CAS Ratemaking Seminar NonMedical Professional Liability Pricing Denise
CAS Ratemaking Seminar Non-Medical Professional Liability Pricing Denise Olson, FCAS, MAAA March 13, 2001 Page 1
Typical Rating Factors • Step Rate - How close to maturity is the risk? • State - Which state carries the most exposure for the risk? What unique issues exist? • Claims History - individual risk • Size of Firm - How is each marginal exposure increase rated? • Area of Practice - e. g. Plaintiff Lawyer or Defense Lawyer - are they complementary Page 2
Step Rate • Does the firm have a retroactive date or is it a completely new firm? • How are changes in firms over time handled? • Are there predecessor firms? Page 3
State • Statute of Limitations - can impact step rates • State economic situation - some Areas of Practice are very tied to the economy • Tort reforms • Other law differences - e. g. Real Estate Attorney Page 4
Claims History • Long tail can make severity less reliable than frequency • Claims staff needs clear understanding of impact of reported incidents • Impact on underwriting of claims that close without payment or with little expense Page 5
Size of Firm • How does a marginal increase in exposure effect the rate? • Size of Firm discounts Page 6
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Area of Practice • Differs from some businesses in that firms may practice in several areas • Interactions are important • Determination of percentage for each grouping is important (Billings, # Hours) • How to determine differences in pure premiums? Page 12
Area of Practice - Example Page 13
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Area of Practice - Example Page 19
Emerging Issue Multi-Disciplinary Practices Brought about by: • The desire to provide one-stop shopping to clients • To eliminate communication problems between professionals • To leverage support structure and marketing Page 20
Examples: • Law Firm specializing in advising municipalities issuing tax-exempt bonds hires financial professionals • Accounting Firm sets up subsidiary entities - a broker/dealer and an insurance agency • Accounting firm specializing in medicare billing hires Nurses Page 21
Examples: • Law firm specializing in environmental issues hires Engineers • Accounting firm that specializes in Business Brokerage has CPAs obtain Real Estate Agents license • Multi-disciplinary Practices (MDPs) • Info-tech Consulting firms providing Webhosting services Page 22
What does the product look like? • What Policy form is being used? – Limits / Deductibles – Conflict of Interest issues – If endorsed, what is primary? • How will the policy be underwritten? • Is stacking of limits possible? Page 23
Pricing Implications • Different rating bases – per revenue $ or commission receipt $ – per professional – per transaction • Different loss distributions - what ILFs to use? Page 24
Pricing Implications • Simple approach: – 1 Attorney and 1 Accountant set up shop together – Billings from Accounting practice brings rate to $1, 500 – Rate for attorney: $1, 800 – Total Price: $3, 300 Page 25
Pricing Implications • Complications: – Reduction in risk due to experts working together – Increase in exposure due to inability to use comparative negligence by other professionals as a defense – How will predecessor firm coverage be handled? – What if the attorney is also a CPA? (What standard of care applies? ) Page 26
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