Exposure rating is emphasized Experience mods / tier rates are often used (but not always)

1. RATEMAKING FOR PHYSICIANS – GENERAL METHODS • Exposure rating is emphasized • Experience mods / tier rates are often used (but not always) • Reflecting experience tricky: high severity/ low frequency • Physician groups often obtain preferred rates (less today) • Most important rating variable is classification

2. CHARACTERISTICS OF INDIVIDUAL PHYSICIAN RISKS • Extreme variation (factor of 150) between high and low rates • This is within a single state • Based on expected loss, without considering experience • Mostly due to practice specialty • Part time, other factors can increase the range further • Greatest determinant of rating is frequency • Severity is also greater for surgical classes but less so • Low overall frequency and long payment patterns impedes IRR

3. WHAT IS DIFFERENT ABOUT PHYSICIANS MED MAL? • Dominated by PIAA mutuals • Customer-focused “to a fault” • Still offering occurrence • Often less opportunistic rate making • Willing to take a loss – often

4. ADJUSTMENTS TO BASE RATE –PECULIARITIES OF MED MAL • Heavy discounting (LLAE > 100%) • Expense loads often low (no brokerage) • Profit often low or zero in spite of risk • Commercial carriers have trouble competing in this environment

5. EXPOSURE BASES USED • Pure premium analysis • Base class equivalent exposures • Consistent high-quality database can be obtained • Adjusted for all rating factors

6. OTHER RATING ADJUSTMENTS • Part time • New practitioner • Joint defense / Waiver of consent to settle • Risk management discounts • Entity coverage (vicarious liability surcharge) • Schedule rating (sometimes forbidden by regulation)

7. CLAIMS MADE COVERAGE ISSUES • Claims made multipliers (esp. in states with occurrence) • Tail multipliers • Prepaid tail load • Heavily influenced by relative trend vs. discount in rates • Can yield counterintuitive results • Particularly true with long payment pattern

8. DISTORTIONS – CALENDAR YEAR INFLATION • Consideration required in the development triangle • Can be adjusted to a current inflation level, then developed • Selecting prospective inflation rates is a hurdle • Cyclical effects versus system changes • Unpredictability of jury inflation

9. DISTORTIONS – JURY INFLATION • Largest current issue facing med mal actuaries • Incredibly leveraged response • A handful of large verdicts impact thousands of settlements • Thousands of settlements = losses for hundreds of insurers • Results of 100’s of insurers balloon rate indications by a handful of actuaries

10. DISTORTIONS – JURY INFLATION (continued) • This yields overreaction that no one can be sure of • Small shifts in frequency – slightly friendlier juries – also possible • This compounds trend and uncertainty • Due to low frequency / high severity is hard to detect and diagnose • The actuary who fixes this problem can go straight to heaven

11. DISTORTIONS – LIMIT CAPPING • Complexity causes distortions • Provider limits tend to be low (often $1M - $2M) • Losses frequently at limits • Stacking of limits is common • Hospitals often provide deep pocket • Many occurrences shared with other insurers • Distributions often either naïve, or difficult to estimate • Data quality becomes critical, sometimes insurmountable obstacle