1page cas ratemaking seminar non-medical professional liability pricing denise olson, fcas, maaa...

1Page

CAS Ratemaking SeminarCAS Ratemaking Seminar

Non-Medical Professional Liability PricingNon-Medical Professional Liability PricingDenise Olson, FCAS, MAAADenise Olson, FCAS, MAAA

March 13, 2001March 13, 2001

2Page

Typical Rating FactorsTypical Rating Factors

• Step Rate - How close to maturity is the risk?Step Rate - How close to maturity is the risk?

• State - Which state carries the most exposure for State - Which state carries the most exposure for the risk? What unique issues exist?the risk? What unique issues exist?

• Claims History - individual riskClaims History - individual risk

• Size of Firm - How is each marginal exposure Size of Firm - How is each marginal exposure increase rated?increase rated?

• Area of Practice - e.g. Plaintiff Lawyer or Defense Area of Practice - e.g. Plaintiff Lawyer or Defense Lawyer - are they complementaryLawyer - are they complementary

3Page

Step RateStep Rate

• Does the firm have a retroactive date or is it a Does the firm have a retroactive date or is it a completely new firm?completely new firm?

• How are changes in firms over time handled?How are changes in firms over time handled?

• Are there predecessor firms?Are there predecessor firms?

4Page

StateState

• Statute of Limitations - can impact step ratesStatute of Limitations - can impact step rates

• State economic situation - some Areas of Practice State economic situation - some Areas of Practice are very tied to the economyare very tied to the economy

• Tort reformsTort reforms

• Other law differences - e.g. Real Estate AttorneyOther law differences - e.g. Real Estate Attorney

5Page

Claims HistoryClaims History

• Long tail can make severity less reliable than Long tail can make severity less reliable than frequencyfrequency

• Claims staff needs clear understanding of impact Claims staff needs clear understanding of impact of reported incidentsof reported incidents

• Impact on underwriting of claims that close Impact on underwriting of claims that close without payment or with little expensewithout payment or with little expense

6Page

Size of FirmSize of Firm

• How does a marginal increase in exposure effect How does a marginal increase in exposure effect the rate?the rate?

• Size of Firm discountsSize of Firm discounts

7Page

Size of FirmSize of Firm

Average Exposures in Interval

Incurred Freq.

Selected Avg

Deductible

% under deductible

(Lognormal)1.0 2.85% 3,639 31.4%2.3 2.62% 4,842 35.9%4.4 2.20% 7,539 43.4%7.4 1.74% 9,912 48.1%

13.8 1.13% 17,339 57.8%28.0 0.69% 35,000 69.3%

8Page

Size of FirmSize of Firm

Ground up Incurred

FrequencyClaim

CtIncremental

claim ctIncremental Exposures

Freq per Additional Exposure

4.15% 0.042 0.042 1.0 4.15%4.09% 0.094 0.053 1.3 4.04%3.88% 0.170 0.076 2.1 3.65%3.36% 0.248 0.078 3.0 2.59%2.69% 0.371 0.124 6.4 1.93%2.24% 0.627 0.256 14.2 1.80%

9Page

Size of FirmSize of Firm

Average Exposures in Interval

Freq per Additional Exposure

LN(Freq per Add'l Expos)

1.0 4.15% (3.183) 2.3 4.04% (3.208) 4.4 3.65% (3.311) 7.4 2.59% (3.652)

13.8 1.93% (3.950) 28.0 1.80% (4.018)

10Page

Size of FirmSize of Firm

Exposures

Actual Freq per

Atty

Fitted Frequency

per Atty1.0 4.15% 3.78%2.3 4.09% 3.70%4.4 3.88% 3.58%7.4 3.36% 3.41%

13.8 2.69% 3.09%28.0 2.24% 2.51%

11Page

Size of FirmSize of Firm

Exposures

Fitted Cumulative

Freq

Implied Exposure Discount

1.0 3.78% 0.0%2.0 3.72% -1.6%5.0 3.55% -6.3%

10.0 3.28% -13.4%15.0 3.04% -19.8%25.0 2.62% -30.7%

12Page

Area of PracticeArea of Practice

• Differs from some businesses in that firms may Differs from some businesses in that firms may practice in several areaspractice in several areas

• Interactions are importantInteractions are important

• Determination of percentage for each grouping is Determination of percentage for each grouping is important (Billings, # Hours)important (Billings, # Hours)

• How to determine differences in pure premiums?How to determine differences in pure premiums?

