Medical Professional Liability in 2003

Medical Professional Liability in 2003 Industry Overview Paul Greve, Willis Victor Adamo, ProAssurance Judy Hart, Endurance Specialty Matt Fay, Converium Anthony Mercurio, Marsh March 2003 S:\People\Hurlj\Presentations\030308_PLUS Presentation (combined).ppt

MPL Overview in 2003 AGENDA • Update financials • Observations from the perspective of... • a primary insurer • an excess insurer • a reinsurer • a provider/captive market 2

MPL - financial status Source: Best’s Aggregates and Averages 3

MPL - financial status 4

Primary Insurer Perspective Victor T. Adamo, Esq. ProAssurance

MPL - primary insurer perspective IS THIS A GREAT BUSINESS, OR WHAT? “Given the continued deterioration in operating profitability, weakened capitalization, uncertainty in the adequacy of loss reserves because of the heightened severity of claims and continued adverse trends, increased reinsurance costs and greater retention levels, A.M. Best views the outlook for the medical malpractice sector as negative.” —A. M. Best, 2003 Property/Casualty Review Preview

MPL - primary insurer perspective COMPLETELY OUT OF THE MARKET • The “Old” News • PIE Mutual • PIC • ICA • Frontier • The “New” News • St. Paul • PHICO • MIIX • Reliance • ROA / DIR

MPL - primary insurer perspective STILL IN THE MARKET • Retrenchments • ACAP • SCPIE • FPIC • Princeton • Zurich • Many Mutuals • Full or Partial Moratoriums • FPIC • ISMIE • Many Mutuals

MPL - primary insurer perspective OVER $1 BILLION OF DISPLACED PREMIUM • Small Start Ups • Florida, New Jersey, Pennsylvania • Can they grow surplus enough to make a meaningful contribution to capacity? • Financial crunch restricts capital growth • Larger Companies • Do not appear to be writing at “retail level” • Exceptions? • Self-Insurance Pools • No premium advantage this time around

MPL - primary insurer perspective IS THERE ENOUGH NEW CAPACITY TO SERVE THE MARKET?

MPL - primary insurer perspective MAJOR CHALLENGES FOR THE SURVIVORS • Burden of constantly conveying “bad news” • Premium increases • Stricter underwriting decisions • More staff demands • Raising/growing surplus to support premium growth • Prior year development overshadowing premium increases in financial results

MPL - primary insurer perspective MAJOR CHALLENGES FOR THE SURVIVORS • Investments no longer provide a major advantage in long-tail lines • New money investment rate 4% • Equity impairment pressures • Reinsurance more business less relationship • Reinsurers establishing high ROE goals • Leading to higher retentions

MPL - primary insurer perspective THE RESULT IS… • Can’t write all the business available • Capacity allocation is now a conscious decision • The “New Math” – underwriting profit replacing operating profit

MPL - primary insurer perspective DECISION FACTORS • Quality of Risk – we are underwriters • Rate adequacy • Avoiding price driven markets/brokers • Regulatory barriers • Unreasonable regulators • Time-consuming approval / review process

MPL - primary insurer perspective IN SUMMARY • Challenging market • Fewer players • Bottom line conscious – or should be • Not as willing to deviate from plan

Excess Insurer Perspective Judy Hart Endurance Specialty

MPL - excess insurer perspective WORLD’S MOST DANGEROUS LINES OF INSURANCE? 21 Source: Insurance Information Institute, calculated from A.M. Best combined ratio data

MPL - excess insurer perspective HOSPITAL MEDICAL PROFESSIONAL LIABILITY How Did Our Predictions Hold? • Further rating downgrades • Additional retrenchment/withdrawal • Continued pricing and retention increases • New capacity • Greater consideration of alternative options by clients with predictable loss exposure • Increased risk financing expenditures will cause greater clinical risk management and proactive claims defense • Further discussion and consideration of tort reform state by state

MPL - excess insurer perspective SO IS THIS A CRISIS? • “Generally” significant capacity still available • Driven by price, not availability • New capacity developing in US, Europe and Bermuda Implications For Stakeholders • Double-digit medical inflation affecting cost • Access to healthcare may suffer in some states • Quality concerns continue

MPL - excess insurer perspective Health care inflation is affecting the cost of medical care, no matter what system it is delivered through Health Benefit Cost WC 24 Source: NCCI; William M. Mercer, Insurance Information Institute

MPL - excess insurer perspective Cost of U.S. Tort System ($ Billions) Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005! Tort costs equaled $636 per person in 2000! Expected to rise to $1,000 by 2005 25 Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for 2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast.

MPL - excess insurer perspective 26 Source: Tillinghast-Towers Perrin

MPL - excess insurer perspective FACTORS DRIVING SEVERITY • Sophistication of plaintiff’s bar • Trial Bar – flush with cash • Higher expectations – drug therapies and technology successes • Venue – some deep judicial “Pits” • Class Actions • Erosion of tort reform/accept “Junk Science” as fact • Jury desensitization to “Deep Pockets Syndrome” • Some corporations do really dumb things (Enron, dot-com, etc.)

MPL - excess insurer perspective HOW DO WE MEET THE CHALLENGES? • World class underwriting and claims management knowledge • World class selling and negotiation skills critical • Increased customer/carrier touch = productivity strain • Uncertain financial stability/insurer insolvency strain relationships/challenge placements • Technical expertise and healthcare specialists “rise to the top”

Reinsurer Perspective Matt Fay Converium

MPL - reinsurer perspective ULTIMATE INCURRED LOSS RATIOS

MPL - reinsurer perspective PAID LOSS RATIOS

MPL - reinsurer perspective PAID TO ULTIMATE INCURRED RATIOS

MPL - reinsurer perspective TRENDS IN MEDICAL COSTS

MPL - reinsurer perspective COMPANY SEVERITY TREND ASSUMPTIONS Versus 7 – 11% average from previous table.

MPL - reinsurer perspective NEGATIVE EFFECT OF COMPOUNDING

MPL - reinsurer perspective % OF PAID CLAIMS BY PAYMENT THRESHOLD PIAA DATA SHARING PROJECT

MPL - reinsurer perspective INVESTMENT RETURN FOR U.S. TREASURIES

MPL - reinsurer perspective COMPANY INVESTMENT INCOME ASSUMPTIONS IN RATEMAKING

MPL - reinsurer perspective HISTORICAL REPORTING PATTERNS Jury Verdict Research, LRP Publications

Provider/Captive Market Perspective Anthony Mercurio Marsh

MPL - provider/captive market perspective HOW ELASTIC IS THIS MARKET? • Will consumers allow insurers to make up lost ground? • What are the alternatives? • How high are the barriers to entry? • Do the alternatives have an advantage? • Once the dollars leave will they come back? 41

MPL - provider/captive market perspective WHAT ARE THE ALTERNATIVES? • Self funding • GROUP captives (RRGs, etc.) • PRUE captives • Others 42

MPL - provider/captive market perspective 2002 BANNER YEAR FOR ALTERNATIVES • Cayman Islands reports largest increase ever • Vermont reports largest increase ever • Almost every Marsh client is engaged in some sort of feasibility study But... • Not immune from • increased severity • lower investment returns on funded assets • Impacting required funding levels 43

MPL - provider/captive market perspective DO THESE VEHICLES HAVE AN ADVANTAGE? • Some fail, but not many • ROI expectations are lower • Many have engaged in a focused effort to reduce losses • Most have lean budgets • Some seem to lack the baggage of the commercial market • Most have a camaraderie among members (impressive) 44

Medical Professional Liability in 2003

Medical Professional Liability in 2003