Transcript CAS Annual Meeting EMERGING ISSUES IN MEDICAL MALPRACTICE THE ROLE OF THE ACTUARY IN ALTERNATIVE INSURANCE MARKETS November 16, 2004 Richard B.

CAS Annual Meeting
EMERGING ISSUES IN MEDICAL MALPRACTICE
THE ROLE OF THE ACTUARY IN
ALTERNATIVE INSURANCE MARKETS
November 16, 2004
Richard B. Lord, FCAS MAAA
Milliman, Inc.
Risk Retention Group

Liability insurance company formed
under the Risk Retention Act (RRA)
 Company owned by it’s members
 RRA: Federal law passed in 1981 for
products liability
 Liability Risk Retention Act
Amendments (LRRA) of 1986:
broadened RRA for medical
professional liability
Risk Retention Group
Risk retention group (RRG)
domiciled in a state
 Governed by Federal law
 Able to write business in any
state
 Primary regulatory enforcement
by state of domicile

Number of Risk Retention
Groups
180
160
140
120
100
80
60
40
20
0
1988
1991
1994
1997
Year
Source: Risk Retention Reporter
2000
2003
Annual RRG Premium
($Millions)
2,500
2,000
1,500
1,000
500
0
1988
1991
1994
1997
Year
Source: Risk Retention Reporter
2000
2003
Medical Malpractice Risk
Retention Groups by Type
45
40
35
30
25
Hospital
Nursing Home
Physician
Other
20
15
10
5
0
2003
2004
Year
Source: Risk Retention Reporter
Medical Malpractice RRG
2004 Premium ($Millions)
$90
8%
$206
19%
$725
69%
$41
4%
Source: Risk Retention Reporter
Hospital
Nursing Home
Physician
Other
Why Form a Risk Retention
Group (Advantages)
Availability/Affordability
 Possible stability across
insurance market cycles
 Niche market
 Selective underwriting
 Loss control/risk management

Role of the Actuary
Initial rate development
 Economic feasibility study

– Expected case
– 90th percentile case
Statement of opinion on loss
reserves
 Ongoing rate evaluation

Risk Retention Group
Funding
Initial capital contribution
 Rate development

Rate Development

Expected Loss and LAE Pure
premium
 Contribution to policyholder surplus
 Management fee
 Other expenses:
– Auditing
– Actuarial
– Federal income tax
Pure Premium Development

Primary Data Sources:
– Entities being underwritten

Secondary Data Sources:
– Insurance carrier rates filed in state
– Industry studies
– State insurance department data
collection programs
– Other insureds in the state
Development of Pure Premium

Primary Data Collection
– Claims Listing:





Occurrence Date
Report Date
Paid Loss
Loss Reserve
Defense Costs
– Exposure Counts


By Category
By Year
Feasibility Study
Pro forma Income Statement
 Pro forma Balance Sheet
 Leverage Ratios

– Premium to Surplus
– Reserves to Surplus
Pro Forma Income Statement
Year 1
1. Net Premium
2. Expenses
3. PY Ultimate Loss
and ALAE
4. Underwriting
Profit: (1)-(2)-(3)
5. Investment
Income
6. Federal Income
Tax
7. Net Profit AfterTax: (4)-(5)-(6)
Year 2
Year 3
Year 4
Year 5
Pro Forma Balance Sheet
Year 1
Assets
1. Cash and
Investments
Liabilities
2. Unpaid Loss and
ALAE
Capital & Surplus
3. Beginning of Year
Capital
4. Capital Paid in
5. Unassigned Surplus:
(1)-(2)-(3)-(4)
6. Total Capital &
Surplus: (3)+(4)+(5)
Year 2
Year 3
Year 4
Year 5
Pro Forma Leverage Ratios
Year 1
1. Net Premium
2. Capital
3. Premium to
Capital Ratio: (1)/(2)
4. Unpaid Loss and
ALAE
5. Reserve to
Capital Ratio: (4)/(2)
Year 2
Year 3
Year 4
Year 5
Statement of Opinion
Statutory annual financial
statement loss and ALAE reserve
opinion
 Requirements vary by state

Risk Retention Group
Concerns
Volume of premium vs. limits of
losses
 Emerging phenomenon
 Insolvency rate vs. P/C insurer
 No guaranty fund coverage
except perhaps for policyholders
in state of domicile
