Medical Professional Liability in 2003

Industry Overview

Paul Greve, Willis Victor Adamo, ProAssurance

Judy Hart, Endurance SpecialtyMatt Fay, Converium

Anthony Mercurio, Marsh

S:\People\Hurlj\Presentations\030308_PLUS Presentation (combined).ppt

Medical Professional Liability in 2003

March 2003

2

MPL Overview in 2003

AGENDA

Update financials

Observations from the perspective of... a primary insurer an excess insurer a reinsurer a provider/captive market

2

3

Source: Best’s Aggregates and Averages 3

MPL - financial status

Medical Malpractice Ratios

0%20%40%60%80%

100%120%140%160%180%

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Loss & LAE

4


33.7%

26.3%

7.5%

-6.2%

-19.4%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1997 1998 1999 2000 2001

Calendar Year

One Year Loss Reserve Development to Premium

5




0%20%40%60%80%

100%120%140%160%180%

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Loss & LAE U/W Expense Dividend

6




0%20%40%60%80%

100%120%140%160%180%

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Loss & LAE U/W Expense Dividend Combined

7




0%20%40%60%80%

100%120%140%160%180%

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Combined Investment Gain

8




0%20%40%60%80%

100%120%140%160%180%

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Combined Investment Gain Operating

Victor T. Adamo, Esq.

ProAssurance

Primary Insurer Perspective

10

IS THIS A GREAT BUSINESS, OR WHAT?

“Given the continued deterioration in operating profitability, weakened capitalization, uncertainty in the adequacy of loss reserves because of the heightened severity of claims and continued adverse trends, increased reinsurance costs and greater retention levels, A.M. Best views the outlook for the medical malpractice sector as negative.”

—A. M. Best, 2003 Property/Casualty Review Preview

MPL - primary insurer perspective

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COMPLETELY OUT OF THE MARKET

The “Old” News PIE Mutual PIC ICA Frontier

The “New” News St. Paul PHICO MIIX Reliance ROA / DIR


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STILL IN THE MARKET

Retrenchments ACAP SCPIE FPIC Princeton Zurich Many Mutuals

Full or Partial Moratoriums FPIC ISMIE Many Mutuals


13

Small Start Ups Florida, New Jersey, Pennsylvania Can they grow surplus enough to make a

meaningful contribution to capacity? Financial crunch restricts capital growth

Larger Companies Do not appear to be writing at “retail level” Exceptions?

Self-Insurance Pools No premium advantage this time around

OVER $1 BILLION OF DISPLACED PREMIUM


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IS THERE ENOUGH NEW CAPACITY TO SERVE THE MARKET?


15

Burden of constantly conveying “bad news” Premium increases Stricter underwriting decisions More staff demands

Raising/growing surplus to support premium growth

Prior year development overshadowing premium increases in financial results

MAJOR CHALLENGES FOR THE SURVIVORS


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MAJOR CHALLENGES FOR THE SURVIVORS

Investments no longer provide a major advantage in long-tail lines

New money investment rate 4% Equity impairment pressures

Reinsurance more business less relationship Reinsurers establishing high ROE goals Leading to higher retentions


17

THE RESULT IS…

Can’t write all the business available

Capacity allocation is now a conscious decision

The “New Math” – underwriting profit replacing operating profit


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DECISION FACTORS

Quality of Risk – we are underwriters

Rate adequacy

Avoiding price driven markets/brokers

Regulatory barriers Unreasonable regulators Time-consuming approval / review process


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IN SUMMARY

Challenging market

Fewer players

Bottom line conscious – or should be

Not as willing to deviate from plan


Judy Hart

Endurance Specialty

Excess Insurer Perspective

2121Source: Insurance Information Institute, calculated from A.M. Best combined ratio data

WORLD’S MOST DANGEROUS LINES OF INSURANCE?

MPL - excess insurer perspective

84.1

100101.3

101.7102.9

103.4106.6

107109.1

109.7111

112.9114.6

115.1116.3

117.1118.7

119.3121.8

129.3131.6

133.3

133.9135.1

135.6

80 90 100 110 120 130 140 150

Burglary & TheftSuretyOther

FidelityInland MarinePriv. Pass PD

Other A&HGroup A&H

Boiler & MachineComm Auto PD

Personal-All LinesPP Auto Liab

All LinesFire

Ocean MarineCommercial - AllFarm Multi Peril

Worker CompComm. Auto Liab.Comm. Multi Peril

AircraftAllied Lines

HomeownersReinsurance

Other LiabilityMed Mal

EarthquateEarthquakeMed Mal

Other LiabilityReinsuranceHomeowners

Allied LinesAircraft

Comm. Multi PerilComm. Auto Liab.

