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Some Unique Issues on Physicians Professional Liability Reinsurance Pricing . Clash CoverXPLTort ReformsRecent Market Trend. Source of Significant Clash Claims. High Concentration in a geographic areaClash among claims against Drs, corps, and hospitals when they are all insuredsExasperated by the trend of more Drs working in groups.
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1. Reinsurance Boot Camp on Pricing TechniquesAug 2007 Medical Malpractice
Leonard Chung, FCAS
Transatlantic Reinsurance Co
2. Some Unique Issues on Physicians Professional Liability Reinsurance Pricing Clash Cover
XPL
Tort Reforms
Recent Market Trend
3. Source of Significant Clash Claims High Concentration in a geographic area
Clash among claims against Drs, corps, and hospitals when they are all insureds
Exasperated by the trend of more Drs working in groups
4. Treatments of Clash in Reinsurance Contract Definition: Claims against more than one risk(insured) due to same event (usually interpreted as one claimant)
XOL covers inures to the benefit of Clash covers
Trigger:
Option (1) the first claim report date, regardless of CM or Occ policies, even though the XOL piece is policy attaching
Problem: when clash among claims in years when clash layer varies
Solution: Interlocking clause-wt avg retention and limit
Option (2) claims stay at respective policy year or loss year and Event total recovery is proportionally distributed to each year based on the Ground-up amount
5. Interlocking Clause Example An Event with 3 claims from 3 report years
6. Charges for Clash Cover Explicit charge as % of premium net of XOL premium
Included in XOL rate (swing or flat with a load)
Included in XOL cession
7. Analysis of Clash Cover Losses Experience Rating:
-Development-probably similar to XOL claim development since 2nd claim could be interpreted as xs losses
-Development is unstable: Most recent diagonal of Triangles often get restated due to reassignment of 1st defendant
-may need to make adjustment for change in geographic concentration of the book of business and the percentage of insureds belonging to groups (with separate corporate limits)
Exposure Rating Methods:
A) Interpret 2nd claim as an excess claim when the corporation has a separate limit: using ILF.
B) Interpret multiple claims as random event: use simulation.
8. Clash Layer Exposure Rating Example A Assumptions
All policy limits are 3M
ILFs from 1M: 2M=1.30, 3M=1.45, 4M=1.55
XOL layer 2Mx1M; Clash layer 3Mx1M, rated as 1stM Prem
All multiple-claim events come from the claim against the corporate’s limit
35% of the exposure from phys insureds belonging to groups with separate corporate limits
Calculation:
2nd claim=1Mxs3M FGU
Clash layer loss/Subj Prem=(1.55-1.45)/1.0xELRx35%
9. Clash Exposure Rating Example B Simulation:
Assumptions:
Average claims per Event=3.0
-Poisson distribution with a parameter=3
-Each claim has same size of loss distribution cap at XOL attachment point
10. Sources of Significant XPL -States where most Drs buy low limits and state laws allow collection beyond policy limits: FL, TX
-Primary companies’ strategy in defending claims
-post judgment penalty
11. Treatments of XPL in Reinsurance Contract Included in regular losses(80%, 90%, 100%), but provide extra limits (e.g. 4Mx1M for policies with limits up to 2M)
A separate limit on XPL per claim
Added to the per Event section
Watch out for Treatment of ALAE when it is pro rata
12. Charges for XPL Cover A flat, or swing rate, usually coincide with XOL cover
13. Analysis of XPL Cover Losses Development
-case reserve development not likely
-most development due to IBNR
Trend beyond policy limits
Exposure Rating
Do not apply it as a load on XOL exposure rating when limit profile is changing
Why?
14. Some Common features in recent tort reforms Cap on non-economic damages
Cap on Legal fees/Contingent fees
Collateral source offsets
Limitation on joint and several liability
Requiring Plaintiffs to Certify merit of claims
Restrict qualification on expert witness
Restrict venue of suit (e.g. PA)
Eliminate post judgment penalty if carriers tender policy limit within a time period (e.g. FL)
15. Estimating Effect of Tort Reforms Difficult to anticipate effect on losses due numerous combinations of features and different legal environment
Use Ground-up loss experience to detect early signs
Look at both severity and frequency
16. Major features in Texas tort reform Non-economic losses for Claims filed after 9/1/03 is capped at 250K per claimant for all Drs and providers combined
Allow offering party to recover litigation cost from other party if final judgment is within 20% of the rejected offer
Passed state constitution
17. A Texas Carrier Untrended Sch P
18. Major features in Florida tort reform For action accrued on/after 9/15/03, Non economic damage cap:500K per claimant, 500K per Dr, max recoverable from all cap at 1M; Cap is lower for emergency care, higher for other hospitals activities
Bad faith law: Safe harbor for insurer to tender policy limit, measured from date suit is filed
Nov 2004 passed: reduced atty fees to 20% of 1st250K and 10% of settlement thereafter
19. A Florida Carrier Untrended Sch P
20. Tort Reforms do’nt always improve (Re)insurance companies results Legal system may allow plaintiff to circumvent caps
Constitutional challenge
accompanied with rate decreases
21. Recent Market Trend and Implication on Reinsurance Pricing Decreasing Frequency
Severity continues to go up
Rate level Erosion
Higher Retention