Reserving for Non-Medical Malpractice Casualty Loss Reserve Seminar September 23-24, 2002 Arlington,...

Reserving forNon-Medical Malpractice

Casualty Loss Reserve SeminarSeptember 23-24, 2002

Arlington, Virginia

Jane C. Taylor, FCAS, JD

Non-Medical Malpractice?

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

Any Non-Medical Service Provider


• Real Property– Contractors - NOT Malpractice– Lawyers– Accountants– Architects and Engineers– Real Estate Agents– Appraisers– Inspectors



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


External Influences:Investing in Personal

Property• Economy

– Overall downturn - began in 2000• Stock Market - Down• Employment - Up …. and Down…. and Up• Bankruptcies - Up

– Some specific areas in difficulty • E-Commerce/Internet• Tech based businesses• Telecommunications

Effects on Non Medical Malpractice

Boom - Bust Cycles• Boom Times - Some body messes up

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

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


Boom - Bust Cycles• Bust Times - Some body messes up

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

• Remedies

–Who put me in this position?


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

Who put me in this position?

• Economy– Overall downturn

• Unemployment• Foreclosures at 30 Year High• No Longer Profitable to Move Ahead

– Some specific areas in difficulty • California - Again • Any Tech Regions• Countrywide?

External Influences: Real Property

External Influences: Real Property

• Real Property– Lawyers– Accountants– Architects and Engineers– Real Estate Agents– Appraisers– Inspectors

Who put me in this position?

External Influences:Judicial

• Judicial System– American ideal

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

– Legal system supports “innovative” claims• Legislation changes options• Lawyers seek new channels• Legal “Fads”

External Influences:Judicial

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

• No Sealed Settlements• Increase Insurance Costs?

External Influences: Regulatory

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

• Insurance– Insurance Company Insolvencies

Increasing– NAIC wants Independent Audit of Data

Underlying Actuarial Opinion


Who Sues?• Financial Advisors

– Individuals to Whom Advice Given• Options

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

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


Who Sues?• Financial Advisors (Con’t)

– Insurance Departments - Civil and/or Criminal• Pennsylvania and Massachusetts

– Directors – Officers – “Insiders” – Actuary


Who Sues?• Real Property

– Homeowners/ Homeowner Associations• Radon, Environmental• Subsidence

– Investors/Developers• Wrong Property• Odors


Who Sues?• Real Property (Con’t)

– State/Townships• Delaware Hotel


Occurrence v Claims Made Coverage

Occurrence

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

1999 2000 2001 2002


Occurrence v Claims Made Coverage

Claims Made

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

1999 2000 2001 2002


Claims Made Coverage• Reported Claims

– Know Claim Count• “John Doe” Defendants

– Embedded Problems • Past Years Exposures• Shifting Mix


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

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


• Data– Delay in Effect– Increased Frequency

• 2000 0.039• 2001 0.042• 2002 0.051 (Projected)

– Increased Severity– Tail Claims

Reserving for Non-MedicalProfessional Liability

Casualty Loss Reserve Seminar

September 23-24, 2002

Arlington, Virginia

Kim E. Piersol, FCAS, MAAA

LLP

State of the Insurance Marketplace

• The Marketplace is HARD– Profitability Not Perceived– Difficulty Purchasing Coverage/Coverage

Narrowed, Limits Reduced, etc.– Gravitation Away From Both Very Large and

Very Small Insureds– Large Buyers of Insurance No Longer

Reaping Benefits of Scale– Growth in Alternative Markets– Growth in “Distressed” Risks/Gravitation to

Surplus Lines


• Underwriter Withdrawals (Some Involuntary)– Legion (In Run-Off)– Reliance National (purchased by Hartford)– TIG (Lost Rating)– The Home (Ancient History?)– Safeco– Etc., Etc.


• Current Primary Players

CNA Westport Zurich Arch Capital ACE Chubb/ERClarendon Gulf Liberty NationalSt. Paul Great American HartfordKemper Casualty Kempes

Lloyds of LondonAIG Monitor/Carolina Casualty United

NationalEvanston ALAS InterstateFireman’s Fund Various Mutuals


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

Paper/Reinsurance)– Self-Insurance– Capital Markets


• Non-Medical Lines-of-Business– Directors & Officers– Lawyers– Accountants– Actuaries/Benefit Consultants– Insurance Agents– Architects & Engineers– School Boards/Public Officials– Travel Agents– Media Professional– Miscellaneous/Other


“Unique” Reserving Issues• Issue #1 – Your Company Changes Ownership

and/or CEOs– 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 Adjustors to

Set-Up “Ultimate” Case Reserves– Reverse Is Usually True in Due-Diligence Situations– Since Non-Medical PL Lines are Claims-Made, ANY