Worker CompFarm Multi Peril

Commercial - AllOcean Marine

FireAll Lines

PP Auto LiabPersonal - All Lines

Comm Auto PDBoiler & Machine

Group A&HOther A&H

Priv. Pass PDInland Marine

FidelityOther

SuretyBurglary & Theft

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HOSPITAL MEDICAL PROFESSIONAL LIABILITY

How Did Our Predictions Hold?

Further rating downgrades

Additional retrenchment/withdrawal

Continued pricing and retention increases

New capacity

Greater consideration of alternative options by clients with predictable loss exposure

Increased risk financing expenditures will cause greater clinical risk management and proactive claims defense

Further discussion and consideration of tort reform state by state


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SO IS THIS A CRISIS?

“Generally” significant capacity still available Driven by price, not availability New capacity developing in US, Europe and

Bermuda

Implications For Stakeholders

Double-digit medical inflation affecting cost Access to healthcare may suffer in some states Quality concerns continue


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Medical Costs Rising Sharply

6.8

0%

10.

1%

8.0%

2.1

%

2.5

%

0.2%

6.1

% 7.3

% 8.1

%

11.2

% 12.7

%

-1.1

%

1.3%

-2.1

%

4.8% 5.2

% 6.6

%

5.9

%

8.4%

4.9

%

8.1

%

11.0

%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

13%

15%

24Source: NCCI; William M. Mercer, Insurance Information Institute

Health care inflation is affecting the cost of medical care, no matter what system it is delivered through

Health Benefit Cost WC


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$129 $130 $141 $144 $148 $159 $156 $156

$167 $169 $179

$198 $204

$298

$0

$50

$100

$150

$200

$250

$300

$350

90 91 92 93 94 95 96 97 98 99 00 01* 02E* 05F

Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for 2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast.

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Cost of U.S. Tort System($ Billions)

Tort costs consumed 2.0% of GDP annually on average since 1990,expected to rise to 2.4% of GDP by 2005!

Tort costs consumed 2.0% of GDP annually on average since 1990,expected to rise to 2.4% of GDP by 2005!

Tort costs equaled $636 per person in 2000!Expected to rise to $1,000 by 2005

Tort costs equaled $636 per person in 2000!Expected to rise to $1,000 by 2005


26Source: Tillinghast-Towers Perrin 26


Defence Costs16%

Awards for Non-Economic Loss

22%

Claimants' Attorney Fee17%

Awards for Economic Loss

20%

Administration25%

Tort Systemis extremelyInefficient

•Only 20% ofthe tort dollarcompensatesvictims foreconomiclosses•At least 58%of every tortdollar neverreaches thevictim

Where the Tort Dollar Goes(2000)

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FACTORS DRIVING SEVERITY

Sophistication of plaintiff’s bar Trial Bar – flush with cash Higher expectations – drug therapies and technology

successes Venue – some deep judicial “Pits” Class Actions Erosion of tort reform/accept “Junk Science” as fact Jury desensitization to “Deep Pockets Syndrome” Some corporations do really dumb things (Enron,

dot-com, etc.)


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HOW DO WE MEET THE CHALLENGES?

World class underwriting and claims management knowledge

World class selling and negotiation skills critical

Increased customer/carrier touch = productivity strain

Uncertain financial stability/insurer insolvency strain relationships/challenge placements

Technical expertise and healthcare specialists “rise to the top”


Matt Fay

Converium

Reinsurer Perspective

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ULTIMATE INCURRED LOSS RATIOS

MPL - reinsurer perspective

OccurrenceIncurred

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 20011992 145.1% 137.0% 132.1% 126.9% 116.7% 110.9% 105.8% 105.2% 104.8% 104.7%1993 133.9% 128.6% 124.7% 118.7% 114.0% 109.1% 106.8% 104.1% 103.7%1994 133.8% 126.0% 121.7% 113.0% 109.2% 103.9% 101.9% 101.1%1995 127.0% 115.9% 117.4% 114.8% 112.1% 111.0% 110.3%

1996 119.1% 117.4% 118.5% 119.1% 122.4% 121.2%1997 129.4% 119.2% 124.2% 131.4% 132.7%1998 121.4% 118.1% 126.7% 137.0%

1999 116.7% 120.2% 131.7%2000 88.9% 93.9%2001 108.4%

Claims-MadeIncurred

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 20011992 112.5% 107.6% 101.4% 97.8% 94.2% 88.9% 85.9% 83.6% 82.3% 81.8%1993 114.1% 107.2% 103.3% 99.1% 94.4% 91.3% 89.1% 87.1% 86.5%1994 111.1% 105.9% 105.8% 100.1% 95.1% 92.4% 90.7% 90.3%

