Current Issues In Medical Malpractice Insurance

1. Current Issues In Medical Malpractice Insurance Carolyn L. Greene - Willis Re Inc. John H. Mize - Tillinghast April 2002 This document was designed for discussion purposes only and is not intended to present detailed information on our analysis and findings. It is incomplete, and not intended to be used, without the accompanying oral presentation and discussion. S:\People\Mizej\Presentations\CAS Mtg 04152002.ppt

2. Current Issues in Medical Malpractice Insurance Overview • Financial Results • Underlying Trends • Primary Marketplace • Reinsurance Marketplace • Input on Renewals • Opportunities for Actuaries 2

3. Financial Results

4. Current Issues in Medical Malpractice Insurance Source: Best’s Aggregates and Averages 4

5. Current Issues in Medical Malpractice Insurance Source: Best’s Aggregates and Averages 5

6. Current Issues in Medical Malpractice Insurance Source: Best’s Aggregates and Averages 6

7. Current Issues in Medical Malpractice Insurance Source: Best’s Aggregates and Averages 7

8. Current Issues in Medical Malpractice Insurance Source: Best’s Aggregates and Averages 8

9. Current Issues in Medical Malpractice Insurance Source: Best’s Aggregates and Averages 9

10. Current Issues in Medical Malpractice Insurance Source: Best’s Aggregates and Averages 10

11. Underlying Trends

12. Current Issues in Medical Malpractice Insurance 12

13. Current Issues in Medical Malpractice Insurance U.S. Median Medical Liability Awards and Settlements 800 700 600 $ in Thousands Settlements 500 Awards 400 300 200 1993 1994 1995 1996 1997 1998 1999 Source: Jury Verdict Research

14. Current Issues in Medical Malpractice Insurance Claim Frequency per 100 Physicians 20.00 18.00 16.5 16.0 15.6 15.5 15.2 15.1 16.00 14.3 14.2 13.8 13.4 14.00 12.00 10.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: St. Paul Physicians & Surgeons 2000 Year-End Update

15. Current Issues in Medical Malpractice Insurance Observations: Trends • Frequency relatively flat - but more concentrated mix? • $1 million limits severity trend: 5% to 8% • Higher trends for long-term care • Greater frequency of shock losses

16. Primary Marketplace

17. Current Issues in Medical Malpractice Insurance Market Drivers • Poor financial performance • Physicians - price competition/use of reserve redundancies • Hospitals - pricing discipline/aggregate maintenance • Investment yields • Loss of capacity • St. Paul leaves marketplace • PHICO, Frontier, PIE, etc. - Gone • MIIX financial troubles • More to come?

18. St. Paul – Major Markets StateSharePosition SC 50.4% 1 AR 50.0% 1 NE 47.4% 1 SD 42.2% 1 ND 39.9% 1 NV 39.5% 1 IA 32.9% 1 MN 38.8% 2 WV 30.7% 2 LA 27.0% 2 DC 26.7% 2 DE 26.4% 2 NC 24.6% 2 KS 22.9% 2 GA 20.8% 2 Average 34.7% Source: CCS

19. Current Issues in Medical Malpractice Insurance Market Drivers • Poor financial performance • Physicians - price competition/use of reserve redundancies • Hospitals - pricing discipline/aggregate maintenance • Investment yields • Loss of capacity • St. Paul leaves marketplace • PHICO, Frontier, PIE, etc. - Gone • MIIX financial troubles • More to come?

20. Current Issues in Medical Malpractice Insurance Current Status of Medical Malpractice Market - Primary • Physicians • Premiums almost uniformly on the up-swing • Driven by losses, investment income, elimination of balance sheet conservatism, and reinsurance costs • 15% or larger increases in filed rates common • Reduction in discounts - material but tough to quantify • Issue is affordability more than availability • Hospitals • At last - excess insurers listen to actuaries! • Focus on specific and aggregate attachments • Large premium increases combined with retention increases

21. Current Issues in Medical Malpractice Insurance Current Status of Medical Malpractice Market - Primary • Long term care • General deterioration in loss experience - with a few very bad jurisdictions • Historically large rating credits • Heavy underwriting, large premium increases and new/higher retentions • For-profit vs. Not-for-profit • Some opportunistic pricing? • Flight to alternative markets

