test should have been administered but said nothing to the physician.
• Patient given “GI cocktail” which included pain meds and symptoms resolved; discharged
an hour after arriving.
• Patient arrived home one half hour after discharge and suffered cardiac arrest and brain
damage. Patient is bedridden and unable to speak. Patient is cared for in his home but
needs 24 hour attendant care.
INTERNAL USE ONLY
12/5/2013
Reserve Evaluation-Case Study
• Plaintiff’s expert claims that the co-defendant physician fell below the SOC
because he failed to complete a full cardiac work up and that the nurses
should have gone up the chain of command to get one done.
• Our expert believes that the patient’s symptoms may have indicated that a
cardiac enzyme test be done by the physician. She further indicated that our
nurses could have gone up the chain of command given the patients
symptoms, but could also have relied on the physician determination as to
whether further testing was required.
• Plaintiff’s chance of success-60%.
• Apportionment as follows: Reinsured nurses 25% Co-defendant physician
75%.
INTERNAL USE ONLY
12/5/2013
Reserve Evaluation-Case Study
• The patient’s past medical bills: $2500; low, medium, high.
• Patient’s lost earnings: 56 yr old to Retire at 60, 65, and 67; Earning $55,000/yr at time of death.
Low: 4 years @ $55,000 = $220,000
Medium: 9 years @ $55,000 = $495,000
High: 11 years @ $55,000 + 2% inflationary factor = $670,000
• Patient’s spouse spent $10,000 on grief counseling for loss of consortium.
• Future Medicals: Life expectancy 5 to 10 years; Cost of care per year $100K to $350K.
Low: 5 years @ $100,000 = $500,000
Medium: 7.5 years @ $200,000 = $1,500,000
High: 10 years @ $350,000 = $3,500,000
• Pain & Suffering: Verdicts for similar incident ranged from $1.5M to $6M.
Low: $1.5M
Medium: $2.5M
High: $6M
INTERNAL USE ONLY
12/5/2013
Reserve Evaluation-How
RNN Weighting (subject to exposure should total 100%)
Estimate of Damages
Past Medicals
Future Medicals
Wages
Pain & Suffering
Loss of Consortium
TOTAL:
$
$
$
$
$
$
LOW
MEDIUM
HIGH
25%
50%
25%
2,500
500,000
220,000
1,500,000
10,000
2,232,500
$
$
$
$
$
$
2,500
1,500,000
495,000
2,500,000
10,000
4,507,500
"ESTIMATED VALUE" OF TOTAL DAMAGES AWARD:
(i.e., "probability-weighted" average value of the range)
$
2,500
$
3,500,000
$
670,000
$
6,000,000
$
10,000
$ 10,182,500
$
5,357,500
$
803,625
INFORMATION FULL VALUE:
Probability of plaintiff verdict:
60%
Apportionment of negligence:
Plaintiff's %
Reinsured's %
Codefendant's %
RISK NEUTRAL VALUE:
INTERNAL USE ONLY
0%
25%
75%
100%
12/5/2013
Reserve Evaluation-“Reality” Study from
Captive Perspective
Ascension’s use of RNN is at present severity driven
• The “Zurich Tool” is used for high exposure cases:
•
•
•
•
•
⁻ All cases over $750,000
⁻ Basket 1 cases targeted for early resolution via Communicate Openly
Resolve Early (CORE)
⁻ All cases going to our National Claims Committee
Assists with evaluating damages from another perspective
Clear identification of liability and damage issues
All claim professionals and evaluators speaking the same language
Focused review by National Claims Committee and direction on likely
damages
Claim professionals applying the same consistent approach to claims at
threshold or below
INTERNAL USE ONLY
12/5/2013
Reserve Evaluation-Captive Perspective
No Caps + Co-Defendant Exposure
RNN Weighting (subject to exposure should total 100%)
Estimate of Damages
Past Medicals
Future Medicals
Wages
Pain & Suffering
Loss of Consortium
TOTAL:
LOW
MEDIUM
HIGH
25%
50%
25%
$
$
$
$1,085,939
2,000,000
1,000,000
4,000,000
$
8,085,939
$
$
$
$
1,085,939
9,000,000
1,500,000
8,000,000
$
1,085,939
$ 19,000,000
$
2,500,000
$ 15,000,000
$ 19,585,939
$ 37,585,939
"ESTIMATED VALUE" OF TOTAL DAMAGES AWARD: $ 21,210,939
