1 Reserving for Non-Medical Malpractice Casualty Loss Reserve Seminar September 8-9, 2003 Chicago,...

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Reserving forNon-Medical Malpractice

Casualty Loss Reserve SeminarSeptember 8-9, 2003

Chicago, Illinois

Jane C. Taylor, FCAS, JD

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Non-Medical Malpractice?

• Financial Managers / Business Advisors– Directors and Officers– Stock Brokers / Investment Houses– Lawyers– Accountants– Actuaries/Benefit Consultants– Insurance Agents/Brokers

Any Non-Medical Service Provider

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• Real Property– Contractors - NOT Malpractice– Lawyers / Title Companies– Accountants– Architects and Engineers– Real Estate Agents– Appraisers / Inspectors– Lenders ?


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• Miscellaneous /Other – School Boards– Travel Agents– Theatrical Agents / Media Professionals– Professional Trainers– Consultants


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External Influences:Financial / Investing

• Economy– Overall downturn - began in 2000– Downturn reinforced by events of 9/11

• Insurers absorbed major losses• Reinsurance tightened

– The 2003 Black Out - August 14-16• Increased oil prices• Major baby boom?

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Stock Market - recovering?Closing Values of NYSE

01/04/99-09/02/03

7000

7500

8000

8500

9000

9500

10000

10500

11000

11500

12000

01/0

4/9

9

03/0

4/9

9

05/0

4/9

9

07/0

4/9

9

09/0

4/9

9

11/0

4/9

9

01/0

4/0

0

03/0

4/0

0

05/0

4/0

0

07/0

4/0

0

09/0

4/0

0

11/0

4/0

0

01/0

4/0

1

03/0

4/0

1

05/0

4/0

1

07/0

4/0

1

09/0

4/0

1

11/0

4/0

1

01/0

4/0

2

03/0

4/0

2

05/0

4/0

2

07/0

4/0

2

09/0

4/0

2

11/0

4/0

2

01/0

4/0

3

03/0

4/0

3

05/0

4/0

3

07/0

4/0

3

Close

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Unemployment– Up … and Down… and Up …and

• Jobs going overseas• Hiring postponed• Varies widely by state / area

– Low South Dakota: 3.10%– High: Alaska:7.70%, Oregon: 7.50%,

Washington:7.30%

• Surprise 93,000 jobs cut week ending 09/05/03

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Unemployment Countrywide Unemployment Percentage

4.5%4.2%

4.0%

4.7%

5.8%

6.2% 6.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1998 1999 2000 2001 2002 July2003

August2003

Percent

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• Consumer Credit– High delinquency ratio ( > 30 days)– Very high debt to asset ratio– “No payment until 2004” – “Zero interest until 2006”

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Consumer EconomyConsumer Credit Accounts 30+ Days Past Due

2.000

2.500

3.000

3.500

4.000

4.500

1Q99

2Q99

3Q99

4Q99

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

Perc

ent

of A

ccounts

Bank Card Composite Index (Closed-End)

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Effects on Insurance

• Restaurants– 9 - 18 months after downturn– Fire– Vandalism– Other Damage -Beer Flood

• Mortgage Guaranty– 18 - 36 months after downturn – Mortgage paid for as long as possible

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Effects on Non Medical Malpractice

Boom - Bust Cycles• Boom Times - Somebody messes up

– Loses money– Making too much money to care– Opportunities too great

• Remedies– None, do not care– Money to fix from future profits

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Boom - Bust Cycles• Bust Times - Somebody messes up

– Losing money– Larger percent of remaining funds– Matters more

• Remedies

–Who put me in this position?

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• Financial Managers / Business Advisors– Directors and Officers– Stock Brokers / Investment Houses– Lawyers– Accountants– Actuaries/Benefit Consultants– Insurance Agents/Brokers

Who put me in this position?

