1. © 2008 Towers Perrin Casualty Actuaries in Reinsurance Observations on Medical Malpractice This document is incomplete without the accompanying discussion; it is confidential and intended solely for the information and benefit of the immediate recipient hereof. James D. Hurley, ACAS, MAAA May 20, 2008

2. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 2 Observations on Medical Malpractice Financial results Reinsurance issues What’s different... or not?

3. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 3 Observations on Medical Malpractice Financial results impacted by... 1990’s —modest loss trends —favorable reserve development —relatively high investment returns —expansion —slippage in pricing 2000’s —loss trends pick up —unfavorable reserve development —investment returns turn —rates adjusted Continued...

4. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 4 Observations on Medical Malpractice (cont.) 2003  2006 —rates/prices tight —tort reform —loss trends —investment returns stabilize 2007  20?? —rates reduced —tort reforms “+“ —loss trends —investment returns “return” (some)

5. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 5 Source: A.M. Best’s Aggregates and Averages Observations on Medical Malpractice

6. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 6 Observations on Medical Malpractice Source: Compilation of Best Data

7. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 7 Observations on Medical Malpractice Source: Compilation of Best Data

8. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 8 Observations on Medical Malpractice Source: Compilation of Best Data

9. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 9 Observations on Medical Malpractice Source: Compilation of Best Data

10. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 10 Observations on Medical Malpractice Source: Compilation of Best Data

11. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 11 Observations on Medical Malpractice Source: Compilation of Best Data

12. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 12 Observations on Medical Malpractice Source: Compilation of Best Data

13. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 13 Observations on Medical Malpractice Source: Compilation of Best Data

14. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 14 Observations on Medical Malpractice Source: Compilation of Best Data

15. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 15 Observations on Medical Malpractice Source: Compilation of Best Data

16. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 16 Observations on Medical Malpractice Source: Compilation of Best Data

17. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 17 Observations on Medical Malpractice Source: Compilation of Best Data

18. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 18 Observations on Medical Malpractice Reinsurance Issues Reinsurance attestation —risk transfer —NAIC survey Proposed rule – New Jersey —reporting requirements

19. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 19 Observations on Medical Malpractice Market needs  some divergence —start-ups –capacity –avoid early “knock-out” —mature companies –clash –ECO/EPL

20. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 20 Observations on Medical Malpractice What’s different... or not? rules rates results capacity other?

21. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 21 What’s different... or not?  “Rules” Florida  proposed SB 1660 consumer protection laws apply to insurance more rigorous requirements on experience rating individual physicians and schedule rating generally ALAE/DCC shall be part of insurer’s “rate base” only to extent they do not exceed “... the national average for such expenses, as determined by the office, for the prior calendar year...” Requires (apparently) a Florida income statement policies effective on/after October 1, 2007, rates shall be 25% less than rates at October 1, 2004

22. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 22 What’s different... or not?  “Rules” Florida  proposed SB 1660 (cont.) insurer/self-insurer or RRG filing a proposed rate change —must give notice to public —any insured can request a hearing within 30 days (any consumer may participate) —public counsel has standing to request hearing —med mal rates cannot be based on experience for 2003 and prior

23. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 23 What’s different... or not?  “Rules” Colorado  SB 164 (proposed 2008) “guts” the non-economic cap “... no rate shall be held to be inadequate unless surplus falls below...” company action level RBC Similar RBC related proposals in Rhode Island, D.C. Other states debating/changing “rules” California (all lines) Ohio – file annually Missouri – recent legislation requires new “rules” Illinois – fully documented filings

24. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 24 What’s different... or not?  “Rates” Percentage of Rate Changes in Survey by Range* *October 2007 Medical Liability Monitor

25. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 25 What’s different... or not?  “Rates” Comments on the survey “repositioning” changes? number of rate increases down by 50% 50% show “no change”; 30% reflect decreases opportunity to get class/territory right manual changes; not collected —tracking and balanced?

26. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 26 What’s different... or not?  “Results”

27. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 27 What’s different... or not?  “Capacity”

28. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 28 What’s different... or not?  “Capacity”

29. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 29 What’s different... or not?  “Capacity”

30. © 2008 Towers Perrin S:\people\Hurlj\Presentations\2008\20080520 CARe (p).ppt 30 What’s different... or not?  “Other” Market composition reduced “commercial” presence specialty companies —non-physician directed —physician directed Investment income volatile stock market interest rates impact of leverage Start-ups how do they play?