Brian Alvers, ACAS, MAAA Aon Re Services Midwestern Actuarial Forum Fall 2003 September 24, 2003...
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Transcript of Brian Alvers, ACAS, MAAA Aon Re Services Midwestern Actuarial Forum Fall 2003 September 24, 2003...
Brian Alvers, ACAS, MAAAAon Re Services
Midwestern Actuarial ForumFall 2003
September 24, 2003
Medical Malpractice: State Of The Line
Business Climate And Liability Tort Reform
Section 1
Industry Analysis
Section 2
Reinsurance And DFA Considerations
Section 3
Agenda
Section 1
Business Climate And Liability Tort Reform
1
Medical Malpractice Crisis
Insurers Increasing Loss Costs Inadequate Loss Reserves Poor Investment Results Hardened Reinsurance Market
Insureds Availability Problems Affordability Problems
Aon Re Inc.Copyright 2003
2
Insurer Actions Taken
Base Rate Increases Reduction Of Schedule Credits Reduction Of Other Discounts (e.g., Claims-Free) Reduction In Limits Offered Increase In SIRs For Excess Business Exit States/Territories With Poor Experience Exit Line Of Business
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Insured Actions Taken
Physician Owned/Operated Insurers Self-Insurance, Captives Limit Services Retire Early Move To Other State/Territory Practice Defensive Medicine
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Medical Malpractice Business ClimateYear 2002
In CrisisCrisis BrewingNo Crisis
Source: AMA Member Communications - July 17, 2002
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Medical Malpractice Business ClimateYear 2003
In CrisisCrisis BrewingNo Crisis
Source: AMA Member Communications - July 9, 2003
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6
States Actions Taken
Florida SB 2-D Passed Still Needs Governor’s Signature
Michigan HB 4980 and SB 633 Proposed
Texas Proposition 12 Approved
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7
Florida SB 2-DCaps On Non-Economic Damages
$500K From Individual Doctors/Defendants, Not To Exceed $1M From All Doctors/Defendants Regardless Of Number Of Claimants
$750K For A Single Hospital, Not To Exceed $1.5M From All Hospitals
$150K Cap For Emergency Room Physicians
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Florida SB 2-DRates Reflecting Savings
Med Mal Insurance Rates Approved On Or Before 7/1/2003 Remain In Effect Until A New Rate Filing Is Made Reflecting Savings Under The New Act
New Filing No Later Than 1/1/2004
The New Rate To Apply To Policies Effective Or Renewed After Effective Date Of The Act (8/14/2003)
Requires Insurers To Provide A Refund
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Michigan HB 4980 And SB 633
Identical Bills Proposed From House And Senate
Make It Easier To Recover Economic And Non-Economic Damages Based On “Loss Of Opportunity”
Currently, Recovery Can Not Be Had Unless The “Loss Of Opportunity” Is Greater Than 50%
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TexasProposition 12
Constitutional Amendment Capping Non-Economic Damages In Jury Awards To $250K In Cases Against Doctors And Health Care Providers
Approved By A 51% To 49% Margin On 9/13/2003
Only 10% Voter Turnout
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11
States With “No Crisis”
California, Colorado $250K Non-Economic Damages Cap
Louisiana $500K Total Damages Cap
Indiana $1.25M Total Damages Cap
Wisconsin $410K, $500K For Minors
New Mexico $600K Cap Excluding Punitive Damages
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States “In Crisis”
FL, TX Reform Passed
NY, IL, PA, NJ, GA, NC, WA, CT, KY, OR, AR, WY No Caps
OH, WV, NV, MS Various Caps $250K to $500K
Missouri $557K Cap $250K Non-Economic Damages Cap Vetoed By Governor
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13
Are Caps The Answer?
Weiss Ratings, Inc. (www.WeissRatings.com) No Far More Important Factors Median Annual Payment Up More In States With Caps
(48.2% Versus 35.9% From 1991 To 2002)
The PIAA (www.thepiaa.org) Says Weiss Makes Numerous Errors In Assumptions Total Claim Payouts Increased 52.8% In Cap States Versus
100.1% In Non-Cap States
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Are Caps The Answer?
GAO Report (GAO-03-702) Losses Appear To Be Primary Driver Of Medical
Malpractice Rate Increases No Clear Policy Recommendations Other Factors Cause Increases Lack Of Comprehensive Data
Especially Economic Versus Non-Economic
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Are Caps The Answer?
