Reinsurance Boot Camp on Reinsurance Boot Camp on Pricing TechniquesPricing Techniques

Aug 2007Aug 2007

Medical MalpracticeMedical MalpracticeLeonard Chung, FCASLeonard Chung, FCAS

Transatlantic Reinsurance CoTransatlantic Reinsurance Co

Some Unique Issues on Physicians Some Unique Issues on Physicians Professional Liability Reinsurance Professional Liability Reinsurance

PricingPricing

Clash CoverClash Cover XPLXPL Tort ReformsTort Reforms Recent Market TrendRecent Market Trend

Source of Significant Clash Source of Significant Clash ClaimsClaims

High Concentration in a geographic High Concentration in a geographic areaarea

Clash among claims against Drs, Clash among claims against Drs, corps, and hospitals when they are corps, and hospitals when they are all insuredsall insureds

Exasperated by the trend of more Exasperated by the trend of more Drs working in groupsDrs working in groups

Treatments of Clash in Treatments of Clash in Reinsurance ContractReinsurance Contract

Definition: Claims against more than one Definition: Claims against more than one risk(insured) due to same event (usually risk(insured) due to same event (usually interpreted as one claimant)interpreted as one claimant)

XOL covers inures to the benefit of Clash coversXOL covers inures to the benefit of Clash covers Trigger:Trigger:

Option (1) the first claim report date, regardless of CM or Option (1) the first claim report date, regardless of CM or Occ policies, even though the XOL piece is policy Occ policies, even though the XOL piece is policy attachingattaching

Problem: when clash among claims in years when clash Problem: when clash among claims in years when clash layer varieslayer varies

Solution: Interlocking clause-wt avg retention and limitSolution: Interlocking clause-wt avg retention and limit Option (2) claims stay at respective policy year or loss Option (2) claims stay at respective policy year or loss

year and Event total recovery is proportionally year and Event total recovery is proportionally distributed to each year based on the Ground-up amountdistributed to each year based on the Ground-up amount

Interlocking Clause ExampleInterlocking Clause Example

An Event with 3 claims from 3 report yearsAn Event with 3 claims from 3 report yearsRep YrRep Yr Loss Loss

AmtAmtXOL CoverXOL Cover Clash Clash

LimitLimitClash Clash RetentioRetentionn

Losses Net Losses Net of XOL of XOL RecoveryRecovery

% of % of TotaTotal Net l Net Evt Evt LossLoss

Clash Clash Recovery Recovery after after InterlockinInterlockingg

20042004 1M1M 2.5Mx500K2.5Mx500K 4M4M 500,000500,000 500,000500,000 29%29%

20052005 250250KK

2.25Mx7502.25Mx750KK

4M4M 750,000750,000 250,000250,000 14%14%

20062006 3M3M 2Mx1M2Mx1M 4M4M 1,000,001,000,0000

1,000,0001,000,000 57%57%

TotalTotal 1,750,0001,750,000

Wt AvgWt Avg 4M4M 821,429821,429 928,571928,571

Charges for Clash CoverCharges for Clash Cover

Explicit charge as % of premium net Explicit charge as % of premium net of XOL premiumof XOL premium

Included in XOL rate (swing or flat Included in XOL rate (swing or flat with a load)with a load)

Included in XOL cessionIncluded in XOL cession

Analysis of Clash Cover Analysis of Clash Cover LossesLosses

Experience Rating:Experience Rating:-Development-probably similar to XOL claim development -Development-probably similar to XOL claim development since 2since 2ndnd claim could be interpreted as xs losses claim could be interpreted as xs losses-Development is unstable: Most recent diagonal of Triangles -Development is unstable: Most recent diagonal of Triangles often get restated due to reassignment of 1often get restated due to reassignment of 1stst defendant defendant-may need to make adjustment for change in geographic -may need to make adjustment for change in geographic concentration of the book of business and the percentage concentration of the book of business and the percentage of insureds belonging to groups (with separate corporate of insureds belonging to groups (with separate corporate limits)limits)

Exposure Rating Methods:Exposure Rating Methods:A) Interpret 2nd claim as an excess claim when the A) Interpret 2nd claim as an excess claim when the corporation has a separate limit: using ILF.corporation has a separate limit: using ILF.B) Interpret multiple claims as random event: use B) Interpret multiple claims as random event: use simulation.simulation.

