specialty med mal insurers: how do they stack up? 2005 cas spring meeting pointe south mountain...
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SPECIALTY MED MAL INSURERS: HOW DO THEY STACK UP?
2005 CAS Spring Meeting
Pointe South Mountain Resort
Phoenix, Arizona
May 17, 2005
Presenter: Ken Quintilian, FCAS, MAAA
Obligatory Caveat
Results of presenter’s company should not be deemed typical…
• Dominated by mutuals
• Business model is direct operation by insureds
• Customer focus is core of mission
• Results in different priorities and operational characteristics
What Makes Med Mal Specialty Companies Different?
• Mission / Priorities (Success Metrics)
• Operations (Performance)
Major Differences Between Specialists And Commercials
• Customers are the owners
• Different priorities than a stock company
• Profit and dividends are not fundamental goals
• Overarching goal: long-term availability and affordability of product for core
customer base
How Does Their Mission Impact Success Metrics?
• Stable & strong earnings less important
• Stable & reasonable pricing the greatest concern
• Margins can be narrower than for commercials
• Solvency & capacity, not profitability, serve as constraints against underpricing
• Tolerance of cycles (and losses) is greater
What Does It Mean For The Bottom Line?
• Commercials can be outdone even with identical pricing and results
• The same loss ratio can be a failure for commercials, a success for specialists
What Does This Mean For Competition?
• St. Paul (Commercial)
• MLMIC (Specialist)
Compare Recent Experience Of Two Big Med Mal Companies
• Major market shares in their respective territories
• Comparable premium volume
• Strong penetration of traditional provider market
• Both enjoyed strong profitability in the 1990’s
• Both took heavy losses in early to mid 2000’s
Similarities
• The cycle was too severe and the losses too adverse for St. Paul: they exited the market entirely
• MLMIC (like many other mutuals at this time) wound down both profitable and unprofitable non-core ventures
• Although adverse development and inadequate regulatory rate relief have continued in its core market, MLMIC has not reduced writings in this mission-critical area
Differences
Using many standard metrics, they seem to (on average!)
• Less diversification, “stick to their knitting”
• Dominant in core niche – economy of scale
• Customer loyalty high – acquisition economies
• Core expertise (e.g., claim defense) hard to match
But Do Specialists Actually Outperform Commercials? If So, Why?
Total Med Mal Industry vs. Specialty Underwriters
Source: Milliman; A.M. Best A&A
27.4%
19.8%
15.9%
26.5%
19.7%
17.7%
25.2%
17.8%
15.2%
24.7%
16.6%14.8%
24.7%
14.6%
0%
10%
20%
30%
2000 2001 2002 2003 2004
Expense Ratio (to NPW)
P/C Industry Med Mal Industry Specialists
Based on 2004 Best Aggregates and Averages (2003 data)
Commercial vs. Specialty Med Mal Underwriters
Components of Expense Ratio (to NPW)
Med Mal Total
Med Mal Specialty
Med Mal Commercial
Commission & Brokerage Expense 4.6% 2.4% 10.4%Other Acquisition Expense 3.2% 2.8% 4.5%General Expense 6.2% 6.4% 5.8%Taxes 2.2% 2.5% 1.5%Total Underwriting Expense 16.3% 14.0% 22.1%
Source: Milliman; A.M. Best A&A
110.1%
96.2%
132.2%
110.0%
123.4%121.0% 119.8%
108.7%102.7%
0%
25%
50%
75%
100%
125%
2000 2001 2002 2003 2004
Loss & LAE Ratio (to NPE)
Med Mal Industry Specialists
