Development of an Inflation Sensitive Exposure Base for Hospital Professional Liability Insurance

The initial idea for the topic of this paper actually began in the mid-seventies, the period of the "malpractice crisis". As actuaries for a carrier specializing in Hospital Professional Liability Insurance (HPL), we are acutely aware that one of the primary causes of the "crisis" was the compound effect of several years of double-digit loss inflation without corresponding premium increases. During the same period, similar forces adversely affected the underwriting results in workers' compensation, our company's other major line of insurance. The effect of inflation on this line was not as severe, however, partially due to the use of an inflation sensitive exposure base, payroll, which generated additional revenue and helped to offset the higher than expected losses.