13Page

Area of Practice - ExampleArea of Practice - Example

Firm 1 % of Work PremiumCurrent

SurchargeArea 1 25% 413 10.0%Area 2 50% 675 -10.0%Area 3 25% 375 0.0%

100% 1,463 -2.5%

14Page

Area of Practice - ExampleArea of Practice - Example

Book # Attys Premium% of

PremiumCurrent

SurchargeArea 1 22 36,300 25% 10.0%Area 2 45 60,750 41% -10.0%Area 3 33 49,500 34% 0.0%

100 146,550 100% -2.3%

15Page

Area of Practice - ExampleArea of Practice - Example

Book Losses # Attys

Experience Pure

Premium

Written Pure

PremiumArea 1 38,720 22 1,760 1,650 Area 2 56,700 45 1,260 1,350 Area 3 42,900 33 1,300 1,500

138,320 100 1,383 1,466

16Page

Area of Practice - ExampleArea of Practice - Example

Book

Experience Pure

Premium

Written Pure

Premium

Indicated Rate

Change

Indicated New

SurchargeArea 1 1,760 1,650 6.7% 24.3%Area 2 1,260 1,350 -6.7% -11.0%Area 3 1,300 1,500 -13.3% -8.2%

1,383 1,466 -5.6%

-5.60%Overall Rate Change:

17Page

Area of Practice - ExampleArea of Practice - Example

Book # Attys

Indicated New

SurchargeNew Pure Premium

New Total Pure

PremiumArea 1 22 24.3% 1,760 38,720 Area 2 45 -11.0% 1,260 56,700 Area 3 33 -8.2% 1,300 42,900

100 1,383 138,320

1,416 New Base Rate = 1,500 x (1-5.6%) =

18Page

Area of Practice - ExampleArea of Practice - Example

Book # Attys Losses

Experience Pure

PremiumIndicated

SurchargeArea 1 - Pure 11 18,586 1,690 19.3%

Area 1 w/Area 2 4 6,846 1,711 20.9%Area 1 w/Area 3 7 13,288 1,898 34.1%

22 38,720 1,760 24.3%

Area 1 Experience Breakdown

19Page

Area of Practice - ExampleArea of Practice - Example

Book # Attys Losses

Loss Ratio without

breakout

Loss Ratio with

breakoutArea 1 - Pure 11 18,586 96.0% 100.0%

Area 1 w/Area 2 4 6,846 97.2% 100.0%Area 1 w/Area 3 7 13,288 107.9% 100.0%

22 38,720 100.0% 100.0%

Area 1 Experience Breakdown

20Page

Emerging Issue - Emerging Issue - Multi-Disciplinary PracticesMulti-Disciplinary Practices

Brought about by:Brought about by:

• The desire to provide one-stop The desire to provide one-stop shopping to clientsshopping to clients

• To eliminate communication problems To eliminate communication problems between professionalsbetween professionals

• To leverage support structure and To leverage support structure and marketingmarketing

21Page

Examples:Examples:

• Law Firm specializing in advising municipalities Law Firm specializing in advising municipalities issuing tax-exempt bonds hires financial issuing tax-exempt bonds hires financial professionalsprofessionals

• Accounting Firm sets up subsidiary entities - a Accounting Firm sets up subsidiary entities - a broker/dealer and an insurance agency broker/dealer and an insurance agency

• Accounting firm specializing in medicare billing Accounting firm specializing in medicare billing hires Nurseshires Nurses

22Page

Examples:Examples:

• Law firm specializing in environmental issues Law firm specializing in environmental issues hires Engineershires Engineers

• Accounting firm that specializes in Business Accounting firm that specializes in Business Brokerage has CPAs obtain Real Estate Agents Brokerage has CPAs obtain Real Estate Agents licenselicense

• Multi-disciplinary Practices (MDPs)Multi-disciplinary Practices (MDPs)

• Info-tech Consulting firms providing Webhosting Info-tech Consulting firms providing Webhosting servicesservices

23Page

What does the product look like?What does the product look like?

• What Policy form is being used?What Policy form is being used?

– Limits / DeductiblesLimits / Deductibles

– Conflict of Interest issuesConflict of Interest issues

– If endorsed, what is primary?If endorsed, what is primary?

• How will the policy be underwritten?How will the policy be underwritten?

• Is stacking of limits possible?Is stacking of limits possible?

24Page

Pricing ImplicationsPricing Implications

• Different rating basesDifferent rating bases

– per revenue $ or commission receipt $per revenue $ or commission receipt $

– per professionalper professional

– per transactionper transaction

• Different loss distributions - what ILFs to use?Different loss distributions - what ILFs to use?

25Page

Pricing ImplicationsPricing Implications• Simple approach:Simple approach:

– 1 Attorney and 1 Accountant set up shop together1 Attorney and 1 Accountant set up shop together

– Billings from Accounting practice brings rate to Billings from Accounting practice brings rate to $1,500$1,500

– Rate for attorney: $1,800Rate for attorney: $1,800

– Total Price: $3,300Total Price: $3,300

26Page

Pricing ImplicationsPricing Implications

• Complications:Complications:

– Reduction in risk due to experts working togetherReduction in risk due to experts working together

– Increase in exposure due to inability to use Increase in exposure due to inability to use comparative negligence by other professionals as a comparative negligence by other professionals as a defensedefense

– How will predecessor firm coverage be handled?How will predecessor firm coverage be handled?

– What if the attorney is also a CPA? (What standard of What if the attorney is also a CPA? (What standard of care applies?)care applies?)