February 22, 2013 - Oregon State Bar

2013 PLF BUDGET, AND 2013 PRIMARY ASSESSMENT PAGE 4
OCTOBER 6, 2012
assessment and 7,104 full-pay attorneys. Primary Program revenue also includes our forecast for
SUA collecrions of $185,000 for 2013 and $196,000 for 2012. The 2013 budget assumes that there
is no major change in the current SUA policies.
Inveshnent returns were better than expected for the first six months of 2012. In doing the 2012
projections and 2013 budget, we used the rates of return for the different asset categories recently
recommended by R. V. Kuhns &Associates, Ina These rates are lower than those used during the
2012 budget preparations. While the percentages chosen are significantly lower than historical rates
of return achieved over long periods, they reflect the current reduced expectations of our investment
consultants. Our calculation of inveshnent return projections for the remainder of 2012 and for
2013 began with the June 30, 2012 market value of all current investments. Investment revenue was
calculated from July forwazd using 2.5 percent for the short-term cash flow bond fund, 4.25 percent
for intermediate bonds, 7.9 percent for domestic equities, 8.65 percent for foreign equities, 7.00
percent for hedge fund of funds, 7 percent for real estate, and 6.75 percent for absolute return. The
overall combined expected rate of return for 2013 is about 6.61 percent. (The overall rate combined
rate of return used in prepared the 2012 budget was 7.21 percent.)
Primary Program Claims Expense
By far, the largest cost category for the PLF is claim costs for indemnity or defense. Since claims
often don't resolve quickly, these costs are paid over several years after the claim is first made.
The calculation of claim costs is the largest factor in determining Primary Program profit or loss.
For any given year, claim expense includes two factors — (1) the cost of new claims and (2) any
additional upward (or downwazd) adjushnents to the estimate of costs for claims pending at the
beginning of the year. Factor 1 (new claims) is much larger and much more important than factor 2.
However, problems would develop if the effects of factor 2 were never considered, particularly if
there were consistent patterns of adjustments. The "indicated average claim cosy' in the actuarial
report calculates an amount for factor 1. The report also discusses the possibility of adding a margin
to the indicated costs. Adding a margin could cover additional claims costs from adverse
development of pending claims (factor 2) or other possible negative economic events such as poor
investment returns. We have included mazgins in the past several years to good effect.
The PLF experienced a significant increase in the frequency of new claims during 2008 and 2009.
The frequency level declined during 2010 (13.6 percent) and 2011 (13.2 percent). Claims frequency
for the first six months of 2012 was 13.6 percent, which is close to budget expectations. Claim
frequency for the second half of 2012 will be distorted by a very large number of claims made
against one lawyer. To date, 99 claims have been made against a single lawyer. The most these
claims will cost of is one coverage limit. Accordingly, it is appropriate to make an adjustment to the
projected claim frequency. If the 99 claims were considered to be 15 (about one coverage limit), the
current projected claim count would be 935 which is less than 13.5 percent frequency. We feel that
the actuaries will agree with the need for an adjustment and will modify their calculation of the
December 31, 2012 in a similar manner. The 2012 projections of claim costs assume 935 claims at
$20,000 per claim.