Current Issues and Trends in Medical Malpractice Casualty Loss Reserve Seminar September 10, 2007 Erik A. Johnson Aon Global Risk Consulting

1 “Medical Malpractice Trends and Issues” Medical Malpractice –Hospital Professional Liability –Physician Professional Liability –Long Term Care Professional Liability Trends and Issues –What clients, insurance brokers, and underwriters are facing –Data based: frequency and severity analysis

2 Hospital Professional Liability – Industry Issues Hospitals are very experienced with self insurance and large retentions – are sophisticated in pursuing ways to drive down retained costs: Recent initiatives (chronologically) –Tort Reform initiatives –Investing in defense strategies (ALAE) –Patient Safety Initiatives Financial officers are sophisticated and wary of “a cycle” of reserve increases and decreases

3 Aon/ASHRM 2006 HPL Benchmarking Study Underlying Data: 47,735 non-zero claims; approximately $4.4b in reported losses; over 700 facilities Most participants are self-insurers 8th annual study Actuarial analysis of Frequency, Severity, and Loss Cost trends countrywide and in specific states Claim Severity is limited to $2M per occurrence Claim Frequency is based on “non-zero” claim count Exposures are “Bed Equivalents”

4 Key Findings of 2006 Study After many years of volatile results, the hospital professional liability trends appear to have stabilized. The overall frequency of claims is not increasing for the second straight year for both hospital professional liability and physician liability. Four states, Texas, Pennsylvania, Florida and California, each with some form of legislative reform, are significant contributors to the frequency decline experienced in the recent past.

5 Key Findings for 2006 (cont) The average size of claims continues to increase at a rate of 6.0%. The average expense associated with defending claims is increasing at 17.0% while the average amount paid to indemnify claimants is increasing at 3.0%. Patient safety initiatives being implemented today will be critical for sustaining the flat frequency trend into the future.

6 HPL Claim Frequency Hospital claim frequency (non zero claims per annual bed equivalent).

7 HPL Claim Severity Trend Overall hospital average paid indemnity.

8 HPL Claim Severity Trend (ALAE) Overall hospital average paid expense on claims closed with indemnity payments.

9 HPL Claim Severity Trend (ALAE) Overall hospital average paid expense on claims closed without indemnity payments.

10 Physician Professional Liability – Industry Issues Price relief in many jurisdictions Many hospitals consider bringing high risk specialties into their hospital professional liability program –A great recruiting tool to bring in specialists –A dangerous adverse selection situation –Who is going to underwrite the doctors that enter the program?

11 Physicians Professional Liability Frequency Trend Overall physician claim frequency (NPDB).

12 Physicians Professional Liability Severity Trend Overall physician average paid indemnity.

13 Long Term Care – Industry Issues Tort Reform had a major impact in specific states Large providers invested heavily in defense (legal staff, mock juries, investigative) Current strategies to reduce liability costs: –“get small” – split assets and operations into separate company –Move away – divest homes in bad legal environments (TX, FL in , now AR, MS, TN) –Buy small or minimum insurance limits

14 LTC Benchmarking Database 60 LTC providers participated –15 FP, multi-facility, multi-state –12 regional, multi-facility, in 2 – 5 states –33 small independents in only 1 state 290,000 licensed beds (255,000 occupied) 20,000 non-zero claims (over 7 year period) Study participants represent 15% of the industry, measured by beds.

15 Key Findings of 2006 LTC Benchmarking Tort Reform is having a favorable impact on lowering both frequency and severity. Operational improvements, a focus on effective defense strategies, and quality of care initiatives are helping to stabilize and/or decrease loss costs, with most measurable impact on severity. Structural changes are evident as larger providers exit high cost states, leaving the market to smaller providers and limited liability corporations that typically have less capacity to indemnify claimants.

16 LTC is a different exposure (Claim Counts)

17 Countrywide Annual Number of Claims Per 1,000 Occupied Beds Frequency of claims continues to climb. Countrywide, the number of claims incurred per 1,000 occupied beds has doubled from 5.6 in 1995 to 11.1 in accident year 2006.

18 Countrywide Severity per Claim Countrywide trends are driven by reductions in the average severity from a high of $261,000 in 1998 to $146,000 in accident year 2006.

19 LTC Severity: The Southeastern Spike (AR)

20 LTC Severity: The Southeastern Spike (MS)

21 LTC Severity: The Southeastern Spike (TN)

22 LTC Severity Trend (ALAE) The average amount spent to defend a GL/PL claim has increased more than sevenfold in the past seven years from approximately $7,400 to $52,800.