Malpractice Loss Trends 2007 Update DRI, March 15, 2007

1. Malpractice Loss Trends 2007 UpdateDRI, March 15, 2007

2. Kimber J. Lantry, Executive Vice President Hudson Insurance Group 851 Napa Valley Corporate Way, Suite N Napa, CA 94558 (707) 225-3301 (707) 224-6936 FAX klantry@hudsoninsgroup.com

3. Medical Malpractice IndustryCombined Ratio Source: Bests Aggregates & Averages, 2005 Property & Casualty edition

4. Selected Company Results2005Source: A. M. Best Statistical Study, August 28, 2006

5. SEVERITY

6. Sources of Medical Malpractice Data • State by state filings - Little hospital data available as hospitals are written surplus lines - Quality varies by size, state requirements and quality of filing • St. Paul data – no longer available • Aon Study – largest available database - 84 hospitals; 63,000 bed equivalents; $250M premium in first $1M layer • Jury Verdicts Research - Countrywide, accurate, but only about 5% of all medical malpractice, skewed towards high severity • National Practitioners Data Base - Physician data only; no hospital data - Only closed claims = 5 year lag - No expense costs included • PIAA Data - Fear of competitors’ use = limited utility

7. Median Medical Malpractice Jury VerdictsSource: Jury Verdicts Research, 2006 LRP Publications

8. Mean Medical Malpractice Jury VerdictsSource: Jury Verdicts Research, 2005 LRP Publications

9. National Practitioners Data BaseSeverity AnalysisSource: National Practitioner Data Bank Public Use File, June 30, 2006

10. PIAA Data BaseSeverity AnalysisSource: PIAA, 2004

11. Aon Risk Consultants, Inc., Medical Professional LiabilityPhysician Professional Liability BenchmarkHISTORICAL SEVERITY * *Based on non-zero claims only; Individual losses limited to $2M

12. FREQUENCY

13. FrequencyPer Earned Unit of ExposureSource: PIAA Data

14. National Practitioners Data BaseFrequency AnalysisSource: National Practitioners Data Bank public use file, June 30, 2006

15. Aon Risk Consultants, Inc., Medical Professional LiabilityPhysician Professional Liability BenchmarkHISTORICAL FREQUENCY PER CLASS 1 EQUIVALENT * * Number of claims per physician; for example, the 2003 year indicates 7 claims per 100 class 1 physicians.

16. FREQUENCY AND SEVERITY TREND ANALYSIS

17. Aon Risk Consultants, Inc., Medical Professional LiabilityPhysician Professional Liability BenchmarkHISTORICAL LOSS COSTS PER CLASS 1 EQUIVALENT * *Individual losses limited to $2M

18. Frequency and Severity • Frequency = number of claims reported • Severity = average cost per claim • Frequency & severity trend factor • General Consensus: 6% - 7%, higher in jurisdictions without tort reform

19. PHYSICIAN ISSUES

20. Hospital vs. Physician Loss CostsSource: 2006 Update on U.S. Tort Cost Trends, Towers Perrin Tillinghast

21. MEDICAL MALPRACTICE INSURANCE COMPANY RESULTS

22. Medical Malpractice Premium Volume • 2005: $9,124,374 • Source: 2006 Best’s Aggregates & Averages – Property/Casualty • This doesn’t count: • Self insurance • Captives • Patient compensation funds • Risk retention and risk purchase groups • JUAs • Trusts

23. Accident Year vs. Calendar Year • Accident Year = Results from all policies written during that year • Calendar Year = Results from all polices written during that year plus any reserve changes made to prior years • Virtually all published data is on a calendar year basis

24. Loss Ratios for Medical Malpractice IndustrySource: 2006 Bests Aggregates & Averages – Property/Casualty

25. Loss Adjusting Expense Ratios for Medical Malpractice IndustrySource: 2006 Bests Aggregates & Averages – Property/Casualty

26. Incurred Loss Ratios for Medical Malpractice IndustryPure Loss + Allocated Loss Adjusting Expenses (ALAE) = Incurred Losses Source: 2006 Bests Aggregates & Averages – Property/Casualty

27. Loss Triangles Source: Schedule P – Part 3F – Section 2 – Medical Malpractice Claims Made

28. Expense RatioSource: 2006 Bests Aggregates & Averages – Property/Casualty • Consists of: • Costs to run company • Commissions to agents & brokers • Premium taxes