1995 109.9% 109.6% 108.3% 105.5% 101.2% 99.9% 99.4%1996 105.3% 105.0% 101.6% 101.2% 98.1% 98.6%1997 106.5% 104.7% 105.7% 105.7% 107.9%

1998 104.9% 106.6% 110.4% 115.3%1999 99.2% 105.6% 114.2%2000 102.5% 112.2%2001 105.1%

Best's Aggregates & Averages 2002 Edition

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PAID LOSS RATIOS


OccurrenceIncurred

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 20011992 8.0% 13.7% 25.8% 43.0% 57.1% 69.8% 78.4% 84.7% 90.2% 94.7%1993 0.6% 5.3% 19.5% 37.3% 52.4% 66.2% 77.8% 86.0% 90.8%1994 0.6% 6.6% 21.5% 39.0% 54.8% 69.8% 79.3% 87.0%1995 0.8% 8.1% 23.5% 42.5% 59.5% 75.9% 86.6%

1996 1.2% 7.4% 22.3% 43.5% 66.4% 85.1%1997 1.4% 8.2% 26.1% 53.0% 79.2%1998 1.4% 9.7% 28.9% 58.8%

1999 1.1% 7.6% 30.4%2000 -0.3% 4.8%2001 1.0%

Claims-MadeIncurred

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 20011992 3.7% 20.7% 41.4% 54.9% 65.2% 69.9% 73.3% 75.6% 77.1% 78.1%1993 3.7% 21.1% 41.2% 58.3% 68.1% 74.2% 77.7% 79.8% 81.5%1994 3.6% 22.7% 45.1% 60.1% 70.5% 76.7% 80.8% 83.6%

1995 4.0% 24.7% 47.7% 66.8% 76.8% 85.8% 90.1%1996 4.2% 23.1% 47.8% 66.0% 79.5% 87.6%1997 5.3% 26.5% 51.6% 71.3% 85.7%

1998 5.4% 27.8% 57.0% 78.5%1999 4.8% 28.8% 59.6%2000 5.8% 31.0%2001 5.0%


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PAID TO ULTIMATE INCURRED RATIOS


OccurrenceIncurred

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 20011992 5.5% 10.0% 19.5% 33.9% 49.0% 62.9% 74.1% 80.5% 86.1% 90.4%1993 0.5% 4.1% 15.6% 31.4% 45.9% 60.7% 72.8% 82.6% 87.5%1994 0.5% 5.2% 17.6% 34.5% 50.2% 67.2% 77.9% 86.1%1995 0.7% 7.0% 20.0% 37.0% 53.1% 68.3% 78.5%

1996 1.0% 6.3% 18.9% 36.5% 54.3% 70.2%1997 1.0% 6.9% 21.0% 40.4% 59.7%1998 1.1% 8.2% 22.8% 42.9%

1999 0.9% 6.3% 23.1%2000 -0.3% 5.1%2001 0.9%

Claims-MadeIncurred

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 20011992 3.3% 19.2% 40.8% 56.1% 69.2% 78.6% 85.4% 90.5% 93.7% 95.5%1993 3.2% 19.6% 39.9% 58.9% 72.1% 81.3% 87.2% 91.7% 94.3%1994 3.3% 21.4% 42.7% 60.0% 74.1% 83.0% 89.1% 92.6%

1995 3.6% 22.6% 44.1% 63.3% 75.9% 85.8% 90.6%1996 4.0% 22.0% 47.0% 65.2% 81.0% 88.9%1997 4.9% 25.4% 48.8% 67.4% 79.4%

1998 5.2% 26.1% 51.6% 68.1%1999 4.8% 27.3% 52.2%2000 5.7% 27.7%2001 4.8%


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TRENDS IN MEDICAL COSTS


(1) (2) (3) (4) (5)

Year

Ground Up Employer

Stop Loss Trend

WC Medical

Claim Costs

Medical CPI

Year to Year Change in

Median Settlement

Fitted Median

Settlement Severities

1992 1.3%1993 -2.1% 5.9%

1994 4.8% 4.8% 11.25%1995 5.2% 4.5% 21.2% 11.25%1996 6.6% 3.5% 7.1% 11.25%

1997 10.0% 5.9% 2.8% 6.7% 11.25%1998 10.5% 8.4% 3.2% 25.0% 11.25%1999 11.0% 4.9% 3.5% 18.4% 11.25%2000 13.5% 8.1% 4.1% -15.6% 11.25%

2001 12.0% 11.0% 4.6%2002 14.0% 4.7%2003 14.0%

2004 14.0%

(1) - A&H Industry(2) - 2002 NCCI Holding, Inc.

