Session 3 Reserving Implications Of Tort Reform

1. Session 3 Reserving Implications Of Tort Reform Kevin M. Bingham – Deloitte. kbingham@deloitte.com Casualty Actuarial Society Loss Reserve Seminar September 13, 2004 1:30 PM – 3:00 PM Las Vegas, Nevada

2. INTRODUCTION • Medical Malpractice? • Reserving Implications • Cap on Non-economic Damages • Effective Date and Phase In • Reporting Speed up • Florida SB2D

3. What do you think of when youhear someone say medical malpractice?

5. Medical Malpractice? “He expressed concern, that facing five years of practice after his training in order to get specialty certification, he might find more lucrative employment as an expert witness in malpractice litigation than he might find as a health care practitioner.” Florida House of Representatives Medical Liability Insurance Report – Observations from a Florida medical student

6. Reserving Implications:Cap on Non-economic Damages

7. Cap on Non-Economic Damages • Economic damages • Lost wages • Medical expense • Funeral expense • Non-economic damages (a/k/a pain and suffering) • Loss of consortium • Loss of companionship • Disfigurement • Mental anguish Quantifiable from a ratemaking and reserving perspective. Highly subjective and difficult to quantify from a ratemaking and reserving perspective.

8. Cap on Non-economic Damages • Type of cap and reserving impact • Hard cap (e.g., $250,000 MICRA cap) • Soft cap • Florida • Texas • “Cap busters” • Florida • Massachusetts • Emergency room vs non-emergency room • Practitioner vs non-practitioner • Per defendant caps • Per claimant caps • Piercing • Disfigurement • Death • Vegetative state • Unanimous verdict

9. Cap on Non-economic Damages • Type of cap and reserving impact (continued) • Massachusetts • McCullough, Campbell & Lane - Damage Caps (www.mcandl.com/massachusetts.html) “In a medical malpractice case, the jury is instructed that if it finds the defendant liable, it is not to award the plaintiff more than $500,000 for pain and suffering, loss of companionship, embarrassment, and other items of general damages, unless it determines that there is: a substantial or permanent loss or impairment of a bodily function or substantial disfigurement, or other special circumstances in the case which warrant a finding that imposition of such a limitation would deprive the plaintiff of just compensation for the injuries sustained. Mass. Ann. Laws ch. 231, § 60H (Law. Co-op. Supp. 1997). Since this standard can often be met, the cap should not be relied on.” Makes reserving assumptions easier (i.e., little impact)

10. Cap on Non-economic Damages • Reserving for “The Big Picture” ALAE Included? Excluded?

11. Cap on Non-economic Damages • Shift towards lower policy limits

12. Cap on Non-economic Damages • Ratio of NE/[NE + E] = 50%

13. Cap on Non-economic Damages • Ratio of NE/[NE + E] = 98.8%

14. Cap on Non-economic Damages • Reserving Considerations • Constitutionality • Texas – Passed Proposition 12 • Wyoming – Voting on constitutional amendment in November • Florida – TBD • Policy limits • Number of claimants/defendants • Severity of injuries faced by company • ALAE • Phase-in effect • Issues: • Is the data captured? • If captured, is it accurate? • Are more co-defendants going bare? • Credibility for use in reserving? • Issues: • Reserving for Chiropractor vs. OBGYN? • Credibility for use in reserving? • Impact of other law changes (e.g., limit on • attorney fees)

15. Reserving Implications:Effective Date and Phase In

16. Effective Date and Phase-In • Does the law apply on an accident date or report date basis? • Apply to accidents that occur on or after the effective date of the law • Impacts future reserving considerations only • Apply to occurrences that are reported after the effective date of the law • Impacts current reserving for IBNR claims (i.e., tail claims) • Impacts future reserving considerations See the September/October 2003 Contingencies Magazine article titled “Measuring the Impact of Medical Liability Tort Reform” for a detailed illustration of the “phase-in” effect

17. Reserving Implications:Reporting Speed-Up

18. Reporting Speed-Up • Often times observed immediately before the passage of tort reform bills • Uncertainty regarding constitutionality • Uncertainty regarding “phase-in” • Precautionary measure by plaintiff attorneys • Reserving considerations • Adjusting actuarial methods for “speed up” in reporting • Monitoring of results going forward (e.g., adjustment may be required if constitutional issues emerge) • Proper application of the cap based on the effective date

19. Florida SB2D

20. Florida Presumed Factor • Presumed factor (PF) – Each insurance company had to adjust the PF to reflect their own mix of business • Mix of business example • Company writes only Chiropractors • Company writes only OB/Gyns • Class specific rating example • Each company had to determine the savings that should be allocated to each class of business • ER practitioners: $150,000/$300,000 cap should see higher savings than others falling under higher caps • The PF calculated by Deloitte was an AVERAGE factor • Effective date and phase-in confirmed – April 22, 2004 • Judge Marlene Alva - Law does not allow retroactive immunity

21. Florida Presumed Factor • Reserving Implications • Numerous sections (e.g., patient safety, notification, expert witness testimony, good SAM, etc.) in addition to caps • Law is still “green” • Passed September 15, 2003 • Long tail nature of medical malpractice claims • Constitutionality still to be determined • 2nd Quarter 2004 earnings calls • Have not seen any tort reform benefit from SB2D • Plaintiff attorneys generally view the law as unconstitutional