INTERNAL USE ONLY Captive Reserving Strategies Susan Beutel Senior Director, Claim & Litigation...

INTERNAL USE ONLY

Captive Reserving Strategies

Susan BeutelSenior Director, Claim & Litigation Counsel, Ascension

Daniel NashNational Healthcare Practice Leader, Zurich North America

Robert BartoloneNational Director, Healthcare Claims, Zurich North America

December 5, 2013

INTERNAL USE ONLY 12/5/2013

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?


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



LOW MEDIUM HIGHRNN Weighting -

Estimate of DamagesPast MedicalsFuture MedicalsWagesPain & SufferingLoss of ConsortiumTOTAL: -$ -$ -$

"ESTIMATED VALUE" OF TOTAL DAMAGES AWARD: -$ (i.e., "probability- weighted" average value of the range)

INFORMATION FULL VALUE:

Probability of plaintiff verdict:

Apportionment of negligence:

Plaintiff's %Reinsured's %Codefendant's %

RISK NEUTRAL VALUE: -$

25% 50% 25%(subject to exposure - should total 100%)


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

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%.

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 = $220,000Medium: 9 years @ $55,000 = $495,000High: 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 = $500,000Medium: 7.5 years @ $200,000 = $1,500,000High: 10 years @ $350,000 = $3,500,000

• Pain & Suffering: Verdicts for similar incident ranged from $1.5M to $6M. Low: $1.5MMedium: $2.5MHigh: $6M




Estimate of DamagesPast Medicals 2,500$ 2,500$ 2,500$ Future Medicals 500,000$ 1,500,000$ 3,500,000$ Wages 220,000$ 495,000$ 670,000$ Pain & Suffering 1,500,000$ 2,500,000$ 6,000,000$ Loss of Consortium 10,000$ 10,000$ 10,000$ TOTAL: 2,232,500$ 4,507,500$ 10,182,500$

"ESTIMATED VALUE" OF TOTAL DAMAGES AWARD: 5,357,500$ (i.e., "probability-weighted" average value of the range)


Probability of plaintiff verdict: 60%


Plaintiff's % 0%Reinsured's % 25%Codefendant's % 75%

100%

RISK NEUTRAL VALUE: 803,625$



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


Reserve Evaluation-Captive PerspectiveNo Caps + Co-Defendant Exposure


Estimate of DamagesPast Medicals $1,085,939 1,085,939$ 1,085,939$ Future Medicals 2,000,000$ 9,000,000$ 19,000,000$ Wages 1,000,000$ 1,500,000$ 2,500,000$ Pain & Suffering 4,000,000$ 8,000,000$ 15,000,000$ Loss of ConsortiumTOTAL: 8,085,939$ 19,585,939$ 37,585,939$

"ESTIMATED VALUE" OF TOTAL DAMAGES AWARD: 21,210,939$ (i.e., "probability-weighted" average value of the range)


Probability of plaintiff verdict: 70%


Plaintiff's % 0%Reinsured's % 30%Codefendant's %

70%

RISK NEUTRAL VALUE: 4,454,297$



Reserve Timing-Reinsurer Perspective

Injury/severity driven statistical reserves @ claim inception

Injury Type

Claim Status All other injuries Death Paralysis/Major Amputation

Serious brain damage/Cognitive

injury

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


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



• 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


Reserve Timing – Captive perspective

Injury/severity driven statistical reserves @ claim inception

Injury Type

Claim Status All other injuries Death Paralysis/Major

AmputationSerious brain

damage/Cognitive injury

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



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



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

Talking Points:• What are Ascension’s best practices?• How does Ascension assure compliance with best practices to

assure consistency in reserve timing?



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 * * *


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


Reserve Timing-Text Mining Methodology ExampleOriginal Claim NotesDocument 1: life planDocument 2: had surgeryDocument 3: had emergency op Document 4: had life careDocument 5: discharged

Revised Claim NotesDocument 1: life planDocument 2: had surgeryDocument 3: had emergency surgeryDocument 4: had life planDocument 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”.


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


Reserve Timing-Text Mining Example Results

Claim Notes Claim Severity ($)Severity –

Over $1MMPredictor:

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 - NONo Life plan

/Surgery

Summarized Severity and Significant Predictor(s)

Document 1: life planDocument 2: had surgeryDocument 3: had emergency surgeryDocument 4: had life planDocument 5: discharged

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.


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.


Captive Reserving Strategies

Closing Remarks

Questions

INTERNAL USE ONLY Captive Reserving Strategies Susan Beutel Senior Director, Claim & Litigation...

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