22. Reinsurance Market

23. Current Issues in Medical Malpractice Insurance General Reinsurance Overall • Results no better than primary market • Top twenty reinsurers, 2000 combined ratio 114.2% versus 113.8% for 1999 • U.S. reinsurers reported a 141.6% combined ratio for 2001 • Enough is enough – adequate pricing or let business go

24. Current Issues in Medical Malpractice Insurance Domestic Reinsurers Twelve Months Ended December 31, 2000 9/30/2001Combined Ratio 1999 2000 Combined Combined Ratio Ratio American Re-Insurance Company 115.3% 117.1% 136.1% Converium Reinsurance (NA) Inc. 107.6% 116.7% 111.8% Employers Reinsurance Group 116.2% 117.0% 132.0% Everest Reinsurance Company 103.3% 103.2% 115.6% NAC Re (XL Re) 146.5% 173.3% 117.3% Odyssey America Reinsurance Corporation 129.8% 104.8% 113.7% Swiss Re American Corporation 109.5% 121.4% 176.3% Transatlantic Re 106.4% 100.4% 116.7%

25. Current Issues in Medical Malpractice Insurance Reinsurance Considerations • Field of domestic reinsurers has been reduced by two-thirds from a decade ago: • 120 stand-alone companies operated, 30 remain with most linked to global partners • The five largest reinsurers control over 38% of the estimated $125B market • To compete reinsurers must have many times the capital formerly required, A.M. Best: “the price of reinsurers’ admission, driven by market forces, is moving toward $1B of Surplus”

26. Current Issues in Medical Malpractice Insurance A Sampling of Consolidations in the Reinsurance Arena • Overseas Partners: Reliance Re • X.L. Capital: NAC Re/Global Capital Re/Mid-Ocean Re • Fairfax Holdings: Odyssey/TIG/Sphere Drake • Partner Re: Winterthur/SAFR US • Gerling Global: Constitution Re • Trenwick: Chartwell/Lasalle Re • Folksamerica: USF Re • Employers Re: Kemper (GE)/Frankona Re • Berkshire Hathaway: General Re/Cologne Re • Swiss Re: M&G/Underwriters Re • Munich Re: American Re

27. New Equity Capital

28. Input on Renewals

29. Current Issues in Medical Malpractice Insurance Renewals – General • Lack of clarity on reinsurers position. Changed wordings, requests for more information, restructuring of programs, general uncertainty • Capacity available but at a price • Negotiations tougher and longer • Reinsurers taking strong position on pricing • Must have good information, good loss history, good presentation with good story • Back to technical trending and pricing approach • Everyone is a lead with their own list of “pet” issues • Late pricing and extended negotiations created bottle-necks • Greater consideration of alternative options by clients with predictable loss exposure

30. Current Issues in Medical Malpractice Insurance 2002 Reinsurance Renewals – Specific • Rate increases, depends on loss history • More swing plans-high minimum/maximum • Tighter terms across the board • Accelerated premium payments • Annual terms instead of continuous • Caps on liability • Focus on “balance” in layers • Increased use of inner aggregate and loss corridors

31. Current Issues in Medical Malpractice Insurance 2002 Reinsurance Renewals – Specific (continued) • Limits reduced, no free capacity • Premium caps • Reduced scope of line covered • Excess cessions increased ILFs • Reduce/remove profit sharing • Territorial concerns • Reduce ceding commission • Few, if any, multi-year programs • Increased communication between primary carrier and reinsurers

32. Opportunities for Actuaries

33. Current Issues in Medical Malpractice Insurance Opportunities for Actuaries • Actuarial evaluations - now “required” for renewals • Hospitals • Large physician groups • Large long term care entities • Assistance in evaluating excess/reinsurance proposals • Captive feasibility studies • Actuarial evaluations • Financial forecasts

34. Current Issues In Medical Malpractice Insurance Carolyn L. Greene - Willis Re Inc. John H. Mize - Tillinghast April 2002 This document was designed for discussion purposes only and is not intended to present detailed information on our analysis and findings. It is incomplete, and not intended to be used, without the accompanying oral presentation and discussion. S:\People\Mizej\Presentations\CAS Mtg 04152002.ppt