Total Med Mal Industry vs. Specialty Underwriters
Source: Milliman; A.M. Best A&A; Best Review & Preview
129.7%
113.8%
133.8%
117.5%
155.0%
131.7%142.5%
137.5% 138.2%123.9% 133.3%
117.6%
0%
25%
50%
75%
100%
125%
150%
175%
1999 2000 2001 2002 2003 2004
Combined Ratio after Dividends
Med Mal Industry Specialists
Total Med Mal Industry vs. Specialty Underwriters
Source: Milliman; A.M. Best A&A
105.9%
79.5%
136.0%
100.1%
129.6%
121.6% 121.3%
105.2%
96.2%
0%
25%
50%
75%
100%
125%
2000 2001 2002 2003 2004
Operating Ratio
Med Mal Industry Specialists
Total Med Mal Industry vs. Specialty Underwriters
Source: Milliman; A.M. Best A&A
27.9%
38.0%
19.0%
31.7%
12.8%
15.9% 15.6%
18.6%
21.4%
0%
10%
20%
30%
40%
2000 2001 2002 2003 2004
Net Investment Gain (to NPE)
Med Mal Industry Specialists
Total Med Mal Industry vs. Specialty Underwriters
Source: A.M. Best QAR Summaries
395.4%
684.8%
489.7%
364.1%
571.1%
407.6%
353.2%
563.0%
354.9%316.6%
510.9%
302.7%322.7%
511.9%
280.8%
0%
100%
200%
300%
400%
500%
600%
700%
1999 2000 2001 2002 2003
Admitted Assets to NPW Ratio
Commercial Casualty Lines Med Mal Specialists Workers' Comp Composite
Commercial Casualty Composite vs. Med Mal And Workers Comp Specialists
Source: A.M. Best QAR Summaries
113.9%
210.7%
127.0%
101.4%
170.2%
94.4%86.9%
147.4%
74.9% 72.6%
104.6%
55.2%
77.3%
109.7%
58.4%
0%
50%
100%
150%
200%
1999 2000 2001 2002 2003
Unassigned Surplus to NPW Ratio
Commercial Casualty Lines Med Mal Specialists Workers' Comp Composite
Commercial Casualty Composite vs. Med Mal And Workers Comp Specialists
Commercial Casualty Composite vs. Med Mal Specialists
Source: A.M. Best QAR Summaries
5 Year Average: 3.1% -1.9%
10 Year Average: 8.2% 5.6%
9.2%
10.9%
2.0% 1.4%
-5.6%
-7.5%
-4.6%
-17.6%
13.1%
-1.3%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
1999 2000 2001 2002 2003
Return on Policyholder Surplus
Commercial Casualty Lines Med Mal Specialists
Source: Towers/Perrin; A.M. Best A&A
3.3%
9.9%
3.7%
8.9%
4.3%
7.4%
3.8%
6.0%
4.1%
6.0%
3.9%
5.4%
3.1%3.3%
1.3%1.7%
0.5% 0.4% 0.4%
0%
2%
4%
6%
8%
10%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Policyholder Dividends (to NPE)
Med Mal Industry Specialists
Total Med Mal Industry vs. Specialty Underwriters
Source: A.M. Best A & A
Commercial Casualty Composite vs. Med Mal Specialists
55.5%
19.9%
56.4%
18.4%
55.2%
23.4%
54.8%
20.1%
0%
10%
20%
30%
40%
50%
60%
2000 2001 2002 2003
Ceded to Gross Written Premium
Commercial Casualty Lines Med Mal Specialists
• Branching out has been unsuccessful historically for these specialists
• Retrenchment a few years ago arose in part from realization of their limitations
• Specialists struggle, as do commercials, to compete with the pricing of self-
insureds and captives
There Are Limits To Their Skill Set
• Med Mal specialty companies know their turf
• This skill shows up in their better-than-average results
• These results satisfy policyholders but would challenge stockholders
• So niche companies usually out-compete commercial stock companies on core business
• This advantage cannot easily be extended to other states or lines
• Captives and self-insurance are a stiff competitor for both specialists and commercials
In Summary…
SPECIALTY MED MAL INSURERS: HOW DO THEY STACK UP?
2005 CAS Spring Meeting
Pointe South Mountain Resort
Phoenix, Arizona
May 17, 2005
Presenter: Ken Quintilian, FCAS, MAAA