Caps May Precipitate More Doctors Being Named In Suits To Obtain Multiple Recoveries
Reinsurers Not Factoring In Reduction In Claim Cost Just Too Early To Tell Little Impact On Modeling For A Couple Of Years Same True For Many Insurers
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Section 2
Industry Data Analysis
16
Industry Data Analysis
Industry 2002 Schedule P (OneSource) Parts 1-4F Sections 1 (Claims-Made) And 2 (Occurrence)
Develop Industry Losses And DCC To Ultimate
Use Paid, Incurred Loss Development Methods
Compare Ultimate Losses To Earned Premium
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80%
90%
100%
110%
120%
130%
140%
1992 1994 1996 1998 2000 2002
Lo
ss a
nd
DC
C R
atio
Industry Loss and DCC Ratio
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Industry Loss and DCC Ratio
Exposure Number Of Licensed Physicians Pros:
Easy To Get (Medical Marketing Services, Inc.) Reasonable Estimate Of Exposure
Cons: What About Hospitals? What About Tail And DDR? What About Trend To Self-Insurance?
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5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
1992 1994 1996 1998 2000 2002
$ P
er
Ph
ys
icia
n
80%
90%
100%
110%
120%
130%
140%
Lo
ss
an
d L
os
s E
xp
en
se
Ra
tio
19
Industry Loss and DCC Ratio
Loss and DCC Ratio
Loss Per Physician
Premium Per Physician
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Industry Loss and DCC Ratio
1994 – 1998 Loss Per Physician Increased 36% Premium Per Physician Decreased 4%
Exponential Trend In Losses Per Physician Trend Rate = 6.82% R2 = 98.4% Actual Trend Rate Higher, As Denominator Is
Licensed Physicians, Not Insured Physicians Generally Assume 7.5% - 10%
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Peer Company Analysis – Top 20 WritersCapital Adequacy
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Net Leverage% NPW Surplus NPW / Surplus (NPW + Net Liab.) / Surplus 2002 BCAR
Company Rating Med Mal 12/31/2001 12/31/2002 12/31/2001 12/31/2002 12/31/2001 12/31/2002 Score
Lexington Insurance Company A++ 16% 1,746,113 1,763,654 0.5 1.1 1.7 3.0 179.8
State Volunteer Mutual Insurance Co. A 100% 137,176 129,287 0.7 1.0 3.8 4.7 173.1Continental Casualty Co A 4% 4,700,064 5,115,932 0.7 1.4 4.3 5.3 170.5Truck Insurance Exchange A 26% 300,614 275,557 2.6 2.7 5.7 6.6 160.1St. Paul Fire & Marine Ins Co. A 3% 4,142,586 4,925,779 1.2 0.9 4.3 3.3 156.8NORCAL Mutual Insurance Company A 100% 268,032 222,214 0.6 0.8 2.7 3.3 148.0Evanston Insurance Co A 24% 230,889 313,850 1.6 1.8 4.7 5.0 141.8Medical Protective Company A 99% 408,215 401,726 0.8 1.3 3.2 4.7 137.1
Health Care Indemnity, Inc. A- 100% 583,763 482,536 0.4 0.7 2.4 3.3 183.9American Physicians Assurance Corp A- 74% 176,819 163,466 1.1 1.4 4.6 5.4 138.8Medical Assurance Company Inc A- 96% 172,841 193,335 1.0 1.2 4.7 5.1 137.6Pronational Insurance Co. A- 96% 175,874 196,955 0.8 0.8 3.9 3.8 137.6Doctors Company Insurance Group A- 97% 383,965 341,412 0.8 1.2 3.0 4.5 129.6MAG Mutual Insurance Company A- 97% 158,558 142,978 0.7 1.0 3.0 4.3 103.5
FPIC Insurance Group B++ 89% 107,914 126,610 1.4 1.1 5.2 5.5 125.4
ISMIE Mutual Insurance Company B+ 100% 241,406 170,517 0.7 1.3 4.0 6.6 87.0
Medical Liability Mutual Insurance Co. B 96% 1,428,745 933,042 0.4 0.8 2.6 4.8 71.2
Princeton Insurance Company B- 64% 141,602 107,239 1.7 1.1 7.3 9.7 73.3
MCIC VT Inc RRG NR-1 96% 10,114 10,352 2.0 2.4Physicians Reciprocal Insurers NR-4 99% 68,559 73,110 2.0 2.1 13.1 12.2
Source: AM Best And The National Association Of Insurance Commissioners
22
Peer Company Analysis – Top 20 WritersEarnings Adequacy (5-Year Average)
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Source: AM Best And The National Association Of Insurance Commissioners
% NPW Pre-Tax Return on CombinedCompany Rating Med Mal ROR PHS Ratio