(3) - Bureau of Labor and Statistics(4) - Jury Verdict Research, LRP Publications(5) - Smoothed using an exponential fit

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Company Severity Trend

Company A 5.00%Company B 4.00%Company C 4.00%Company D 5.50%Company E 4.00%Company F 5.00%Company G 3.00%Company H 3.00%Company I 5.00%Company J 3.50%Company K 1.50%Company L 4.00%

COMPANY SEVERITY TREND ASSUMPTIONS

Versus 7 – 11% average from previous table.


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NEGATIVE EFFECT OF COMPOUNDING

Reserves are 6.1% deficient, or $33M of reserve strengthening is needed.

If the correct trend was 8.0%, reserves would be 9.2% deficient and need $51M of reserve strengthening.

If the correct trend was 10.0%, reserves would be 15.7% deficient and

need $87M of reserve strengthening.


Assumed Trend was 5.0%Actual Trend was 7.0% Assuming rates kept pace with t rend assumptions

Actual Needed

Percent

Reserve Defic iency

Reserve Def. ($M)

Year 1 Premium 100 102 1.9% 2 Year 2 Premium 105 109 3.8% 4

Year 3 Premium 110 117 5.8% 6 Year 4 Premium 116 125 7.8% 9 Year 5 Premium 122 134 9.9% 12

All Years 553 586 6.1% 33

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% OF PAID CLAIMS BY PAYMENT THRESHOLDPIAA DATA SHARING PROJECT


0

10

20

30

40

50

60

70

80

90

100

1985 1987 1989 1991 1993 1995 1997 1999 2001

$250K-<$500K

$100K-<$250K

$500K-<$1M

<$100K

=>1M

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INVESTMENT RETURN FOR U.S. TREASURIES


Daily Treasury Y ield C urve R ates 3/6/03

1 yr y ie ld = 1. 22 %5 yr y ie ld = 2. 63 %

10 yr y ie ld = 3. 67 %

20 yr y ie ld = 4. 70 %

T r e a s u r y Y ie ld C u r v e

0 .0 0 %

1 .0 0 %

2 .0 0 %

3 .0 0 %

4 .0 0 %

5 .0 0 %

M a tu r ity

Yiel

d

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COMPANY INVESTMENT INCOME ASSUMPTIONS IN RATEMAKING


Com pa nyInte re st Ra te Assu m ptio n

Co mp an y A 6. 00%Co mp an y B 6. 00%Co mp an y C 6. 00%Co mp an y D 5. 50%Co mp an y E 4. 25%Co mp an y F 5. 75%Co mp an y G 5. 00%Co mp an y H 5. 30%Co mp an y I 5. 00%Co mp an y J 5. 00%Co mp an y K 5. 00%Co mp an y L 5. 75%Co mp an y M 5. 00%

1 yr yield = 1. 22%5 yr yield = 2. 63%

10 yr yield = 3. 67%

20 yr yield = 4. 70%

Daily Treasury Yield Curve Rates

3/6/03

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HISTORICAL REPORTING PATTERNS

Jury Verdict Research, LRP

Publications


Year of

Trial

Months from

Incident to Trial

Months from

Fil ing to Trial1994 61 361995 57 38

1996 57 361997 57 361998 48 281999 45 25

2000 45 24

Anthony Mercurio

Marsh

Provider/Captive Market Perspective

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HOW ELASTIC IS THIS MARKET?

Will consumers allow insurers to make up lost ground?

What are the alternatives?

How high are the barriers to entry?

Do the alternatives have an advantage?

Once the dollars leave will they come back?

41

MPL - provider/captive market perspective

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WHAT ARE THE ALTERNATIVES?

Self funding

GROUP captives (RRGs, etc.)

PRUE captives

Others

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2002 BANNER YEAR FOR ALTERNATIVES

Cayman Islands reports largest increase ever

Vermont reports largest increase ever

Almost every Marsh client is engaged in some sort of feasibility study

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But...

Not immune from increased severity lower investment returns on funded assets

Impacting required funding levels


44

DO THESE VEHICLES HAVE AN ADVANTAGE?

Some fail, but not many

ROI expectations are lower

Many have engaged in a focused effort to reduce losses

Most have lean budgets

Some seem to lack the baggage of the commercial market

Most have a camaraderie among members (impressive)

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Medical Professional Liability in 2003

Medical Professional Liability in 2003

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