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Understanding the Insurance Cycle. June 2008. John H. Mize, FCAS, MAAA Towers Perrin Atlanta, GA . Agenda. What is the insurance cycle? History of insurance cycles for medical malpractice The underlying causes of the cycle How can you better manage through the cycle?.

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Understanding the insurance cycle l.jpg

Understanding the Insurance Cycle

June 2008

John H. Mize, FCAS, MAAA

Towers Perrin

Atlanta, GA


Agenda l.jpg

Agenda

  • What is the insurance cycle?

  • History of insurance cycles for medical malpractice

  • The underlying causes of the cycle

  • How can you better manage through the cycle?


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What is the insurance cycle?

“The tendency to swing between profitable and unprofitable periods over time”


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The Insurance Cycle – history for medical malpractice

Premium

Millions

2005

Source: A. M. Best Aggregates and Averages 1976 – 2005Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined


The insurance cycle history for medical malpractice5 l.jpg

The Insurance Cycle – history for medical malpractice

Developed Losses

Millions

2005

Source: A. M. Best Aggregates and Averages 1976 – 2005Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined


The insurance cycle history for medical malpractice6 l.jpg

The Insurance Cycle – history for medical malpractice

Millions

Premium

Developed Losses

2005

Source: A. M. Best Aggregates and Averages 1976 – 2005Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined


The insurance cycle history for medical malpractice7 l.jpg

The Insurance Cycle – history for medical malpractice

Millions

Premium

Initial Loss Estimate

Developed Losses

2005

Source: A. M. Best Aggregates and Averages 1976 – 2005Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined


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Medical malpractice – Market results


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The process for recognizing a change in cost

Claims Costs Change – Verdicts, Settlements, or Both

Loss runs reflect higher paid losses and case reserves

Actuaries reflect new cost in reserves, premiums

Depending on the jurisdiction, this process can take 3 to 5 years.


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Historical changes in estimates of Medical Malpractice loss costs (Schedule P)

*Prior Years do not include data up to 2006

Source: Best’s Aggregates & Averages


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Historical changes in estimates of Medical Malpractice loss costs (Schedule P)

Source: Best’s Aggregates & Averages


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The process for recognizing a change in cost

Claims Costs Change – Verdicts, Settlements, or Both

Loss runs reflect higher paid losses and case reserves

Actuaries reflect new cost in reserves, premiums

The time lag inherent in this system often amplifies the reserve and premium impacts of cost changes


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How does this cost recognition cycle tie to the market cycle?

Claims Costs Change – Verdicts, Settlements, or Both

Loss runs reflect higher paid losses and case reserves

Actuaries reflect new cost in reserves, premiums

Prices are adjusted to reflect the new cost level


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Factors that disconnect market pricing from cost estimates

  • “Learning” too much from calendar year results

  • Market capacity/competition

  • Reserve adequacy

  • Optimism regarding loss trends

    • Will tort reforms hold?

    • Will jury attitudes remain favorable?


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Will it be different this time?

  • More controls

  • More active rating agency involvement

  • Less reliance on investment income

  • Effect of 120 new carriers

    • 80 with less than $10 million of premium for 2007


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What did the healthcare industry do in response to the last hard market?

  • Strengthened risk financing capabilities

    • Created captive insurance companies

    • Increased retentions – voluntarily or not

  • Emphasized patient safety and loss prevention activities

    • Emphasis on quality

    • Targeted loss prevention efforts

    • More aggressive management of adverse events

  • Pushed for tort reform – with some success


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What can you and your system do to better handle the cycle?

  • Continue your current efforts to improve outcomes

  • Encourage your actuaries and auditors to take a longer term view – not overly optimistic or pessimistic

  • In a soft market

    • Don’t believe that the hard times are over

    • Keep your financing options open

      • Capacity to take more risk

    • If a deal looks too good to be true…

    • Improve terms other than price

    • Closely monitor physician carrier strength

  • In a hard market

    • Avoid retention increases when rates are just returning to adequacy

    • Increase risk taking in later part of the hard market


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Questions?


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Thank You


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