Clash Layer Exposure Rating Clash Layer Exposure Rating Example AExample A

AssumptionsAssumptions

All policy limits are 3MAll policy limits are 3M ILFs from 1M: 2M=1.30, 3M=1.45, 4M=1.55ILFs from 1M: 2M=1.30, 3M=1.45, 4M=1.55 XOL layer 2Mx1M; Clash layer 3Mx1M, rated as 1stM XOL layer 2Mx1M; Clash layer 3Mx1M, rated as 1stM

PremPrem All multiple-claim events come from the claim against All multiple-claim events come from the claim against

the corporate’s limitthe corporate’s limit 35% of the exposure from phys insureds belonging to 35% of the exposure from phys insureds belonging to

groups with separate corporate limitsgroups with separate corporate limitsCalculation:Calculation:22ndnd claim=1Mxs3M FGU claim=1Mxs3M FGUClash layer loss/Subj Prem=(1.55-1.45)/1.0xELRx35%Clash layer loss/Subj Prem=(1.55-1.45)/1.0xELRx35%

Clash Exposure Rating Clash Exposure Rating Example BExample B

Simulation:Simulation:

Assumptions:Assumptions:

Average claims per Event=3.0Average claims per Event=3.0

-Poisson distribution with a -Poisson distribution with a parameter=3parameter=3

-Each claim has same size of loss -Each claim has same size of loss distribution cap at XOL attachment distribution cap at XOL attachment pointpoint

Sources of Significant XPLSources of Significant XPL

-States where most Drs buy low -States where most Drs buy low limits and state laws allow collection limits and state laws allow collection beyond policy limits: FL, TXbeyond policy limits: FL, TX

-Primary companies’ strategy in -Primary companies’ strategy in defending claimsdefending claims

-post judgment penalty-post judgment penalty

Treatments of XPL in Treatments of XPL in Reinsurance ContractReinsurance Contract

Included in regular losses(80%, 90%, Included in regular losses(80%, 90%, 100%), but provide extra limits (e.g. 100%), but provide extra limits (e.g. 4Mx1M for policies with limits up to 4Mx1M for policies with limits up to 2M)2M)

A separate limit on XPL per claimA separate limit on XPL per claim Added to the per Event sectionAdded to the per Event section Watch out for Treatment of ALAE Watch out for Treatment of ALAE

when it is pro ratawhen it is pro rata

Charges for XPL CoverCharges for XPL Cover

A flat, or swing rate, usually coincide A flat, or swing rate, usually coincide with XOL coverwith XOL cover

Analysis of XPL Cover Analysis of XPL Cover LossesLosses

DevelopmentDevelopment-case reserve development not likely-case reserve development not likely-most development due to IBNR-most development due to IBNR

Trend beyond policy limitsTrend beyond policy limits Exposure RatingExposure Rating

Do not apply it as a load on XOL exposure Do not apply it as a load on XOL exposure rating when limit profile is changingrating when limit profile is changing

Why?Why?

Some Common features in Some Common features in recent tort reformsrecent tort reforms

Cap on non-economic damagesCap on non-economic damages Cap on Legal fees/Contingent feesCap on Legal fees/Contingent fees Collateral source offsetsCollateral source offsets Limitation on joint and several liabilityLimitation on joint and several liability Requiring Plaintiffs to Certify merit of claimsRequiring Plaintiffs to Certify merit of claims Restrict qualification on expert witnessRestrict qualification on expert witness Restrict venue of suit (e.g. PA)Restrict venue of suit (e.g. PA) Eliminate post judgment penalty if carriers Eliminate post judgment penalty if carriers

tender policy limit within a time period (e.g. FL)tender policy limit within a time period (e.g. FL)

