Reinsurance Boot Camp on Pricing Techniques Aug 2007

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