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2002 CAS Ratemaking Seminar COM-21 Medical Malpractice Pricing

2002 CAS Ratemaking Seminar COM-21 Medical Malpractice Pricing. Jeff Donaldson, FCAS, MAAA The Doctors’ Company. Introduction. Claims-Made Product Pure Premium Method Pricing for Purchased Tail Coverage Pricing for Free Tail Coverage Class Pricing Other Ratemaking Issues.

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2002 CAS Ratemaking Seminar COM-21 Medical Malpractice Pricing

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  1. 2002 CAS Ratemaking SeminarCOM-21 Medical Malpractice Pricing Jeff Donaldson, FCAS, MAAA The Doctors’ Company

  2. Introduction • Claims-Made Product • Pure Premium Method • Pricing for Purchased Tail Coverage • Pricing for Free Tail Coverage • Class Pricing • Other Ratemaking Issues

  3. Claims-Made Product • Covers claims reported to the company during policy period • Restricted to claims with occurrence dates on or after the Retroactive Date • Prior Acts : claims with accident dates prior to policy effective date • Coverage Trigger : Incident vs. Demand

  4. Claims-Made Product • Tail Coverage : covers all claims reported subsequent to policy expiration for claims which occurred between retro date and expiration date • Free Tail Coverage provided upon Death, Disability, or Retirement

  5. Pure Premium Method • Report Year losses stratified by Lag • Lag is defined as report year minus accident year • L(i,j) = losses from report year “i”, lag “j”

  6. Pure Premium Method

  7. Pure Premium Method • 1st Year Claims-Made Policy

  8. Pure Premium Method • 2nd Year Claims-Made Policy

  9. Pure Premium Method • Mature Claims-Made Policy

  10. Pure Premium Method • Tail Policy effective Year1

  11. Pure Premium Method • Exposures generated by report year and lag combination)

  12. Pure Premium Method • Report year losses developed and trended • Adjusted losses divided by exposures • Generates a point estimate of pure premium by lag using the experience of all policies (advantage over loss ratio method)

  13. Pure Premium Method - Example • Step Factor Calculation • Pure Premium by Lag

  14. Purchased Tail Pricing • Assume 5% loss trend applied to report year losses • Losses stated as percent of mature losses for report year0

  15. Purchased Tail Pricing

  16. Purchased Tail Pricing • Tail pure premium = 124% x Mature pure premium • Tail Premium should not be 124% of Mature premium for two reasons: • longer payout • claims-made premium includes load for free tail coverage

  17. Free Tail Pricing • Loaded as % of premium or loss • Model Parameters: • age distribution • inception year distribution for current insureds • mortality, disability, and retirement rates

  18. Free Tail Pricing • Model Parameters: • lapse rates • eligibility requirements • pure premium • pure premium trend • discount rate

  19. Class Pricing • Recognized medical specialties • Grouped for ratemaking purposes • Many different class plans and relativities used in industry • Some specialties sub-divided based upon underwriting criteria

  20. Class Pricing • Check for heterogeneity within classes and specialties • Test for heterogeneity • Poisson assumption • Mean = Variance ?

  21. Heterogeneity Test - Example

  22. Heterogeneity Comparisons

  23. Other Ratemaking Issues • Coverage Triggers (Demand vs. Incident) • Mass Torts (e.g. pedicle screws, breast implants, Fen Phen) • Tort Reform • Corporate Vicarious Liability • Impact of Managed Care

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