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SPECIALTY MED MAL INSURERS: HOW DO THEY STACK UP?

SPECIALTY MED MAL INSURERS: HOW DO THEY STACK UP?. 2005 CAS Spring Meeting Pointe South Mountain Resort Phoenix, Arizona May 17, 2005 Presenter: Ken Quintilian, FCAS, MAAA. Obligatory Caveat. Results of presenter’s company should not be deemed typical….

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SPECIALTY MED MAL INSURERS: HOW DO THEY STACK UP?

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  1. SPECIALTY MED MAL INSURERS: HOW DO THEY STACK UP? 2005 CAS Spring Meeting Pointe South Mountain Resort Phoenix, Arizona May 17, 2005 Presenter: Ken Quintilian, FCAS, MAAA

  2. Obligatory Caveat Results of presenter’s company should not be deemed typical…

  3. What Makes Med Mal Specialty Companies Different? • Dominated by mutuals • Business model is direct operation by insureds • Customer focus is core of mission • Results in different priorities and operational characteristics

  4. Major Differences Between Specialists And Commercials • Mission / Priorities (Success Metrics) • Operations (Performance)

  5. How Does Their Mission Impact Success Metrics? • Customers are the owners • Different priorities than a stock company • Profit and dividends are not fundamental goals • Overarching goal: long-term availability and affordability of product for core customer base

  6. What Does It Mean For The Bottom Line? • Stable & strong earnings less important • Stable & reasonable pricing the greatest concern • Margins can be narrower than for commercials • Solvency & capacity, not profitability, serve as constraints against underpricing • Tolerance of cycles (and losses) is greater

  7. What Does This Mean For Competition? • Commercials can be outdone even with identical pricing and results • The same loss ratio can be a failure for commercials, a success for specialists

  8. Compare Recent Experience Of Two Big Med Mal Companies • St. Paul (Commercial) • MLMIC (Specialist)

  9. Similarities • Major market shares in their respective territories • Comparable premium volume • Strong penetration of traditional provider market • Both enjoyed strong profitability in the 1990’s • Both took heavy losses in early to mid 2000’s

  10. Differences • The cycle was too severe and the losses too adverse for St. Paul: they exited the market entirely • MLMIC (like many other mutuals at this time) wound down both profitable and unprofitable non-core ventures • Although adverse development and inadequate regulatory rate relief have continued in its core market, MLMIC has not reduced writings in this mission- critical area

  11. But Do Specialists Actually Outperform Commercials? If So, Why? Using many standard metrics, they seem to (on average!) • Less diversification, “stick to their knitting” • Dominant in core niche – economy of scale • Customer loyalty high – acquisition economies • Core expertise (e.g., claim defense) hard to match

  12. Total Med Mal Industry vs. Specialty Underwriters Source: Milliman; A.M. Best A&A

  13. Commercial vs. Specialty Med Mal Underwriters Components of Expense Ratio (to NPW) Based on 2004 Best Aggregates and Averages (2003 data)

  14. Total Med Mal Industry vs. Specialty Underwriters Source: Milliman; A.M. Best A&A

  15. Total Med Mal Industry vs. Specialty Underwriters Source: Milliman; A.M. Best A&A; Best Review & Preview

  16. Total Med Mal Industry vs. Specialty Underwriters Source: Milliman; A.M. Best A&A

  17. Total Med Mal Industry vs. Specialty Underwriters Source: Milliman; A.M. Best A&A

  18. Commercial Casualty Composite vs. Med Mal And Workers Comp Specialists Source: A.M. Best QAR Summaries

  19. Commercial Casualty Composite vs. Med Mal And Workers Comp Specialists Source: A.M. Best QAR Summaries

  20. Commercial Casualty Composite vs. Med Mal Specialists 5 Year Average: 3.1% -1.9% 10 Year Average: 8.2% 5.6% Source: A.M. Best QAR Summaries

  21. Total Med Mal Industry vs. Specialty Underwriters Source: Towers/Perrin; A.M. Best A&A

  22. Commercial Casualty Composite vs. Med Mal Specialists Source: A.M. Best A & A

  23. There Are Limits To Their Skill Set • Branching out has been unsuccessful historically for these specialists • Retrenchment a few years ago arose in part from realization of their limitations • Specialists struggle, as do commercials, to compete with the pricing of self- insureds and captives

  24. In Summary… • Med Mal specialty companies know their turf • This skill shows up in their better-than-average results • These results satisfy policyholders but would challenge stockholders • So niche companies usually out-compete commercial stock companies on core business • This advantage cannot easily be extended to other states or lines • Captives and self-insurance are a stiff competitor for both specialists and commercials

  25. SPECIALTY MED MAL INSURERS: HOW DO THEY STACK UP? 2005 CAS Spring Meeting Pointe South Mountain Resort Phoenix, Arizona May 17, 2005 Presenter: Ken Quintilian, FCAS, MAAA

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