(i.e., "probability-weighted" average value of the range)
INFORMATION FULL VALUE:
Probability of plaintiff verdict:
70%
Apportionment of negligence:
Plaintiff's %
Reinsured's %
Codefendant's %
0%
30%
70%
RISK NEUTRAL VALUE:
INTERNAL USE ONLY
$
4,454,297
12/5/2013
Reserve Timing-Reinsurer Perspective
Injury/severity driven statistical reserves @ claim inception
Injury Type
Serious brain
Paralysis/Major
damage/Cognitive
Amputation
injury
Claim Status
All other injuries
Death
Incident
$25
$100
$500
$1,000
Demand for
Compensation
$5,000
$10,000
$25,000
$50,000
Lawsuit
$10,000
$25,000
$50,000
$100,000
INTERNAL USE ONLY
12/5/2013
Reserve Timing-Captive Perspective
Does Ascension use severity to set initial reserves?
Based on Ascension’s work with High Reliability and our CORE
program we target cases with severe injury but our actual reserve is
based on multiple factors.
• Pros and cons of current placement of statistical reserves
• Initial reserve provides an opportunity to evaluate the injury and
•
•
claim to determine if the care was appropriate and met the
Standard of Care (SOC)
Delays in discovery can impact attaining reserve early in the
litigation process
Does not take into account jurisdictional issues, attorney issues or
the sympathy factor
INTERNAL USE ONLY
12/5/2013
Reserve Timing-Captive Perspective
• Pros and cons of severity driven statistical reserves
• Severity + high damages = high reserve
• Evaluates severity of injury while other factors impact total
reserve:
⁻ Damage caps or Patient Compensation Funds (PCF)
⁻ Joint and several liability
⁻ Apparent agency
⁻ Contributory fault
⁻ Punitive damages
⁻ Jurisdiction
⁻ Plaintiff’s counsel
⁻ Expert opinions positive and negative
INTERNAL USE ONLY
12/5/2013
Reserve Timing – Captive perspective
Injury/severity driven statistical reserves @ claim inception
Injury Type
Serious brain
Paralysis/Major
damage/Cognitive
Amputation
injury
Claim Status
All other
injuries
Death
Incident/ Basket 1
Early Resolution
$100K
$100K
$100K
$100K
Demand for
Compensation
$0-$15K
$0-$25K
$25K
$50-$100K
Lawsuit
$35K
$100K
$35-$100K
$100K
INTERNAL USE ONLY
12/5/2013
Reserve Timing-Reinsurer Perspective
Specified Interval-Best Practices
• Initial reserves set within five (5) business days of receipt of the claim
• Initial reserves are based on the limited information received from the notice
of loss or lawsuit
• All initial indemnity reserves converted to case-based reserves 180 days from
receipt of the claim
• Where critical facts or information has not yet been obtained or verified,
reasonable assumptions are appropriate, so long as they are clearly identified
and adequately explained.
• Re-evaluate the claim exposure upon receipt of new information that
potentially impacts the assessment of liability or damages. within 30 days of
receipt of that information
INTERNAL USE ONLY
12/5/2013
Reserve Timing-Captive Perspective
Specified Interval-Best Practices
• Reserves set on all claims, Notice of Intents (NOI) and suits upon notification
by our Health Ministries to Ascension
• Reserves reviewed:
• 90 days after suit is filed, investigation findings
• 210 day, evaluate expert support
• 365 day, fully reserved unless significant change in case
• 3/31 and 9/30 reserve reviews for our actuaries
• Quarterly metrics on compliance with reserving including:
• Reserve notes
• Changes after 365 days for receipt of suit
• Changes of >25K prior to mediation or facilitation
• Weekly meetings with claims team reviewing all cases at the above time
frames including the reserve
INTERNAL USE ONLY
12/5/2013
Reserve Timing-Reinsurer Perspective
Avoiding Reserving Surprises-Predictive Modeling
Predictive Modeling is used to evaluate underwriting, risk and
claims exposure.
