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Reserving for Non-Medical Malpractice

Reserving for Non-Medical Malpractice. Casualty Loss Reserve Seminar September 8-9, 2003 Chicago, Illinois Jane C. Taylor, FCAS, JD. Non-Medical Malpractice?. Any Non-Medical Service Provider. Financial Managers / Business Advisors Directors and Officers Stock Brokers / Investment Houses

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Reserving for Non-Medical Malpractice

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  1. Reserving forNon-Medical Malpractice Casualty Loss Reserve Seminar September 8-9, 2003 Chicago, Illinois Jane C. Taylor, FCAS, JD

  2. Non-Medical Malpractice? Any Non-Medical Service Provider • Financial Managers / Business Advisors • Directors and Officers • Stock Brokers / Investment Houses • Lawyers • Accountants • Actuaries/Benefit Consultants • Insurance Agents/Brokers

  3. Non-Medical Malpractice? Any Non-Medical Service Provider • Real Property • Contractors - NOT Malpractice • Lawyers / Title Companies • Accountants • Architects and Engineers • Real Estate Agents • Appraisers / Inspectors • Lenders ?

  4. Non-Medical Malpractice? Any Non-Medical Service Provider • Miscellaneous /Other • School Boards • Travel Agents • Theatrical Agents / Media Professionals • Professional Trainers • Consultants

  5. External Influences:Financial / Investing • Economy • Overall downturn - began in 2000 • Downturn reinforced by events of 9/11 • Insurers absorbed major losses • Reinsurance tightened • The 2003 Black Out - August 14-16 • Increased oil prices • Major baby boom?

  6. External Influences:Financial / Investing Stock Market - recovering?

  7. External Influences:Financial / Investing Unemployment • Up … and Down… and Up …and • Jobs going overseas • Hiring postponed • Varies widely by state / area • Low South Dakota: 3.10% • High: Alaska:7.70%, Oregon: 7.50%, Washington:7.30% • Surprise 93,000 jobs cut week ending 09/05/03

  8. External Influences:Financial / Investing Unemployment

  9. External Influences:Financial / Investing • Consumer Credit • High delinquency ratio ( > 30 days) • Very high debt to asset ratio • “No payment until 2004” • “Zero interest until 2006”

  10. Consumer Economy

  11. Effects on Insurance • Restaurants • 9 - 18 months after downturn • Fire • Vandalism • Other Damage -Beer Flood • Mortgage Guaranty • 18 - 36 months after downturn • Mortgage paid for as long as possible

  12. Effects on Non Medical Malpractice Boom - Bust Cycles • Boom Times - Somebody messes up • Loses money • Making too much money to care • Opportunities too great • Remedies • None, do not care • Money to fix from future profits

  13. Effects on Non Medical Malpractice Boom - Bust Cycles • Bust Times - Somebody messes up • Losing money • Larger percent of remaining funds • Matters more • Remedies • Who put me in this position?

  14. Effects on Non Medical Malpractice Who put me in this position? • Financial Managers / Business Advisors • Directors and Officers • Stock Brokers / Investment Houses • Lawyers • Accountants • Actuaries/Benefit Consultants • Insurance Agents/Brokers

  15. External Influences: Real Property Economy • Unemployment • Delinquencies ( > 30 days) 4th Q 2001 4.67% 4th Q 2002 4.53% 1st Q 2003 4.52% • New Foreclosures 4th Q 2002 0.25% 1st Q 2003 0.37%

  16. External Influences: Real Property • Economy • Overall downturn • No Longer Profitable to Move Ahead • Large Commercial Bankruptcies • Some specific areas in difficulty • Northwest - Again • Southeast

  17. External Influences: Real Property • Real Property • Lawyers / Title Companies • Accountants • Architects and Engineers • Real Estate Agents • Appraisers / Inspectors • Lenders - Predatory Lenders • Who put me in this position?

  18. External Influences:Judicial • Judicial System • American ideal • Something bad happens • “It’s not my fault” • Someone will pay

  19. External Influences:Judicial • Judicial System (Con’t) • Legal system supports “innovative” claims • Legislation changes options • Lawyers seek new channels • Legal “Fads” • Construction defect • Mold • Medical Malpractice - again

  20. External Influences:Judicial • Judicial System (Con’t) • Texas and Florida • No Sealed Settlements • Increase Insurance Costs?

  21. External Influences: Regulatory • SEC - Misfeasance or Malfeasance? • Enron • World com • Tyco • ImClone

  22. External Influences: Regulatory • Insurance • Insurance Company Insolvencies Increasing • Reliance • Kemper • ROA and affiliated companies • NAIC wants Independent Audit of Data Underlying Actuarial Opinion • More Accountability for Opining Actuary

  23. Effects on Non Medical Malpractice Who Sues? • Financial Advisors • Individuals to Whom Advice Given • Options • Investments • Shareholders - Individual or Class Action • SEC - Civil and/or Criminal • Enron - D&O, Accountants • ImClone - D&O, “Insiders”

  24. Effects on Non Medical Malpractice Who Sues? • Financial Advisors (Con’t) • Insurance Departments - Civil and/or Criminal • Pennsylvania - Directors, Officers, “Insiders”, Actuary, Accountants • Massachusetts - Directors, Officers, Actuary • A.M. Best?? • Investment Advisors??

