The Opportunity Presented by Medical Malpractice Databases and GLM

CAS GLM Seminar

October 4, 2004

Robert J. Walling, FCAS, MAAA

A Brief Recap

Cyclical Swings

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Net

Ope

ratin

g R

atio

Medical Malpractice All Lines Homeowners Workers Compensation Other Liability Private Passenger AL

Availability Problems Frontier – Rehabilitation 8/01 Reliance – Liquidation 10/01 St. Paul – Exits Market 12/01 PHICO – Liquidation 2/02 MIIX – Voluntary Run-off 5/02 Reciprocal of America Group – Liquidation 6/03 Legion – Liquidation 7/03

Over 30% of the 1999-2000 market is goneAnother 10-20% has been downgraded severely

enough to impact the availability of coverage

Availability Problems

State % DisplacedAR 52.6%DE 67.8%IA 37.8%KS 35.6%LA 36.5%MT 33.9%ND 36.2%NE 47.5%NH 46.7%

State % DisplacedNJ 53.4%NV 40.6%PA 43.1%PR 39.0%SC 60.5%SD 68.5%VT 36.8%WV 42.5%

Widespread, but not Uniform

A Brief Recap – Industry Perspective Severities Gone Wild ● Negative Outcomes, Unpredictable Costs Not Malpractice

(Timing & Magnitude) ● Market Exits Due to Entitlement Juries Inadequate Rates Big Attorney Pay Days Caps on Non-Economics ●Caps on Atty Cont. Fees

A Brief Recap – Trial Bar PerspectiveInsurance Companies Healthcare Providers Excessive Profits ● Repeat Offender Docs Destructive Competition ● Defensive Medicine Poor Investment Policy ● No Overall Medical Rate Gouging Outcome Improvement Must Need Better (More) ● Must Need Better (More) State

Regulation Oversight

Industry Reserve Development

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Original Held Mature Evaluation

Signs of Intrigue – “Destructive” Price Competition

“While an increase in litigation and higher damages awards are often blamed for rising premiums, insurance companies may be equally culpable due to their pricing policies of the 1990s.”

- Robert Wood Johnson Foundation

Signs of Intrigue - AffordabilityYear Premium Annual Change

2003 213,763 30.0%

2002 164,437 40.5%

2001 117,049 12.7%

2000 103,859 27.0%

1999 81,765 17.2%

1998 69,786 12.1%

1997 62,259 -7.3%

1996 67,141 +5.7%

Annual Average 16.7%

Broward County, FL General Surgeons Source: Medical Liability Monitor

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Medical Malpractice Private Passenger AutoLiability

Workers Compensation

Line of Business

Penn

ies

per D

olla

r of P

rem

ium

Losses ( Claimants' Share) Losses ( Attorneys' Share) ALAE ULAE Commissions Taxes, Licenses & Fees Other Acquisition Expense General Expenses

Regulators “Inescapable” Conclusion

Thecurrent

system iswoefully

inefficient

Regulators “Inescapable” Conclusion

Data for a conclusive answer is rarely available

Various States of Readiness

Got it (e.g. FL, ME) Thought they had it (e.g. OR) Just Getting Started (e.g. NC, VT, OH)

Florida Closed Claim Database Injury Location (e.g. Hospital, Delivery Room) Occurrence, Report, Suit, and Settlement Dates Patient Date of Birth, Sex Severity of Injury (e.g. Emotional, Death, Serious) Insured County & County of Suit Method & Stage of Settlement Arbitration indicator Insurer Type Insured Specialty (e.g. 80267- Pediatrics) Insured Limits Indemnity Paid (Medical, Wage & Other; future) Loss Adjustment (Defense Costs vs. Other ALAE) Non-Economic Loss

Predicted Values

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

0%

2%

4%

6%

8%

10%

12%

14%

Occ_Year

Severity Trends by Occurrence Year

Non-Economic Damages by Occurrence Year

Predicted Values

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0%

2%

4%

6%

8%

10%

12%

14%

Occ_Year

Predicted Values

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

Occ_Year

SEV_DESC (DEATH)

SEV_DESC (Emotional Only - Fright, no physical damage)

SEV_DESC (Permanent: Major -Paraplegia, blindness, loss of twolimbs, brain damage.)

SEV_DESC (Permanent: Minor -Loss of fingers, loss or damage to organs. Includes non-disabling injuries.)

SEV_DESC (Permanent: S ignificant - Deafness, loss of limb, loss of eye, loss of one kidney or lung.)

SEV_DESC (Temporary: Major - Burns, surgical material left, drug side effect, brain damage. Recovery delayed.)

SEV_DESC (Temporary: Minor - Infections, misset fracture, fall in hospital. Recovery delayed.)

SEV_DESC (Temporary: S light -Lacerations, contusions, minor scars, rash. No delay.)

Claim Severity by Injury Type Over Time

Predicted Values

-1000

1000

3000

5000

7000

9000

11000

0 1 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 25HIGHINJ

0

50

100

150

200

250

300

ATTORNEY (3) ExposureATTORNEY (2) ExposureATTORNEY (1) ExposureATTORNEY (2)ATTORNEY (1)

Impact of Attorney Involvement on Claim Severity

Severities by Settlement LagPredicted Values

0

10,000

20,000

30,000

40,000

50,000

60,000

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Settlement_Lag

ALAE / Loss+ALAE by Settlement LagPredicted Values

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Settlement_Lag

Severities By Claim TypePredicted Values

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

DEA TH Emotional Only -Fright, no physical

damage

NO RES PONSE Permanent: Grave -Quadraplegia,severe brain

damage, lifelongcare or fatalprognosis.

Permanent: Major -Paraplegia,

blindness, loss oftwo limbs, brain

damage.

Permanent: Minor -Loss of fingers,

loss or damage toorgans. Includes

non-disablinginjuries.

Permanent:S ignificant -

Deafness, loss oflimb, loss of eye,loss of one kidney

or lung.

Temporary: Major -Burns, surgicalmaterial left, drugside effect, brain

damage. Recoverydelayed.

Temporary: Minor -Infections, misset

fracture, fall inhospital. Recovery

delayed.

Temporary: S light -Lacerations,

contusions, minorscars, rash. No

delay.

SEV_DESC

Differences by Age & SexPredicted Values

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

10 20 30 40 50 60 70 80

IP_Age

IP_Sex (F)

IP_Sex (M)

Other Issues Reviewed

Impact of Local Courts Differences by Specialty Impact of Insured Limits Impact of Standard vs. Alternative Mkts Trends by Severity of Injury Location of Injury

Future GLM Directions Better databases will be built Better matching exposures will be available Add US Chamber of Commerce Litigation

Rank to Multi-State Analysis Impact of Loss Prevention and System

Efficiency Measures Look for Shifts to Economic Damages After

Non-Economic Damage Caps

Future Medical Malpractice Directions Trial Lawyers & Insurers will still disagree New medical technology will be developed Diagnoses will not be perfect The struggle to improve medical care;

at affordable costs; with reasonable compensation; and an efficient system from strong, stable, responsible insurers will continue…