A Trend Model for Social Inflation in Medical Professional Liability

This paper will examine the issue of social inflation trend in Medical Malpractice indemnity payments. I will demonstrate how a Calendar Year (CY) paid severity trend model can be used to identify and project social inflation. Using publicly available data, I will show how this line of business exhibits a cyclical stair step pattern which is the cornerstone of what I call the Level Shift model. I will then propose a method for calculating the severity trend factors for both claims made and occurrence policies based on this Level Shift model. The generalized model can also be used to incorporate shifts in both frequency and severity trend patterns due to external “Key Events” that change the loss landscape for this line of business. I will discuss how the jurisdiction and legal environment in which a claim is made can affect the loss cost trends and how the effect of “Key Events” that result from changes in these environments can be projected using the Level Shift model. Finally, I will demonstrate how the Level Shift model can help shed light on the unexpected loss development (adverse development) actuaries see in the Medical Malpractice line of business.