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Reinsurance Boot Camp on Pricing Techniques Aug 2007. Medical Malpractice Leonard Chung, FCAS Transatlantic Reinsurance Co. Some Unique Issues on Physicians Professional Liability Reinsurance Pricing. Clash Cover XPL Tort Reforms Recent Market Trend. Source of Significant Clash Claims.

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Reinsurance boot camp on pricing techniques aug 2007

Reinsurance Boot Camp on Pricing TechniquesAug 2007

Medical Malpractice

Leonard Chung, FCAS

Transatlantic Reinsurance Co

Some unique issues on physicians professional liability reinsurance pricing
Some Unique Issues on Physicians Professional Liability Reinsurance Pricing

  • Clash Cover

  • XPL

  • Tort Reforms

  • Recent Market Trend

Source of significant clash claims
Source of Significant Clash Claims Reinsurance Pricing

  • 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

Treatments of clash in reinsurance contract
Treatments of Clash in Reinsurance Contract Reinsurance Pricing

  • 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

Interlocking clause example
Interlocking Clause Example Reinsurance Pricing

  • An Event with 3 claims from 3 report years

Charges for clash cover
Charges for Clash Cover Reinsurance Pricing

  • Explicit charge as % of premium net of XOL premium

  • Included in XOL rate (swing or flat with a load)

  • Included in XOL cession

Analysis of clash cover losses
Analysis of Clash Cover Losses Reinsurance Pricing

  • 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.

Clash layer exposure rating example a
Clash Layer Exposure Rating Example A Reinsurance Pricing


  • 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


    2nd claim=1Mxs3M FGU

    Clash layer loss/Subj Prem=(1.55-1.45)/1.0xELRx35%

Clash exposure rating example b
Clash Exposure Rating Example B Reinsurance Pricing

  • Simulation:


    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

Sources of significant xpl
Sources of Significant XPL Reinsurance Pricing

-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

Treatments of xpl in reinsurance contract
Treatments of XPL in Reinsurance Contract Reinsurance Pricing

  • 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

Charges for xpl cover
Charges for XPL Cover Reinsurance Pricing

  • A flat, or swing rate, usually coincide with XOL cover

Analysis of xpl cover losses
Analysis of XPL Cover Losses Reinsurance Pricing

  • 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?

Some common features in recent tort reforms
Some Common features in recent tort reforms Reinsurance Pricing

  • 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)

Estimating effect of tort reforms
Estimating Effect of Tort Reforms Reinsurance Pricing

  • 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

Major features in texas tort reform
Major features in Texas tort reform Reinsurance Pricing

  • 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

A texas carrier untrended sch p
A Texas Carrier Untrended Sch P Reinsurance Pricing

Major features in florida tort reform
Major features in Florida tort reform Reinsurance Pricing

  • 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

Tort reforms do nt always improve re insurance companies results
Tort Reforms do’nt always improve (Re)insurance companies results

  • Legal system may allow plaintiff to circumvent caps

  • Constitutional challenge

  • accompanied with rate decreases

Recent market trend and implication on reinsurance pricing
Recent Market Trend and Implication on Reinsurance Pricing results

  • Decreasing Frequency

  • Severity continues to go up

  • Rate level Erosion

  • Higher Retention