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					           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   2000   2003
                                                Year
Source: Risk Retention Reporter
                      Annual RRG Premium
                           ($Millions)
              2,500

              2,000

              1,500

              1,000

                500

                    0
                     1988         1991   1994     1997   2000   2003
                                                Year
Source: Risk Retention Reporter
               Medical Malpractice Risk
               Retention Groups by Type
            45
            40
            35
            30
            25                                  Hospital
            20                                  Nursing Home
            15                                  Physician
            10                                  Other

              5
              0
                          2003           2004
                                  Year
Source: Risk Retention Reporter
                Medical Malpractice RRG
                2004 Premium ($Millions)

                      $90
                      8%


            $206                         Hospital
            19%                          Nursing Home
                                         Physician
                                  $725
                                         Other
                                  69%
                  $41
                  4%



Source: Risk Retention Reporter
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   Year 2   Year 3   Year 4   Year 5

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 After-
Tax: (4)-(5)-(6)
      Pro Forma Balance Sheet
                         Year 1   Year 2   Year 3   Year 4   Year 5
        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)
     Pro Forma Leverage Ratios
                         Year 1   Year 2   Year 3   Year 4   Year 5

1. Net Premium

2. Capital

3. Premium to
Capital Ratio: (1)/(2)
4. Unpaid Loss and
ALAE
5. Reserve to
Capital Ratio: (4)/(2)
    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

				
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