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									                                     Session 3
                                 Reserving
                                Implications
                               Of Tort Reform

Kevin M. Bingham – Deloitte.
kbingham@deloitte.com

Casualty Actuarial Society Loss Reserve Seminar
September 13, 2004
1:30 PM – 3:00 PM
Las Vegas, Nevada
INTRODUCTION
• Medical Malpractice?
• Reserving Implications
   ° Cap on Non-economic Damages
   ° Effective Date and Phase In
   ° Reporting Speed up
• Florida SB2D
What do you think of when you
 hear someone say medical
        malpractice?
Medical Malpractice?
 “He expressed concern, that facing
 five years of practice after his
 training in order to get specialty
 certification, he might find more
 lucrative employment as an expert
 witness in malpractice litigation
 than he might find as a health care
 practitioner.”
  Florida House of Representatives Medical
  Liability Insurance Report – Observations
  from a Florida medical student
   Reserving Implications:
Cap on Non-economic Damages
Cap on Non-Economic Damages
• Economic damages
   ° Lost wages
   ° Medical expense           Quantifiable from a ratemaking
                               and reserving perspective.
   ° Funeral expense
• Non-economic damages (a/k/a pain and suffering)
   °   Loss of consortium
   °   Loss of companionship   Highly subjective and difficult
                               to quantify from a ratemaking
   °   Disfigurement           and reserving perspective.
   °   Mental anguish
Cap on Non-economic Damages
• Type of cap and reserving impact
   ° Hard cap (e.g., $250,000 MICRA cap)
   ° Soft cap
                        • Emergency room vs non-emergency room
      • Florida
                        • Practitioner vs non-practitioner
      • Texas           • Per defendant caps
   ° “Cap busters”      • Per claimant caps
      • Florida         • Piercing
      • Massachusetts   • Disfigurement
                        • Death
                        • Vegetative state
                        • Unanimous verdict
Cap on Non-economic Damages
• Type of cap and reserving impact (continued)
    ° Massachusetts
        • McCullough, Campbell & Lane - Damage Caps
          (www.mcandl.com/massachusetts.html)

          “In a medical malpractice case, the jury is instructed that if it finds the
          defendant liable, it is not to award the plaintiff more than $500,000 for pain
          and suffering, loss of companionship, embarrassment, and other items of
          general damages, unless it determines that there is:
                  a substantial or permanent loss or impairment of a bodily function or
                  substantial disfigurement, or other special circumstances in the case
                  which warrant a finding that imposition of such a limitation would
                  deprive the plaintiff of just compensation for the injuries sustained.

          Mass. Ann. Laws ch. 231, § 60H (Law. Co-op. Supp. 1997). Since this
          standard can often be met, the cap should not be relied on.”

                    Makes reserving assumptions easier (i.e., little impact)
Cap on Non-economic Damages

• Reserving for “The Big Picture”


                                                  ALAE
                                       Non
                Policy                          Included?
                                     economic
                Limits                          Excluded?
                                     Damages
                         Reserving
                          Impact



                         Economic
                         Damages
Cap on Non-economic Damages

• Shift towards lower policy limits
Cap on Non-economic Damages

• Ratio of NE/[NE + E] = 50%
Cap on Non-economic Damages

• Ratio of NE/[NE + E] = 98.8%
Cap on Non-economic Damages
• Reserving Considerations
   ° Constitutionality
        • Texas – Passed Proposition 12
        • Wyoming – Voting on constitutional amendment in November
        • Florida – TBD                       Issues:
   °   Policy limits                            • Is the data captured?
                                                • If captured, is it accurate?
   °   Number of claimants/defendants           • Are more co-defendants going bare?
   °   Severity of injuries faced by company    • Credibility for use in reserving?

   °   ALAE
   °   Phase-in effect                Issues:
                                     • Reserving for Chiropractor vs. OBGYN?
                                     • Credibility for use in reserving?
                                     • Impact of other law changes (e.g., limit on
                                       attorney fees)
  Reserving Implications:
Effective Date and Phase In
Effective Date and Phase-In
• Does the law apply on an accident date or report
  date basis?
   ° Apply to accidents that occur on or after the effective
     date of the law
         • Impacts future reserving considerations only
   ° Apply to occurrences that are reported after the
     effective date of the law
         • Impacts current reserving for IBNR claims (i.e., tail claims)
         • Impacts future reserving considerations

   See the September/October 2003 Contingencies Magazine article titled “Measuring the Impact
   of Medical Liability Tort Reform” for a detailed illustration of the “phase-in” effect
Reserving Implications:
 Reporting Speed-Up
Reporting Speed-Up
• Often times observed immediately before the passage of
  tort reform bills
   ° Uncertainty regarding constitutionality
   ° Uncertainty regarding “phase-in”
   ° Precautionary measure by plaintiff attorneys
• Reserving considerations
   ° Adjusting actuarial methods for “speed up” in reporting
   ° Monitoring of results going forward (e.g., adjustment may be
     required if constitutional issues emerge)
   ° Proper application of the cap based on the effective date
Florida SB2D
Florida Presumed Factor
• Presumed factor (PF) – Each insurance company had to
  adjust the PF to reflect their own mix of business
   ° Mix of business example
       • Company writes only Chiropractors
       • Company writes only OB/Gyns
   ° Class specific rating example
       • Each company had to determine the savings that should be allocated
         to each class of business
            - ER practitioners: $150,000/$300,000 cap should see higher
              savings than others falling under higher caps
   ° The PF calculated by Deloitte was an AVERAGE factor
   ° Effective date and phase-in confirmed – April 22, 2004
       • Judge Marlene Alva - Law does not allow retroactive immunity
Florida Presumed Factor
• Reserving Implications
   ° Numerous sections (e.g., patient safety, notification,
     expert witness testimony, good SAM, etc.) in addition
     to caps
   ° Law is still “green”
      • Passed September 15, 2003
      • Long tail nature of medical malpractice claims
      • Constitutionality still to be determined
   ° 2nd Quarter 2004 earnings calls
      • Have not seen any tort reform benefit from SB2D
      • Plaintiff attorneys generally view the law as unconstitutional

								
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