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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
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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
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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?
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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
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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
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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
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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%
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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%
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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)
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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%
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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%
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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?
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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%
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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%
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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
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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:
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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%) =
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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
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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
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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
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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
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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
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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?
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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?
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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
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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?)