Estimating Effect of Tort Estimating Effect of Tort ReformsReforms

Difficult to anticipate effect on losses Difficult to anticipate effect on losses due numerous combinations of due numerous combinations of features and different legal features and different legal environmentenvironment

Use Ground-up loss experience to Use Ground-up loss experience to detect early signsdetect early signs

Look at both severity and frequencyLook at both severity and frequency

Major features in Texas tort Major features in Texas tort reformreform

Non-economic losses for Claims filed Non-economic losses for Claims filed after 9/1/03 is capped at 250K per after 9/1/03 is capped at 250K per claimant for all Drs and providers claimant for all Drs and providers combinedcombined

Allow offering party to recover litigation Allow offering party to recover litigation cost from other party if final judgment cost from other party if final judgment is within 20% of the rejected offeris within 20% of the rejected offer

Passed state constitutionPassed state constitution

A Texas Carrier Untrended Sch A Texas Carrier Untrended Sch PP

YearYear Ult SevUlt Sev Freq/ OL EPFreq/ OL EP ULR on OL EPULR on OL EP ULRULR

19971997 187187 0.435%0.435% 81%81% 114%114%

19981998 220220 0.416%0.416% 92%92% 137%137%

19991999 222222 0.356%0.356% 79%79% 142%142%

20002000 277277 0.273%0.273% 75%75% 134%134%

20012001 245245 0.286%0.286% 70%70% 103%103%

20022002 273273 0.339%0.339% 92%92% 101%101%

20032003 257257 0.432%0.432% 111%111% 101%101%

20042004 378378 0.125%0.125% 47%47% 39%39%

20052005 461461 0.116%0.116% 54%54% 46%46%

20062006 422422 0.183%0.183% 77%77% 72%72%

Major features in Florida tort Major features in Florida tort reformreform

For action accrued on/after 9/15/03, Non For action accrued on/after 9/15/03, Non economic damage cap:500K per claimant, economic damage cap:500K per claimant, 500K per Dr, max recoverable from all cap at 500K per Dr, max recoverable from all cap at 1M; Cap is lower for emergency care, higher 1M; Cap is lower for emergency care, higher for other hospitals activitiesfor other hospitals activities

Bad faith law: Safe harbor for insurer to Bad faith law: Safe harbor for insurer to tender policy limit, measured from date suit tender policy limit, measured from date suit is filedis filed

Nov 2004 passed: reduced atty fees to 20% Nov 2004 passed: reduced atty fees to 20% of 1of 1stst250K and 10% of settlement thereafter250K and 10% of settlement thereafter

A Florida Carrier Untrended A Florida Carrier Untrended Sch PSch P

YearYear Ult SevUlt Sev Freq/ OL EPFreq/ OL EP ULR on OL ULR on OL EPEP

ULRULR

19971997 288288 0.158%0.158% 46%46% 118%118%

19981998 260260 0.158%0.158% 41%41% 104%104%

19991999 276276 0.148%0.148% 41%41% 100%100%

20002000 351351 0.153%0.153% 54%54% 124%124%

20012001 321321 0.176%0.176% 56%56% 108%108%

20022002 354354 0.163%0.163% 58%58% 88%88%

20032003 384384 0.181%0.181% 69%69% 84%84%

20042004 442442 0.127%0.127% 56%56% 58%58%

20052005 649649 0.109%0.109% 71%71% 69%69%

20062006 620620 0.110%0.110% 68%68% 66%66%

Tort Reforms do’nt always Tort Reforms do’nt always improve (Re)insurance improve (Re)insurance

companies resultscompanies results Legal system may allow plaintiff to Legal system may allow plaintiff to

circumvent capscircumvent caps Constitutional challengeConstitutional challenge accompanied with rate decreasesaccompanied with rate decreases

Recent Market Trend and Recent Market Trend and Implication on Reinsurance Implication on Reinsurance

PricingPricing Decreasing FrequencyDecreasing Frequency Severity continues to go upSeverity continues to go up Rate level ErosionRate level Erosion Higher RetentionHigher Retention