CHANGE IN CASE RESERVING PHILOSOPHIES WILL DRAMATICALLY AFFECT THE RESERVING ACTUARY


“Unique” Reserving Issues

• Partial Solutions to Issue #1– Shy Away From “Standard” LDF Reserving

Approaches• Incurred Loss Development• Paid Loss Development (yes, even the payment patterns

can be affected)• Backward-Recursive

– 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


“Unique” Reserving Issues• Issue #2 – Mix of (Sub) Lines-of-Business

– Many Companies Write Several Different Non-Medical Lines

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

– Some Companies Combine Non-Medical PL Reserve Analysis into a BIG (or not so big) BUCKET (for credibility)

– Mix Can Cause Much Distortion in Historical Development Patterns

– THE DIFFERENCE IN DEVELOPMENT AMONG THE SEPARATE LINES-OF-BUSINESS IN NON-MEDICAL PL IS SIGNIFICANT


“Unique” Reserving Issues• Partial Solutions to Issue #2

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

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


“Unique” Reserving Issues• Issue #3 – The Use of “Pegged” Loss

Ratios for “New” Lines-of-Business– Pressure on “Not Showing 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

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

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



– Always Consider Murphy’s Law– Never Lose Sight That Underreserving

Effects Will Multiply, e.g. on a $50 million book pegged at a 75, if it develops to a 175, you’re $150 million in-the-hole after three years.

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


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

Priors”– Exiting Carriers (Usually) Must Offer Extended

Reporting if Leaving– Exiting Carriers May Trigger Flurry of Incidence

Reporting– 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



– 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

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


“Unique” Reserving Issues• Issue #5: Catastrophic Claims Situations

(Clash)– An Event May Trigger Multiple Non-Medical PL

Coverages; e.g., A U.S. Stock Insurance Company Insolvency Will Probably Trigger:

D&O Accountants Actuaries (If an Outside Consultant) Lawyers

– Other Industries May Trigger Other P/C Lines (e.g. Enron, WordCom, etc., etc.)

Surety Fiduciary Even W/C ?? Others


“Unique” Reserving Issues• Partial Solutions to Issue #5:

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

Lawyers and/or Claims Adjustors


“Unique” Reserving Issues• Issue #6: The Hard Market Has

Narrowed Coverage/Lowered Limits in Many Cases– Degree Varies By Line– “Tailing-Out” To Maintain Broader

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



• Partial Solutions to Issue #6:– 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

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


“Unique” Reserving Issues• Issue #7: Lack of Industry

Information to Supplement Your Company’s Loss Experience History– Unlike Medical Professional, Non-

Medical PL Does Not Have Its Own Schedule P Line

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


“Unique” Reserving Issues• Partial Solutions to Issue #7:

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

– Communicate With Underwriters & Claims Adjustors

– Other Sources of Non-Medical PL Information:Professional Liability Underwriting Society (PLUS)-

“Professional Liability in the New Economy”Wyatt D&O StudyAmerican Bar Association – Standing Committee on

Professional LiabilitySome Brokers/Administrators Perform “Surveys”


“Unique” Reserving Issues• Issue #8: Observed Lack of

Employment of Claims-Made Reserving Methodologies by Some Company Reserving Actuaries– Reluctance to Use Marker/Mohl

(Backward Recursive)– Failure to Take Advantage of the

Reported Claims “Drop-Kick”– Publication of “Nonsensical” Ultimates



• Partial Solutions to Issue #8:– 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

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



• Summary - Things Not To Forget1.Communicate With Underwriters & Claims

Adjustors2.Be Consistent With Pricing Actuary3.Homogeneous Groupings

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

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

5.Handle Large Catastrophic Claims Separately6.Backward Recursive

Specific Reserving Issue – Example of “A” Catastrophic

Event• Andersen Attest Services Professional

Liability Claim: Good Example of Unique Reserving Situation to be Handled Separately– May Expose Other Lines of Business Within

Your Company as well as Clash Covers– Traditional Reserving Methods Won’t Work– Highly Visible


Event• What are the Exposures• What are the Claims• Multiple Claims Interdependent

– Timing– External Influences– Mitigation Strategies (on all parts)

• Range of Possibilities


Event• Exposure Based on Underlying SIR and

Captive• High Excess Layers Most Likely Triggered• Everyone Will Want a Piece of The Pie• Need to Work Closely with Underwriters,

Claims Adjusters and Attorneys


Event• Developments Change Rapidly• Analysis Lends Itself to Simulation

Techniques– Which Claims will Likely be Paid for What– Which Claims will be Paid First– Assumptions and Updates Can Be Changed Easily

• Facilitates Discussions With Management– Communication

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Reserving for Non-Medical Malpractice Casualty Loss Reserve Seminar September 23-24, 2002 Arlington,...

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