  25. Effects on Non Medical Malpractice Who Sues? • Real Property • Homeowners/ Homeowner Associations • Radon, Environmental • Subsidence • Mold • Investors/Developers • Wrong Property • Odors

  26. Effects on Non Medical Malpractice Who Sues? • Real Property (Con’t) • State/Townships • Delaware Hotel

  27. Effects on Non Medical Malpractice Occurrence v Claims Made Coverage Occurrence

  28. Effects on Non Medical Malpractice Occurrence v Claims Made Coverage Claims Made

  29. Effects on Non Medical Malpractice Claims Made Coverage • Reported Claims • Know Claim Count • “John Doe” Defendants • Embedded Problems • Past Years Exposures • Shifting Mix

  30. Effects on Non Medical Malpractice Claims Made Coverage (Con’t) • Extended Reporting Endorsement - “Tail” • Entitlement to Coverage • May Be Free • May Be Unlimited • One Policy Limit - Generally

  31. Effects on Non Medical Malpractice • Data • Delay in Effect Due to Claims Made • Increased Frequency 1998-2002 • Increased Severity 1998-2003 • Client Security Violations 2002-2003 • Tail Claims ?

  32. Reserving for Non-MedicalProfessional Liability Casualty Loss Reserve Seminar September 8-9, 2003 Chicago, IL Kim E. Piersol,FCAS, MAAA

  33. State of the Insurance Marketplace • The Marketplace is HARD • Profitability Not Perceived - Decreasing Acceptable Combined Ratios (see Issue #3) • Difficulty Purchasing Coverage/Coverage Narrowed, Limits Reduced, etc. • Gravitation Away From Both Very Large and Very Small Insureds

  34. State of the Insurance Marketplace • The Marketplace is HARD (Con’t) • Recognition of Large Reserve Deficiencies (see Issue #1) • Growth in Alternative Markets • Growth in “Distressed” Risks/Gravitation to Surplus Lines

  35. State of the Insurance Marketplace • Underwriter Withdrawals (Some Involuntary) • Kemper Specialty • Virginia Surety • Lexington Insurance Company • Etc., Etc.

  36. State of the Insurance Marketplace Current Primary Players

  37. State of the Insurance Marketplace • New Players/Alternative Markets • Underwriters Come and Go • RRGs • Purchasing Groups • Captives (Difficulty Finding Paper/Reinsurance) • Self-Insurance • Capital Markets

  38. State of the Insurance Marketplace

  39. State of the Insurance Marketplace“Unique” Reserving Issues • Increased Pressure on Profitability – Each LOB/Program Must Meet Owners Goals and Targets • Tendency to Strengthen Reserves (“Prior Regime’s Fault”) • Pressure (Perceived or Real) on Claims • Issue #1 – Your Company Changes Ownership and/or CEOs

  40. State of the Insurance Marketplace“Unique” Reserving Issues • Adjusters to Set-Up “Ultimate” Case Reserves • Reverse Is Usually True in Due-Diligence Situations • Issue #1(Con’t) – Your Company Changes Ownership and/or CEOs

  41. State of the Insurance Marketplace“Unique” Reserving Issues • Since Non-Medical PL Lines are Claims-Made, ANY CHANGE IN CASE RESERVING PHILOSOPHIES WILL DRAMATICALLY AFFECT THE RESERVING ACTUARY • Issue #1(Con’t) – Your Company Changes Ownership and/or CEOs

  42. State of the Insurance Marketplace“Unique” Reserving Issues • Shy Away From “Standard” LDF Reserving Approaches • Incurred Loss Development • Paid Loss Development (yes, even the payment patterns can be affected) • Backward-Recursive • Partial Solutions to Issue #1

  43. State of the Insurance Marketplace“Unique” Reserving Issues • Depending on Size of Book (Stability), Using Berquist/Sherman Adjustments May Do the Trick on Loss Development Methods • Since It Is a Claims-Made Product, Frequency (a given) x Severity May Work Well • Pay More Attention to Large, Unpaid Losses • Partial Solutions to Issue #1

  44. State of the Insurance Marketplace“Unique” Reserving Issues • Many Companies Write Several Different Non-Medical Lines • Many Companies Enter & Exit Lines Individually and/or Rate of Growth May Differ Significantly • Issue #2 – Mix of (Sub) Lines-of-Business

  45. State of the Insurance Marketplace“Unique” Reserving Issues • Keep Lines-of-Business Separate (Backward-Recursive Usually Works Well) • If You Must Combine, Recognize Mix Change in Development Factor Selections • Partial Solutions to Issue #2

  46. State of the Insurance Marketplace“Unique” Reserving Issues • Pressure to “Not Show a Loss” on New Lines • Non-Medical PL Pricing Experience Data for New Entrants Basically Non-Existent or Not-Applicable (See Also Issue #7) • Pressure to Produce – Pricing Off “Lowest” Competitor • Issue #3 – The Use of “Pegged” Loss Ratios for “New” Lines-of-Business

  47. State of the Insurance Marketplace“Unique” Reserving Issues • “Let’s Wait Until We Have the Experience to Reserve For This” – HUH?? • Historically, “Pegs” Are Usually Based on Underwriting or Economic Break-Even • Issue #3 (Con’t.) – The Use of “Pegged” Loss Ratios for “New” Lines-of-Business

  48. State of the Insurance Marketplace“Unique” Reserving Issues • Always Consider Murphy’s Law • Never Lose Sight That Under Reserving Effects Will Multiply, • $50 million book pegged at a 75.0% • If it develops to a 175.0%, you’re $150 million in-the-hole after three years • Partial Solutions to Issue #3

  49. State of the Insurance Marketplace“Unique” Reserving Issues • Importance of Range, “What If” Analyses Up-Front • Partial Solutions to Issue #3 (Con’t)

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