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Non-Medical Professional Liability

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  1. Non-Medical Professional Liability Denise Olson, FCAS, MAAA CNA Pro

  2. Non-Medical Professional Liability • Errors and Omissions / Malpractice • Usually involves breach of contract, misrepresentation, negligence fraud • Damages - typically economic, no punitives • Examples: Lawyers, Accountants, Architects & Engineers, Design Professionals, Actuaries, Real Estate Agents

  3. Non-Medical Professional Liability • Coverage is typically claims made • Claims are covered in the year first reported • Cleaner due to coverage issues - when did the cause accrue? • Shortens the tail considerably • Expenses can be inside or outside the limit • Defense of claims is a primary coverage benefit

  4. Non-Medical Professional Liability - Considerations • Coverage provisions • Book profile • Limit and Deductible profiles • How does the Limit apply (excess of deductible)

  5. Non-Medical Professional Liability - Other Unique Features • Classifications - Not all lawyers are equal • Exposure Base - What is appropriate can vary • Claims handling is a key consideration • Very little industry data available • State variations can be important

  6. Non-Medical Professional Liability - Pricing Issues • Extended Reporting Period • Step Rating • Retroactive Dates

  7. Step Rate • Definition & Purpose • Graphical Representation of Area covered in each step • Determination of Proper Step Rates • Other Uses for Analysis

  8. Definition & Purpose • Step is the level of maturity of the policy • Step 1 (sometimes called Step 0) is the first year after retroactive date • Retroactive date is set for date after which prior acts will be covered • Adjusts for fact that policies with more recent retroactive dates will have fewer and possibly less severe claims

  9. Step Rate Graph • Amount covered by each policy increases with each year after the retroactive date • Rates need adjustment to account for increasing exposure

  10. Evaluation of Step Rate Factors • Two main methods of handling • Ultimate incurred loss ratio analysis by Step • Step Rate Relativity Analysis based on losses only

  11. Ultimate Incurred Loss Ratio • Separate premium data by step • Split losses by applicable policies • Adjust for varying degrees of deductible and limit (basic limits) and mix of business • Use loss ratio differentials to determine if current factors are appropriate

  12. Advantages Occurrence dates are irrelevant If only relativity adjustments are needed, this is simpler Data quality issues are less likely to occur Disadvantages Step Rate calculation changes can’t be tested Need to match losses by policies Low volume of data at lower steps usually Ultimate Incurred Loss Ratio

  13. Loss Only Method • Separate incurred loss data by lag • Determine % of incurred losses by step • Adjust for varying deductibles, limits, and sizes of firm • Develop to ultimate

  14. Advantages Premium data not needed Can use for ERP analysis Can use to develop step rates without experience Disadvantages Mix of business may still be an issue Occurrence dates are needed and must be fairly accurate More complex Loss Only Method

  15. Loss Only Method - Example • Used Lawyers E&O Data • Current Rating Method • Average Number of Years Experience - capped • Same whether full prior acts or not • Base Rate multiplied by number of attorneys • New Approach • Each Attorney rated individually • Base rates then added

  16. Loss Only Method - Example • Pull all available data • Check data for accuracy of occurrence dates • Separate by Accident Year and Lag • Make adjustments for differences between incurred lag pattern and ultimate lag pattern • Select step factors

  17. Loss Only Method - Example • Data errors: Sampling performed • Approximately 30% of all claims are miscoded by occurrence date • Assumed that most errors set claims made date as occurrence date • Adjusted Step 1 selection to reflect data errors

  18. Loss Only Method - Example Adjusting for Ultimate Values • Claims with larger lags tend to have higher ultimate claim amounts due to delay • Due to large amounts - newer years will have less loss in the higher steps • Development is not as great as straight loss analysis

  19. Loss Only Method - Other uses • Can use results for Extended Reporting Period pricing • Use losses by lag expected • Discount to current • Treated like an occurrence policy without new claims possible