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Economy– Unemployment

• Delinquencies ( > 30 days) 4th Q 2001 4.67%4th Q 2002 4.53%1st Q 2003 4.52%

• New Foreclosures 4th Q 2002 0.25%1st Q 2003 0.37%

External Influences: Real Property

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• Economy– Overall downturn

• No Longer Profitable to Move Ahead• Large Commercial Bankruptcies

– Some specific areas in difficulty • Northwest - Again • Southeast


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• Real Property– Lawyers / Title Companies– Accountants– Architects and Engineers– Real Estate Agents– Appraisers / Inspectors– Lenders - Predatory Lenders

Who put me in this position?

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External Influences:Judicial

• Judicial System– American ideal

• Something bad happens• “It’s not my fault”• Someone will pay

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• Judicial System (Con’t)– Legal system supports “innovative”

claims• Legislation changes options• Lawyers seek new channels• Legal “Fads”

– Construction defect– Mold– Medical Malpractice - again

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• Judicial System (Con’t)– Texas and Florida

• No Sealed Settlements• Increase Insurance Costs?

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External Influences: Regulatory

• SEC - Misfeasance or Malfeasance?• Enron• World com• Tyco• ImClone

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External Influences: Regulatory

• Insurance– Insurance Company Insolvencies

Increasing• Reliance• Kemper• ROA and affiliated companies

– NAIC wants Independent Audit of Data Underlying Actuarial Opinion

– More Accountability for Opining Actuary

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Who Sues?• Financial Advisors

– Individuals to Whom Advice Given• Options• Investments

– Shareholders - Individual or Class Action– SEC - Civil and/or Criminal

• Enron - D&O, Accountants• ImClone - D&O, “Insiders”

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Who Sues?• Financial Advisors (Con’t)

– Insurance Departments - Civil and/or Criminal• Pennsylvania - Directors, Officers,

“Insiders”, Actuary, Accountants• Massachusetts - Directors, Officers, Actuary• A.M. Best??• Investment Advisors??

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Who Sues?• Real Property

– Homeowners/ Homeowner Associations• Radon, Environmental• Subsidence• Mold

– Investors/Developers• Wrong Property• Odors

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Who Sues?• Real Property (Con’t)

– State/Townships• Delaware Hotel

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Occurrence v Claims Made Coverage

Occurrence

1/ 99 1/ 00 1/ 01 1/ 02 1/ 03

1999 2000 2001 2002

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Occurrence v Claims Made Coverage

Claims Made

1/ 99 1/ 00 1/ 01 1/ 02 1/ 03

1999 2000 2001 2002

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Claims Made Coverage• Reported Claims

– Know Claim Count• “John Doe” Defendants

– Embedded Problems • Past Years Exposures• Shifting Mix

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Claims Made Coverage (Con’t)• Extended Reporting Endorsement -

“Tail”– Entitlement to Coverage– May Be Free– May Be Unlimited– One Policy Limit - Generally

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• Data– Delay in Effect Due to Claims Made– Increased Frequency 1998-2002– Increased Severity 1998-2003– Client Security Violations 2002-2003 – Tail Claims ?

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33

Reserving for Non-Medical

Professional LiabilityCasualty Loss Reserve Seminar

September 8-9, 2003Chicago, IL

Kim E. Piersol, FCAS, MAAA

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State of the Insurance Marketplace

• The Marketplace is HARD– Profitability Not Perceived - Decreasing

Acceptable Combined Ratios (see Issue #3)

– Difficulty Purchasing Coverage/Coverage Narrowed, Limits Reduced, etc.

– Gravitation Away From Both Very Large and Very Small Insureds

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• The Marketplace is HARD (Con’t)– Recognition of Large Reserve

Deficiencies (see Issue #1)– Growth in Alternative Markets– Growth in “Distressed” Risks/Gravitation

to Surplus Lines

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• Underwriter Withdrawals (Some Involuntary)– Kemper Specialty– Virginia Surety– Lexington Insurance Company– Etc., Etc.

