Medical Malpractice is a highly specialized, long-tailed line of business. This note covers key ratemaking and reserving challenges, focusing on downward development adjustments and expected claims ratio modifications.
Claims-Made Policies vs. Occurrence Policies
Because Medical Malpractice has an extremely long reporting lag (claims are often reported years after the medical incident), insurers frequently write Claims-Made policies instead of Occurrence policies.
- Occurrence Policy: Covers incidents that occur during the policy period, regardless of when they are reported. Requires substantial IBNR reserving.
- Claims-Made Policy: Covers claims first reported during the policy period, provided the incident occurred after the retroactive date. This minimizes pure IBNR reserving.
Reserving Under Negative Development (Downward LDFs)
In Medical Malpractice, case reserves set by claims adjusters can occasionally be overly conservative. Over time, as claims are settled, actual payments may be lower than initial case reserves, resulting in negative incremental development (Loss Development Factors < 1.0).
Selecting Ultimate Estimates
When using standard reserving techniques (like the Chain Ladder method), downward development can produce ultimate estimates that are less than current reported losses. To avoid under-reserving, actuaries select:
This ensures that current reported losses act as a floor for the ultimate projection.
Expected Claims Ratio Adjustments
When implementing the Expected Claims reserving technique, the a priori Expected Claims Ratio (ECR) must be adjusted to ensure that the historical premium levels are consistent with the experience period being evaluated.
Rate Level Adjustments
If the historical ECR is based on an earlier period (e.g., 2011) but is being applied to project losses for a subsequent year (e.g., 2015), the denominator (premiums) must be adjusted for rate level changes:
This adjustment ensures that the earned premiums utilized in the projection are aligned with the rating environment of the target accident year, maintaining consistency between the ECR and the subject period.