The Medical ProfessionalMarketplace and

The Buyer’s Response to It

Jack Jensen

HealthCare Practice Leader

Casualty Actuarial Society

Boston, MA

November 11, 2002

Table of Contents

I. Scary Movie Slides

II. Buyer’s Response Slides

Source: A.M. Best’s

100105110115120125130135140145150155

1997 1998 1999 2000 2001

Medical Malpractice

All Lines

Medical Malpractice Combined Ratio Continues to Climb

115 11

8

129

118

115

132

109 11

2

136

118

116

115

130 13

4

153

108 11

0

131

102

93

103

90

100

110

120

130

140

Wo

rke

rsC

om

pe

nsa

tio

n

Co

mm

erc

ial

Pa

cka

ge

s

Ge

ne

ral

Lia

bil

ity

Co

mm

erc

ial

Au

to

Me

dic

al

Ma

lpra

ctic

e

Pro

pe

rty

Inla

nd

Ma

rin

e

1999 2000 2001 (est.) Data Source: A.M. Best Company

Combined Ratios by Coverage Line

-2

-1.5

-1

-0.5

0

0.5

$ in

mill

ions

Source: Conning & Company

200

0

(400)

(600)

(800)

(200)

Estimated Medical Malpractice Reserve Position

All Years Total: $(1.7) billion

Source: Jury Verdict Research

U.S. Median Medical Liability Awards and Settlements

0100200300400500600700800900

1,000

1993 1994 1995 1996 1997 1998 1999 2000

$ in

Tho

usan

ds

Settlements

Awards

Medical Malpractice Claim Severity is Increasing

$1,000,000

$500,000

Source: Jury Verdict Research & West Law

Sample Large Awards

$27,570,327

$23,530,746

$19,275,466

$18,924,000

$15,700,000

$15,317,000

$15,000,000

$14,460,000

$12,381,670

$11,500,000

$10,800,000

$10,600,000

1997

Queens County, NY

Boone County, KY

Queens County, NY

Dade County, FL

LA County, CA

Oakland County, MI

Philadelphia County, PA

Cuyahoga County, OH

US District, HI

Kings County, NY

Cook County, IL

Cook County, IL

Medical Malpractice Severity is Increasing

Source: Jury Verdict Research

Sample Large Awards:

$269,000,000

$108,000,000

$100,000,000

$75,000,000

$60,686,150

$55,439,270

$49,594,684

$41,444,531

$32,676,410

$31,100,000

$30,000,000

$23,500,000

2000-2001

Dallas County, TX

Bronx County, NY

Philadelphia County, PA

Nassau County, NY

Los Angeles County, CA

Cook County, IL

Philadelphia County, PA

Kings County, NY

TX

Escambia County, FL

New Haven, CT

Cuyahoga County, OH

Medical Malpractice Severity is Increasing

Medical Malpractice Premiums “In Play”

St. Paul $ 534 million

PHICO 135

Frontier 59

Travelers 28

MIIX 185

SCPIE 151

TIG 100

$1.192 billion of premiums in need of a new home

Institutional Provider Markets

United States Bermuda EuropeanAIG AWAC SwissReAce Endurance HannoverReArch XL London Market

Berkley StarrChubb AceCNAERC

One BeaconZurich

Axis

Green - CAT Excess OnlyRed - New Markets

Response of Medical Malpractice Insurers

• Underwriting discipline is now the focus• Withdrawal of capacity• Reduction in offered capacity• Continued pricing increases

• INCREASED DEPENDENCY ON ACTUARIAL REVIEWS

• Increased self-insured retentions• Limitations in coverage

Buyer’s Response(Institutional)

• Dramatically Increased Risk Retained

• Formalization of Risk Retention Vehicles

· Trusts · Captives (est. 24 new Marsh HC captives in 2002) · RRG’s and Pooling Vehicles

• Focus on Carrier Credit Quality

• Channeled Physician Programs (See Physician Response)

Increased Risk Retention

(Institutional)1. Disappearance of primary risk transfer coverage in some venues

2. Much higher primary per claim retentions.

3. Loss of aggregate stop loss protection.

4. If aggregate stop survives then imposition of surviving retentions (aka maintenance deductible).

5. Inner Aggregate Deductible on first layer excess policies.

6. Retro Rating (swing plans) on first excess coverage.

7. Quota Share Excess participation by insured or its captive.

Challenge: How to fit the client’s consulting actuary’s loss projection model into these more complex retention schemes

Managed Care Organizations

Primary E&O Markets

Here

Chubb

AIG

BCS (limited)

Gone

TIG

CNA

Steadfast

St. Paul

Farmers

Some PIAA’s

Managed Care E&OAverage Per Enrollee Per Year (PEPY)

$0.00

$1.00

$2.00

$3.00

By No. of Enrollees

Co

st P

EP

Y

2000 2001 2002

2000 $0.93 $0.43 $0.35 $0.44

2001 $1.52 $0.49 $0.68 $0.41

2002 $1.71 $2.04 $1.60 $0.81

25,000- 350,001- 1,000,001- 5,000,001

Managed Care E&O

Average Retentions Graph

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

By No. of Enrollees

Re

ten

tio

ns

2000 2001 2002

2000 47,100 255,000 370,000 958,333

2001 89,444 291,667 1,568,182 3,458,333

2002 218,421 750,000 2,520,833 23,666,667

25,000-350,000

350,001-1,000,000

1,000,001-5,000,000

5,000,001 and up

Actuarial Challenge for MCO’s

Akin to Mid 70’s on Provider Side

• Retained Risk has gone from small to humongous

• Historical claims data resides with carriers (or if with insureds, often

not in a data base)

• How to make a loss pick even if perfect historical data exists if:

· “class action” threats generate a sea change in liability dynamics

· ERISA protections are eroding

· Industry itself is changing its approach to utilization controls

Medical Malpractice – Physician Markets

15%

98%

112%

17%

93%

110%

19%

92%

111%

22%

93%

115%

22%

92%

113%

21%

103%

124%

22%

116%

138%

0%

20%

40%

60%

80%

100%

120%

140%

1995 1996 1997 1998 1999 2000 2001

Calendar Year

Comparison of Loss, Underwriting Expense & Combined Ratios

Underwriting Expense Loss Combined

Medical Malpractice – Physician Markets

23.3%

19.3%20.2%

16.1%

12.3%

4.0%

-9.9%-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1995 1996 1997 1998 1999 2000 2001

Calendar Year

Net Income as a Percent of Premiums

Physician ResponseI. Looking to Government:

• JUA’s or Similar (NH, RI, WV, SC, MS)

II. Looking to Hospitals:

• Hospital Sponsored PIAA Programs (drying up)

• Hospital Deductible Payment Programs

• On-Call Hospital Risk Assumption

• Hospital Owned Captive Channeling

• Hospital Investment in RRG arrangements

III. Looking to Managed Care Organizations:

• Neither physicians nor MCOs appear to be motivated to move forward in the channeled med-mal arena

IV. Looking to Physician Specialty Organizations:

• RRG’s and similar poolings

Territory

11A

2

3

4