Hospital Self-Insurance Funding: A Monte Carlo Approach

The common theme which appears to have evolved in the actuarial methodology for determining self-insurance funding contributions can be described in basic terms as a two-step process: (a) estimating expected retained losses for the self-insured entity and (b) estimating a safety margin or risk loading to maintain funding at a selected high level of confidence. Variations on this general theme abound. Using Hospital Professional Liability as an example, this paper sets forth a simulation technique which approximates the aggregate loss distribution and the distribution of required funding to cover losses, focusing on the interaction of several variables. Special emphasis is placed on treating the run-off of the fund’s prior year losses and the prospective target year losses simultaneously in determining the required funding on a year-by-year basis. Keywords: Medical Malpractice, Hospitals, Loss Simulation, Severity Distribution