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Current Primary Players


CNA Westport Zurich ARCH Capital Chubb Executive Risk ACE

Clarendon Monitor/Carolina Casualty AIGSt. Paul Great American Hartford

Lloyds of London Gulf Liberty NationalFireman’s Fund Philadelphia Ins Cos. Various Mutuals

Evanston ALAS Interstate

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•New Players/Alternative Markets– Underwriters Come and Go– RRGs– Purchasing Groups– Captives (Difficulty Finding

Paper/Reinsurance)– Self-Insurance– Capital Markets

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Professional Liability Insurance Lines and Sub-Lines

Medical Non-Medical ManagerialProfessional Liability Professional Liability Liabilty

Physicians Accountants D & O

Hospital Lawyers Fiduciary Liability

Allied Health Care Media EPLI

MCO Technology

Public Officials

Insuance Agents

Real Estate

Miscellaneous

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“Unique” Reserving Issues

– Increased Pressure on Profitability – Each LOB/Program Must Meet Owners Goals and Targets

– Tendency to Strengthen Reserves (“Prior Regime’s Fault”)

– Pressure (Perceived or Real) on Claims

• Issue #1 – Your Company Changes Ownership and/or CEOs

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– Adjusters to Set-Up “Ultimate” Case Reserves

– Reverse Is Usually True in Due-Diligence Situations

• Issue #1(Con’t) – Your Company Changes Ownership and/or CEOs

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• Since Non-Medical PL Lines are Claims-Made, ANY CHANGE IN CASE RESERVING PHILOSOPHIES WILL DRAMATICALLY AFFECT THE RESERVING ACTUARY

• Issue #1(Con’t) – Your Company Changes Ownership and/or CEOs

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– Shy Away From “Standard” LDF Reserving Approaches•Incurred Loss Development•Paid Loss Development (yes, even the

payment patterns can be affected)•Backward-Recursive

• Partial Solutions to Issue #1

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– Depending on Size of Book (Stability), Using Berquist/Sherman Adjustments May Do the Trick on Loss Development Methods

– Since It Is a Claims-Made Product, Frequency (a given) x Severity May Work Well

– Pay More Attention to Large, Unpaid Losses


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– Many Companies Write Several Different Non-Medical Lines

– Many Companies Enter & Exit Lines Individually and/or Rate of Growth May Differ Significantly

• Issue #2 – Mix of (Sub) Lines-of-Business

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– Keep Lines-of-Business Separate (Backward-Recursive Usually Works Well)

– If You Must Combine, Recognize Mix Change in Development Factor Selections


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– Pressure to “Not Show a Loss” on New Lines– Non-Medical PL Pricing Experience Data for

New Entrants Basically Non-Existent or Not-Applicable (See Also Issue #7)

– Pressure to Produce – Pricing Off “Lowest” Competitor

• Issue #3 – The Use of “Pegged” Loss Ratios for “New” Lines-of-Business

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– “Let’s Wait Until We Have the Experience to Reserve For This” – HUH??

– Historically, “Pegs” Are Usually Based on Underwriting or Economic Break-Even

• Issue #3 (Con’t.) – The Use of “Pegged” Loss Ratios for “New” Lines-of-Business

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– Always Consider Murphy’s Law– Never Lose Sight That Under Reserving

Effects Will Multiply, •$50 million book pegged at a 75.0%• If it develops to a 175.0%, you’re $150

million in-the-hole after three years


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• Importance of Range, “What If” Analyses Up-Front

• Partial Solutions to Issue #3 (Con’t)

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– Exiting Carriers (Usually) Must Offer Extended Reporting if Leaving

– Exiting Carriers May Trigger Flurry of Incidence Reporting

• Issue #4 – “Tailing-Out” and/or “In-With-No-Priors”

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– Programs With Significant Rate Action May Make It Advantageous for Insured to Trigger Extended Reporting and Purchase First-Year Claims-Made With Another Carrier

– Step-Rating Provides for Another Variable and Recognizes Differences in Coverage and Development Based Upon Retroactive Date

