Casualty Loss Reserve Seminar

Current Issues and Trends in Medical Malpractice Casualty Loss Reserve Seminar Edward Wrobel Gail Tverberg September 12, 2006 This document is incomplete without the accompanying discussion; it is confidential and intended solely for the information and benefit of the immediate recipient hereof.

Overview • Observations on financial results – Edward Wrobel • Malpractice tort reforms and their impact on loss data – Gail Tverberg • Significant risk and uncertainty in medical malpractice loss reserving – Bill Burns • Observations and trends – Edward Wrobel • Closing/questions

Observations on Financial Results Edward Wrobel

Observations on Financial Results Source: A.M. Best’s Aggregates and Averages

Net Loss & DCC Schedule P - Part 2Occurrence and Claims Made Ultimate Loss at Different Valuation Points Source: A.M. Best

Observations on Financial Results • Financial results impacted by... • 1990s • modest loss trends • favorable reserve development • relatively high investment returns • expansion • slippage in pricing • 2000s • loss trends pick up • unfavorable reserve development • investment returns decline • rates adjusted

Malpractice Tort Reforms and Their Impact on Loss Data Gail E. Tverberg

Overview • State Reforms by Year • Federal Reforms • Impacts of Tort Reforms on Loss Data • Industry Calendar Year Data

State Reforms by Year - 2003 • Tort reforms in several large states • Florida: $500K physician / $750K hospital non-economic damage (NED) cap • Idaho: $250K NED cap • Ohio: Variable NED cap to $1M; collateral source offset • Oklahoma: $300K NED cap for obstetrics • Texas: $250K NED cap; mandatory periodic payments; joint and several liability changes • West Virginia: $250K - $500K NED cap

State Reforms by Year - 2004 • Tort reforms in several smaller states, and enhancements to previous reforms in larger states • Florida: Cap on attorney fees • Massachusetts: Reduction in pre-judgment interest • Mississippi: $500K NED cap • Nevada: Enhancements to $350K NED cap; attorney fee cap; periodic payments • Ohio: Reduction in pre-judgment interest; NED cap lowered to $250K - $500K • Oklahoma: $350K NED cap enhancements; changes to joint and several liability

State Reforms by Year - 2005 • More tort reforms – not as significant as in 2003 • Alaska: $250K - $400K NED cap • Connecticut: Weak package, including small reduction in prejudgment interest • Georgia: $350K NED cap; joint and several liability changes; venue changes • Illinois: $500K physician, $1M hospital NED cap • Missouri: $350K NED cap; joint and several liability changes; collateral source; venue • South Carolina: $350K NED cap; joint and several liability changes • Many states: Evidence of apology not admissible in court

State Reforms by Year – 2005 (cont’d.) • Other 2005 changes • New Jersey: Mandatory offer of $5,000 deductible; premium subsidy; reporting requirements • Pennsylvania: Joint and several liability reforms overturned • Wisconsin: $350K NED cap overturned

State Reforms by Year - 2006 • Very few reforms in 2006 • Florida: Joint and Several Liability Reform • Wisconsin: $750K NED cap (to replace $350K cap struck down in 2005)

Federal Tort Reform • Federal NED cap legislation introduced each year • 2006 legislation patterned after Texas legislation • Filibuster threatened • Failed to get 60 votes needed to invoke cloture

Impact of Tort Reforms on Loss Data • Legislation states when a given reform is effective • Injuries after xx/xx/xxxx • Accident year basis • Often used on non-economic damage caps or changes in statute of limitations • Suits filed after xx/xx/xxxx • Similar to report year basis • For example, may be used on change in prejudgment interest rate, or change in periodic payment requirement

Impact of Tort Reforms on Loss Data (cont’d.) • Claims paid after xx/xx/xxxx • Rarely see this for true tort reforms – more often, for other changes • Example – collect closed claim data after given date; new disciplinary procedures for physicians after a given date • Legislation is generally a package of reforms • Different parts may have different reform effective dates

Impact of Tort Reforms on Loss Data (cont’d.) • Actual impact on loss data seems to differ from theoretical • Indirect impacts as well as direct • Typical impacts • Large jump in claims reported and claims paid • Occurs shortly after legislation is passed, before it becomes effective • Purpose: avoid the new law • Drop in claims reported after effective date • Empty pipeline • Wait to see how new legislation will work out • May bounce back

Impact of Tort Reforms on Loss Data (cont’d.) • True reforms • Will have a long-term effect • May reduce annual trend rate • May need to be tested in court to be fully effective • Indirect impact on jurors • May result from hearing about need for legislation • Thus, possible to have some effect in states without reforms

Change in National Practitioner Databank Payments

Florida – AM Best Page 14 Data ($ millions)

Texas – AM Best Page 14 Data ($ millions)

Observations on Trends Edward Wrobel

Observations on Trends • Frequency • Generally flat to down • Exposure base considerations? • Severity • Following surge in late 1990s/early 2000s, leveling off? • Heavily influenced by jurisdiction • Some tort-reform driven, some not • Other factors? • Impact on reserving

Medical Malpractice +31% +18% +16% +15% +12% Source: 1990 St. Paul Filing

Medical Malpractice +31% +18% +16% +15% +12% +7% +6% +3% +1% Source: 1990 St. Paul Filing

St. Paul-Hospitals Frequency

St. Paul-Hospitals Severity

St. Paul-Hospitals Pure Premium

Questions?

Casualty Loss Reserve Seminar