Transcript Download Handout 2

RATEMAKING FOR PHYSICIANS –
GENERAL METHODS
• Exposure rating is emphasized
• Experience mods / tier rates are often used
(but not always)
• Reflecting experience tricky: high severity/
low frequency
• Physician groups often obtain preferred
rates (less today)
• Most important rating variable is
classification
CHARACTERISTICS OF INDIVIDUAL
PHYSICIAN RISKS
• Extreme variation (factor of 150) between
high and low rates
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This is within a single state
Based on expected loss, without considering
experience
Mostly due to practice specialty
Part time, other factors can increase the range further
• Greatest determinant of rating is frequency
• Severity is also greater for surgical classes
but less so
• Low overall frequency and long payment
patterns impedes IRR
WHAT IS DIFFERENT ABOUT
PHYSICIANS MED MAL?
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Dominated by PIAA mutuals
Customer-focused “to a fault”
Still offering occurrence
Often less opportunistic rate making
Willing to take a loss – often
ADJUSTMENTS TO BASE RATE –
PECULIARITIES OF MED MAL
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Heavy discounting (LLAE > 100%)
Expense loads often low (no brokerage)
Profit often low or zero in spite of risk
Commercial carriers have trouble
competing in this environment
EXPOSURE BASES USED
• Pure premium analysis
• Base class equivalent exposures
• Consistent high-quality database can be
obtained
• Adjusted for all rating factors
OTHER RATING ADJUSTMENTS
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Part time
New practitioner
Joint defense / Waiver of consent to settle
Risk management discounts
Entity coverage (vicarious liability
surcharge)
• Schedule rating (sometimes forbidden by
regulation)
CLAIMS MADE COVERAGE ISSUES
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Claims made multipliers (esp. in states with
occurrence)
• Tail multipliers
• Prepaid tail load
• Heavily influenced by relative trend vs.
discount in rates
• Can yield counterintuitive results
• Particularly true with long payment pattern
DISTORTIONS – CALENDAR YEAR
INFLATION
• Consideration required in the development
triangle
• Can be adjusted to a current inflation
level, then developed
• Selecting prospective inflation rates is a
hurdle
• Cyclical effects versus system changes
• Unpredictability of jury inflation
DISTORTIONS – JURY INFLATION
• Largest current issue facing med mal
actuaries
• Incredibly leveraged response
• A handful of large verdicts impact thousands
of settlements
• Thousands of settlements = losses for
hundreds of insurers
• Results of 100’s of insurers balloon rate
indications by a handful of actuaries
DISTORTIONS – JURY INFLATION
(continued)
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This yields overreaction that no one
can be sure of
• Small shifts in frequency – slightly
friendlier juries – also possible
• This compounds trend and uncertainty
• Due to low frequency / high severity is
hard to detect and diagnose
• The actuary who fixes this problem can go
straight to heaven
DISTORTIONS – LIMIT CAPPING
• Complexity causes distortions
• Provider limits tend to be low (often $1M •
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$2M)
Losses frequently at limits
Stacking of limits is common
Hospitals often provide deep pocket
Many occurrences shared with other insurers
Distributions often either naïve, or difficult to
estimate
Data quality becomes critical, sometimes
insurmountable obstacle