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CAS Annual MeetingCAS Annual Meeting
EMERGING ISSUES IN MEDICAL MALPRACTICEEMERGING ISSUES IN MEDICAL MALPRACTICE
THE ROLE OF THE ACTUARY IN THE ROLE OF THE ACTUARY IN ALTERNATIVE INSURANCE MARKETSALTERNATIVE INSURANCE MARKETS
November 16, 2004November 16, 2004
Richard B. Lord, FCAS MAAARichard B. Lord, FCAS MAAAMilliman, Inc.Milliman, Inc.
Risk Retention GroupRisk Retention Group
Liability insurance company formed Liability insurance company formed under the Risk Retention Act (RRA)under the Risk Retention Act (RRA)
Company owned by it’s membersCompany owned by it’s members RRA: Federal law passed in 1981 for RRA: Federal law passed in 1981 for
products liabilityproducts liability Liability Risk Retention Act Liability Risk Retention Act
Amendments (LRRA) of 1986: Amendments (LRRA) of 1986: broadened RRA for medical broadened RRA for medical professional liabilityprofessional liability
Risk Retention GroupRisk Retention Group
Risk retention group (RRG) Risk retention group (RRG) domiciled in a statedomiciled in a state
Governed by Federal lawGoverned by Federal lawAble to write business in any Able to write business in any
statestatePrimary regulatory enforcement Primary regulatory enforcement
by state of domicileby state of domicile
Number of Risk Retention Number of Risk Retention GroupsGroups
0
20
40
60
80
100
120
140
160
180
1988 1991 1994 1997 2000 2003
Year
Source: Source: Risk Retention ReporterRisk Retention Reporter
Annual RRG Premium Annual RRG Premium ($Millions)($Millions)
0
500
1,000
1,500
2,000
2,500
1988 1991 1994 1997 2000 2003
Year
Source: Source: Risk Retention ReporterRisk Retention Reporter
Medical Malpractice Risk Medical Malpractice Risk Retention Groups by TypeRetention Groups by Type
0
5
10
15
20
25
30
35
40
45
2003 2004
Year
Hospital
Nursing Home
Physician
Other
Source: Source: Risk Retention ReporterRisk Retention Reporter
Medical Malpractice RRG Medical Malpractice RRG 2004 Premium ($Millions)2004 Premium ($Millions)
$72569%
$414%
$20619%
$908%
Hospital
Nursing Home
Physician
Other
Source: Source: Risk Retention ReporterRisk Retention Reporter
Why Form a Risk Retention Why Form a Risk Retention Group (Advantages)Group (Advantages)
Availability/AffordabilityAvailability/AffordabilityPossible stability across Possible stability across
insurance market cyclesinsurance market cyclesNiche marketNiche marketSelective underwritingSelective underwritingLoss control/risk managementLoss control/risk management
Role of the ActuaryRole of the Actuary
Initial rate developmentInitial rate developmentEconomic feasibility studyEconomic feasibility study
– Expected caseExpected case– 9090thth percentile case percentile case
Statement of opinion on loss Statement of opinion on loss reservesreserves
Ongoing rate evaluationOngoing rate evaluation
Risk Retention Group Risk Retention Group FundingFunding
Initial capital contributionInitial capital contributionRate developmentRate development
Rate DevelopmentRate Development
Expected Loss and LAE Pure Expected Loss and LAE Pure premiumpremium
Contribution to policyholder surplusContribution to policyholder surplus Management feeManagement fee Other expenses:Other expenses:
– AuditingAuditing– ActuarialActuarial– Federal income taxFederal income tax
Pure Premium DevelopmentPure Premium Development
Primary Data Sources:Primary Data Sources:– Entities being underwrittenEntities being underwritten
Secondary Data Sources:Secondary Data Sources:– Insurance carrier rates filed in stateInsurance carrier rates filed in state– Industry studiesIndustry studies– State insurance department data State insurance department data
collection programscollection programs– Other insureds in the stateOther insureds in the state
Development of Pure PremiumDevelopment of Pure Premium
Primary Data CollectionPrimary Data Collection– Claims Listing:Claims Listing:
Occurrence DateOccurrence Date Report DateReport Date Paid LossPaid Loss Loss ReserveLoss Reserve Defense CostsDefense Costs
– Exposure CountsExposure Counts By CategoryBy Category By YearBy Year
Feasibility StudyFeasibility Study
Pro forma Income StatementPro forma Income StatementPro forma Balance SheetPro forma Balance SheetLeverage RatiosLeverage Ratios
– Premium to SurplusPremium to Surplus– Reserves to SurplusReserves to Surplus
Pro Forma Income StatementPro Forma Income Statement
Year 1Year 1 Year 2Year 2 Year 3Year 3 Year 4Year 4 Year 5Year 5
1. Net Premium1. Net Premium
2. Expenses2. Expenses
3. PY Ultimate Loss 3. PY Ultimate Loss and ALAEand ALAE
4. Underwriting 4. Underwriting Profit: (1)-(2)-(3)Profit: (1)-(2)-(3)
5. Investment 5. Investment IncomeIncome
6. Federal Income 6. Federal Income TaxTax
7. Net Profit After-7. Net Profit After-Tax: (4)-(5)-(6)Tax: (4)-(5)-(6)
Pro Forma Balance SheetPro Forma Balance Sheet
Year 1Year 1 Year 2Year 2 Year 3Year 3 Year 4Year 4 Year 5Year 5
AssetsAssets
1. Cash and 1. Cash and InvestmentsInvestments
LiabilitiesLiabilities
2. Unpaid Loss and 2. Unpaid Loss and ALAEALAE
Capital & SurplusCapital & Surplus
3. Beginning of Year 3. Beginning of Year CapitalCapital
4. Capital Paid in4. Capital Paid in
5. Unassigned Surplus: 5. Unassigned Surplus: (1)-(2)-(3)-(4)(1)-(2)-(3)-(4)
6. Total Capital & 6. Total Capital & Surplus: (3)+(4)+(5)Surplus: (3)+(4)+(5)
Pro Forma Leverage RatiosPro Forma Leverage Ratios
Year 1Year 1 Year 2Year 2 Year 3Year 3 Year 4Year 4 Year 5Year 5
1. Net Premium1. Net Premium
2. Capital2. Capital
3. Premium to 3. Premium to Capital Ratio: (1)/(2)Capital Ratio: (1)/(2)
4. Unpaid Loss and 4. Unpaid Loss and ALAEALAE
5. Reserve to 5. Reserve to Capital Ratio: (4)/(2)Capital Ratio: (4)/(2)
Statement of OpinionStatement of Opinion
Statutory annual financial Statutory annual financial statement loss and ALAE reserve statement loss and ALAE reserve opinionopinion
Requirements vary by stateRequirements vary by state
Risk Retention Group Risk Retention Group ConcernsConcerns
Volume of premium vs. limits of Volume of premium vs. limits of losseslosses
Emerging phenomenonEmerging phenomenon Insolvency rate vs. P/C insurerInsolvency rate vs. P/C insurerNo guaranty fund coverage No guaranty fund coverage
except perhaps for policyholders except perhaps for policyholders in state of domicilein state of domicile
