Using a Claim Simulation Model for Reserving and Loss Forecasting for Medical Professional Liability

Various recent papers have included criticisms related to the use of link-ratio techniques for estimating ultimate losses. While this paper does not review these criticisms, it does outline development characteristics of medical professional liability losses that would lead the actuary to believe that link-ratio techniques may not always be the best available option for projecting ultimate losses. The paper then proceeds to provide a model that addresses these weaknesses and then extends this model for loss forecasting applications. More specifically, this paper provides a framework for evaluating medical professional liability loss exposures. The concepts used in this model are more fully discussed and described in other statistical textbooks or refereed actuarial journals. This paper is intended to provide a synthesis of existing distinct processes. Rather than repeat those discussions, a bibliographical reference is provided. The bibliography included, therefore, should be considered a critical section of this paper. Specifics of the modeling within the framework presented are the responsibility of the actuary implementing the model. While the paper does include alternatives that may be considered within the framework, it is not intended to be a comprehensive listing of these alternatives. This model has been developed in recognition of data availability issues for self-insured healthcare facilities. However, this model may easily be expanded for use in an insurance company context or for evaluating other medical professional liability exposures.