• Issue #4 (Con’t) – “Tailing-Out” and/or “In-With-No-Priors”

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– Keep Track of Retroactive Dates and Claims-Made Step Factor in Data Bases – Extended Reporting and Incident Reporting Will Result in Very Different Development Patterns

– Rule-of-Thumb #1: Mass Triggering of Extended Reporting or Incident Reporting Will Produce a (Very) Unprofitable Situation


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– Rule-of-Thumb #2: Mass “In-With-No-Priors” Usually Produces Favorable Results


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– An Event May Trigger Multiple Non-Medical PL Coverages, e.g., A U.S. Stock Insurance Company Insolvency Will Probably Trigger:D&OAccountantsActuaries (If an Outside Consultant)Lawyers

• Issue #5: Catastrophic Claims Situations (Clash)

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– Other Industries May Trigger Other P/C Lines (e.g. Enron, WorldCom, etc., etc.)SuretyFiduciaryEven W/C ??Others

• Issue #5 (Con’t): Catastrophic Claims Situations (Clash)

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– Handle Big-Ticket Events Separately– Work Closely With Underwriters,

Lawyers and/or Claims Adjusters

• Partial Solutions to Issue #5:

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– Degree Varies By Line– “Tailing-Out” To Maintain Broader

Coverage/Higher Limits on Prior Acts (See Issue #4)

• Issue #6: The Hard Market Has Narrowed Coverage/Lowered Limits in Many Cases

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– Capture Kind-of-Loss, Deductibles, Policy Limits, etc., In Your Reserving Databases

– The Reserving Actuary Should Maintain a Close Working Relationship With the Pricing Actuary


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– Be Aware That Changes in Coverage May Infer Different $ and Claim Count Development and that Historical Development and Trends May Need Modification

• Partial Solutions to Issue #6 (Con’t):

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– Unlike Medical Professional, Non-Medical PL Does Not Have Its Own Schedule P Line

– No Separate Tracking by “Ratemaking” Agencies (ISO, NCCI, RAA, etc)

• Issue #7: Lack of Industry Information to Supplement Your Company’s Loss Experience History

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– Obtain Rate Filings of Admitted Carriers {Theoretical – Even Admitted Company Filings are “Sparse” for Non-Medical PL}

– Communicate With Underwriters & Claims Adjusters


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– Other Sources of Non-Medical PL Information:Professional Liability Underwriting

Society (PLUS)- “Professional Liability in the New Economy”


www.plusweb.org/foundation/GSUStudy-FinalReport.pdf

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Other Sources of Non-Medical PL InformationWyatt D&O StudyAmerican Bar Association – Standing

Committee on Professional LiabilitySome Brokers/Administrators Perform

“Surveys”


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– Reluctance to Use Marker/Mohl (Backward Recursive)

– Failure to Take Advantage of the Reported Claims “Drop-Kick”

– Publication of “Nonsensical” Ultimates

• Issue #8: Observed Lack of Employment of Claims-Made Reserving Methodologies by Some Company Reserving Actuaries

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– At Least Look At and Acknowledge Implied IBNR/Case Reserve Ratios By Report (Accident) YearFor an Older Year With No Outstanding

Case Reserves (All Claims Have Been Paid and Closed), Don’t Show an IBNR Reserve


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There Should Be Some Sort of Reasonable Progression of These Ratios – At Least Question “Reversals”

– Don’t Dismiss Backward Recursive Out-of-Hand – AT LEAST TRY IT


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– Communicate With Underwriters & Claims Adjusters

– Be Consistent With Pricing Actuary– Homogeneous Groupings

–Lines-of-Business–Extended Reporting Vs. Claims-Made

• Summary - Things Not To Forget

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– Avoid the Use of Pegs – If Used, Perform Sensitivity Testing and Communicate Results

– Handle Large Catastrophic Claims Separately

• Summary - Things Not To Forget

– Backward Recursive

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