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Risk Retention Group

CAS Annual Meeting EMERGING ISSUES IN MEDICAL MALPRACTICE THE ROLE OF THE ACTUARY IN ALTERNATIVE INSURANCE MARKETS November 16, 2004 Richard B. Lord, FCAS MAAA Milliman, Inc. Risk Retention Group. Liability insurance company formed under the Risk Retention Act (RRA)

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Risk Retention Group

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  1. CAS Annual MeetingEMERGING ISSUES IN MEDICAL MALPRACTICETHE ROLE OF THE ACTUARY IN ALTERNATIVE INSURANCE MARKETSNovember 16, 2004Richard B. Lord, FCAS MAAAMilliman, Inc.

  2. Risk Retention Group • Liability insurance company formed under the Risk Retention Act (RRA) • Company owned by it’s members • RRA: Federal law passed in 1981 for products liability • Liability Risk Retention Act Amendments (LRRA) of 1986: broadened RRA for medical professional liability

  3. Risk Retention Group • Risk retention group (RRG) domiciled in a state • Governed by Federal law • Able to write business in any state • Primary regulatory enforcement by state of domicile

  4. Number of Risk Retention Groups Source: Risk Retention Reporter

  5. Annual RRG Premium ($Millions) Source: Risk Retention Reporter

  6. Medical Malpractice Risk Retention Groups by Type Source: Risk Retention Reporter

  7. Medical Malpractice RRG 2004 Premium ($Millions) Source: Risk Retention Reporter

  8. Why Form a Risk Retention Group (Advantages) • Availability/Affordability • Possible stability across insurance market cycles • Niche market • Selective underwriting • Loss control/risk management

  9. Role of the Actuary • Initial rate development • Economic feasibility study • Expected case • 90th percentile case • Statement of opinion on loss reserves • Ongoing rate evaluation

  10. Risk Retention Group Funding • Initial capital contribution • Rate development

  11. Rate Development • Expected Loss and LAE Pure premium • Contribution to policyholder surplus • Management fee • Other expenses: • Auditing • Actuarial • Federal income tax

  12. Pure Premium Development • Primary Data Sources: • Entities being underwritten • Secondary Data Sources: • Insurance carrier rates filed in state • Industry studies • State insurance department data collection programs • Other insureds in the state

  13. Development of Pure Premium • Primary Data Collection • Claims Listing: • Occurrence Date • Report Date • Paid Loss • Loss Reserve • Defense Costs • Exposure Counts • By Category • By Year

  14. Feasibility Study • Pro forma Income Statement • Pro forma Balance Sheet • Leverage Ratios • Premium to Surplus • Reserves to Surplus

  15. Pro Forma Income Statement

  16. Pro Forma Balance Sheet

  17. Pro Forma Leverage Ratios

  18. Statement of Opinion • Statutory annual financial statement loss and ALAE reserve opinion • Requirements vary by state

  19. Risk Retention Group Concerns • Volume of premium vs. limits of losses • Emerging phenomenon • Insolvency rate vs. P/C insurer • No guaranty fund coverage except perhaps for policyholders in state of domicile

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