29. Combined Ratio Source: 2006 Bests Aggregates & Averages – Property/Casualty

30. Incident Date to Trial DateMedium Number of MonthsJury Verdicts Research, 2005

31. Occurrence to Settlement Lag(in number of years)Source: National Practitioners Data Bank public use file, June 30, 2006

32. Filing Date to Trial DateMedium Number of MonthsJury Verdicts Research, 2005

33. Investment IncomeSource: 2006 Bests Aggregates & Averages – Property/Casualty • Med Mal companies hold on to each premium dollar for an average of 3 years

34. Overall Operating Ratio“The Bottom Line”Source: 2006 Bests Aggregates & Averages – Property/Casualty

35. Malpractice Industry Premium and Losses 1976-2005 Medical Malpractice Accident-Year Results ($ in millions)

36. TORT REFORM

37. Average Loss per Physician in States With and Without CapsLoss ($) per PhysicianSource: Richard S. Biondi & Arthur Gurevitch Contingencies November/December 2003 States without caps States with caps

38. Malpractice Claims per Physician in States With & Without Caps - Claims per 100 PhysiciansSource: Richard S. Biondi & Arthur Gurevitch Contingencies November/December 2003 States without caps States with caps

39. Differential in Loss per Physician in States With & Without CapsCapped States % of Uncapped StatesSource: Richard S. Biondi & Arthur Gurevitch Contingencies November/December 2003

40. Malpractice Premium per Physician in States With & Without CapsPremium ($) per PhysicianSource: Richard S. Biondi & Arthur Gurevitch Contingencies November/December 2003 States without caps States with caps

41. National Practitioners Data BaseFrequency Analysis – MichiganNOTE: Michigan enacted caps on non-economic damages in 1994Source: National Practitioners Data Bank public use June 30, 2006

42. National Practitioners Data BaseSeverity Analysis - MichiganSource: National Practitioner Data Bank Public Use File, June 30, 2006

43. Tort Reform • In 1975-77, in 1985-87 and in 2001-2003 numerous states enacted medical malpractice tort reform. • Five to seven years later (1980-82 and 1990-92), after court challenges to virtually every element of tort reform, approximately 50% was struck down by the states’ high courts. By that standard, we should start seeing the 2001-2003 tort reform start being struck down in 2007.

44. State by State Tort Reform Initiatives Limits on Noneconomic/Pain and Suffering Damage Awards (as of March 15, 2005) ND $500k WA VT MT $250k MN ME $400k* SD $500k WI $350k1 ID $250k OR NH MI $500k* WY NY NE $500k1 IA MA - $500k OH $350k PA NV $350k IN $250k1 RI UT $400k CO $300k IL KS $250k MO $350k WV $250k CT CA KY VA* OK $300k NJ $250k TN NM $200k*1 NC DE AR AZ SC MS $350k GA $350k MD -$650k+* AL TX $250k DC LA $500k1* FL $500k* AK $400k* None < $250k $300 - 375k $400- 500k $500k and up HI $375k Source – National Conference of State Legislatures (January 13, 2005) *See notes for additional details 1 Cap is limit of liability for Providers; remainder to PCF

45. THE FUTURE

46. Medical Malpractice Crisis – What Crisis? HOSPITALS • Soft market has returned. Hospital excess insurance is the most competitive, but insurance bidding wars are increasingly common for primary as well. PHYSICIANS • Rate filing are commonly for modest declines. Large physician groups are enjoying insurance company bidding wars. Numerous carriers are aggressively attempting to expand market share.

47. Factors Affecting The Market • “Class of 2001” is mostly doing well Arch Capital Ace Gen Star Endurance Specialty Berkeley Medical Excess Underwriters OneBeacon Darwin Underwriters • Availability of reinsurance support for new entrants • A plethora of risk retention groups and admitted physician company startups • Rush to self-insurance and captives is over

48. The Future • Steadily softening market for the next 5 years or more • Continued new market entrants as industry profitability becomes clearer • Higher limits, broader policies • Likely to be followed by: • Unwinding of captives as commercial insurance market becomes cheaper • Followed by…inexorable rising of severity…and the next malpractice crisis