For medical malpractice claims, predictive modeling can be used as
follows:
• Data/Text mining for trends based on procedure & injury
• Data/Text mining for the potential to go into litigation
• Data/Text mining for high exposure claims * * *
INTERNAL USE ONLY
12/5/2013
Reserve Timing-Text Mining
• Process of extracting unstructured knowledge hidden in text fields
• Discovery of patterns and trends in the text (claim notes)
• Quantify the relationships and associations found in the text
• Use these quantifications of relationships and associations to predict an
outcome (e.g. claim severity)
The process quantifies and finds associations across all text and summarizes
the results for further data analysis
INTERNAL USE ONLY
12/5/2013
Reserve Timing-Text Mining Methodology
Example
Original Claim Notes
Document 1: life plan
Document 2: had surgery
Document 3: had emergency op Document
4: had life care
Document 5: discharged
Abbreviations: “op” defined
as a synonym for “surgery”.
Multi-word terms: “life” and “plan” defined
as one single term. “life” and “care” are also
defined as one single term. “life care” is
synonym for “life plan”.
Revised Claim Notes
Document 1: life plan
Document 2: had surgery
Document 3: had emergency surgery
Document 4: had life plan
Document 5: discharged
INTERNAL USE ONLY
12/5/2013
Reserve Timing-Text Mining Terms
Sample text terms used:
life expectancy
resuscitation
ultrasound
aneurysm
nerve
brachial
cardiac arrest
resuscitate
airway
sepsis
life care plan
infectious disease
epidural
respiratory
disfigurement
fetal distress
dead
neurological
lost wage claim
subdural hematoma
cerebral palsy
brain damage
cardiac
coronary
anoxic
delivery
economic damage
amputation
severe
aspiration
pulmonary
embolism
renal failure
spinal/spine
unresponsive
wrongful death
fetus
neuro
placenta
brain
anesthesia
permanent injury
uterine rupture
intubation
cervical
mrsa
c-section
decompression
severity
lumbar
flesh eating bacteria
meningitis
seizure
aortic
paralysis
burn
INTERNAL USE ONLY
12/5/2013
Reserve Timing-Text Mining Example
Results
Document 1: life plan
Document 2: had surgery
Document 3: had emergency surgery
Document 4: had life plan
Document 5: discharged
Summarized Severity and Significant Predictor(s)
Claim Notes
Claim Severity ($)
Severity – Over
$1MM
Predictor:
Relationship 3
doc1
$1,250,178
1 – YES
Life plan
doc2
$67,512
0 – NO
Surgery
doc3
$100,523
0 – NO
Surgery
doc4
$1,532,549
1 – YES
Life plan
doc5
$5,324
0 - NO
No Life plan
/Surgery
Relationship 3 is the most significant variable for predicting whether a claim is over
$1MM. The other variables identify relationships among the documents, but are not as
useful predicting the target.
INTERNAL USE ONLY
12/5/2013
Reserve Timing – Captive Perspective
 Predictive modeling is a valuable tool for identifying claims with
adverse exposure.
 Our reserving does take in some of the principles of predictive
modeling and it is a valuable tool in recognizing those cases with
significant adverse exposure.
 We have had success with using predictive modeling to resolve
cases early and before much discovery is completed.
INTERNAL USE ONLY
12/5/2013
Captive Reserving Strategies
Closing Remarks
Questions
INTERNAL USE ONLY
12/5/2013