Lexington Insurance Company A++ 16% 24.4% 8.9% 97.1
State Volunteer Mutual Insurance Co. A 100% 0.0% 1.9% 134.7Continental Casualty Co A 4% -1.2% 1.0% 123.1Truck Insurance Exchange A 26% -6.4% -12.3% 108.6St. Paul Fire & Marine Ins Co. A 3% 6.5% 10.5% 117.8NORCAL Mutual Insurance Company A 100% 2.1% -1.6% 122.7Evanston Insurance Co A 24% 9.4% 11.6% 98.8Medical Protective Company A 99% 15.9% 14.4% 106.0
Health Care Indemnity, Inc. A- 100% 9.4% 5.4% 114.1American Physicians Assurance Corp A- 74% -8.1% -6.3% 126.2Medical Assurance Company Inc A- 96% 10.4% 5.9% 111.0Pronational Insurance Co. A- 96% -8.1% 7.5% 134.2Doctors Company Insurance Group A- 97% 0.2% 0.8% 115.3MAG Mutual Insurance Company A- 97% 3.0% -0.1% 120.9
FPIC Insurance Group B++ 89% 4.4% 3.1% 110.2
ISMIE Mutual Insurance Company B+ 100% 0.7% -0.9% 131.1
Medical Liability Mutual Insurance Co. B 96% -6.3% -0.8% 136.7
Princeton Insurance Company B- 64% -9.8% -9.6% 130.6
MCIC VT Inc RRG NR-1 96% -1.8% 111.7Physicians Reciprocal Insurers NR-4 99% 5.7% 10.2% 120.8
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
23
Peer Company Analysis – Top 20 WritersAverage Increase In Net Leverage = 28%
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Source: AM Best And The National Association Of Insurance Commissioners
Year-End 2001
Year-End 2002
A++ A- B++ Or LowerAM Best Rating
Net Leverage = (NPW + Net Liabilities) / Surplus
A
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Remaining Medical Malpractice Writers Are Capital Constrained
Opportunity To Sell In Hard Market Hampered By Poor Capital Adequacy As Measured By A.M. Best
Poor U/W Results Reduced Reported Surplus Net Capital Required To Support Rating Increasing
Substantially Rising Net Premiums Through Increased Market Share And
Rising Rates “Excessive Growth” Compounding Increased Required Capital Assumed Reserve Deficiency
A.M. Best Capital Adequacy Issues
Section 3
Reinsurance And DFA Considerations
25
Reinsurance Market Dynamics
Past Results Reflect Inadequate Primary Rates Significant Increase In Severity And Frequency Severity Increases Have Greater Effect On Excess
Reinsurers Reinsurance Market Response
Reinsurers Require Projected U/W Profit 12% - 18% ROE Perform Extensive Actuarial Analysis
Huge Concern Over Severity Trend, Reserves Restricted Capacity May Increase Rate At Renewal Despite Rate Increases And
Exposure Reduction By Cedant
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Reinsurance Market Dynamics
Reinsurer Focus Points Quality Of Business Plan/Underwriting Discipline Purchasing Philosophy Of Buyer
Cedants Extremely Leveraged Higher Primary Rates, Surplus Down Pressure On Rating (AM Best, S&P) Pressure On Capital Adequacy (BCAR, S&P CAR, RBC) But Reinsurers Will Not Do Quota Share Consider Non-Traditional, Structured Program, And/Or
Lower Excess Of Loss Retention
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Reinsurance ConsiderationsIn Medical Malpractice
Take Into Account Effective Rate Action Not Just Base Rate Increases Change In Schedule Credits/Debits Change In Increased Limits Factors
Take Into Account Changes In Exposure Limit And Attachment Profile State/Territory Mix Classification/Specialty Mix
Docs: OB/GYN, Cardiac Surgeons, Neurosurgeons Hospitals: Teaching Versus Not, Size, Rural/Urban
Coverage Not Just Per Claim (Per Doctor) Watch Out For Clash, ECO/XPL
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DFA ConsiderationsIn Medical Malpractice
Split ALAE Only From Indemnity And ALAE Claims Could Be 80/20 Split
Lognormal Works Very Well For Severity Both Indemnity And ALAE Watch For Clustering
Correlation Indemnity And Settlement Lag Indemnity And ALAE
Don’t Forget Parameter Uncertainty Coefficient Of Variation Worst Of All 10-Year Schedule P Lines
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