What every physician must know about medical malpractice insurance
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What Every Physician Must Know About Medical Malpractice Insurance. Presented By Eric S. Poe, Esq., CPA Vice President of Marketing and Business Development Direct line: (609) 520-3067 Email: [email protected] Agenda. Part I: Overview of the Industry What makes insurance profits different

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What every physician must know about medical malpractice insurance

What Every Physician Must Know About Medical Malpractice Insurance

Presented By Eric S. Poe, Esq., CPA

Vice President of Marketing and Business Development

Direct line: (609) 520-3067

Email: [email protected]


Agenda
Agenda Insurance

Part I: Overview of the Industry

  • What makes insurance profits different

  • Inherent pitfalls of medical malpractice insurance industry

  • Important terms to evaluate the financial condition of an insurance carrier

  • The importance of A.M. Best Ratings

    Part II: Common Mistakes Made By Physicians

  • The differences of the occurrence-type and claims-made policy forms

  • Prevailing case law that affects NJ physicians

  • Why the “crisis” may not be over

  • Why you need to shop yourself: rate increases can vary


Background on Insurance: Insurance

Basic Accounting Is Different

  • Premiums

  • Incurred Losses (a.k.a. Loss Reserves)

  • Expenses

  • Profit / Net Income


Illustration of typical income statement
Illustration of Typical Income Statement Insurance

Premiums $100

Less:

Loss reserves ($70)

Expenses ($35)

Underwriting Income (Loss) ($ 5)

Investment Income $10

Net Income (Loss) $ 5


Impact of under reserving on income statement
Impact of Under-Reserving on Income Statement Insurance

Premiums $100

Less:

Loss reserves ($70) ($50)

Expenses ($35)

Underwriting Income (Loss) ($ 5) $15

Investment Income $10

Net Income (Loss) $ 5 $25


Inherent pitfalls with medical malpractice insurance industry
Inherent Pitfalls With Medical InsuranceMalpractice Insurance Industry

1. Industry Dominated by Regional Insurers

As a result of medical malpractice crisis environments, many medical societies or hospital associations created insurance vehicles to solve their availability problems. These “stop-gap” solutions grew into industry giants.

The recent largest insurers to go insolvent or placed under rehabilitation for medical malpractice have been PHICO and MIIX. MLMIC is current largest med mal insurance company in the world (created by NYMS)


Inherent pitfalls with medical malpractice insurance industry1
Inherent Pitfalls With Medical InsuranceMalpractice Insurance Industry

2. Short term profitability can be achieved by mere under-reserving or “aggressive” reserving

Due to the differences in accounting, proper reserving is the largest driver of profitability in the financial statements


Inherent pitfalls with medical malpractice insurance industry2
Inherent Pitfalls With Medical InsuranceMalpractice Insurance Industry

3. “Long-tailed” insurance line

Malpractice has the longest average time from a claim being made to paid loss. Therefore, determining and verifying reserve adequacy (mistakes) takes longer than other lines of insurance


Inherent pitfalls with medical malpractice insurance industry3
Inherent Pitfalls With Medical InsuranceMalpractice Insurance Industry

4. When significant under-reserving occurs the results only cause additional problems

Rate increases are the first request when reserves develop. However, rate increases can risk non-renewal and political rejection. Therefore, management cuts expenses – typically reinsurance. This only means more exposure to the company.

Furthermore, when the past reserves are developing, often companies will then under-reserve current year claims to offset it. These all cause rapid sudden declines.


Therefore bigger isn t necessarily better
Therefore Bigger Isn’t Necessarily Better Insurance

  • Last insurers in med mal to go out of business:

    MIIX, PHICO, Reliance – all top 10 largest in U.S.

  • $Premiums simply means taking more risk

  • Assets are always large due to long-tail line

  • Less reinsurance required

  • Smaller insurers are actually required to secure reinsurance at lower levels.


Important terms to understand in evaluating financial condition
Important Terms To Understand in Evaluating Financial Condition

  • Surplus (can be known as “Total Adjusted Capital”)

  • Reserve Development

  • Reinsurance

  • A.M. Best Rating


Surplus
Surplus Condition

  • The excess capital an insurance company maintains that currently has no allocated use. The surplus is maintained in order to act as a “cushion” in case the premiums collected are not adequate to pay for the losses

  • NOTE: The $ of surplus is not as important as the ratio of premium to surplus


Reserve development
Reserve Development Condition

  • Any adjustment (increase or decrease) in reserves that an insurer sets aside to pay for expected ultimate losses

  • “Reserve strengthening” is not a positive term (this should be viewed similar to “Oops! We estimated incorrectly”)


Reinsurance
Reinsurance Condition

  • Insurance for insurance companies

  • Attachment points (ask this question)

  • Remember: history tells us that one of the first expenses to be reduced when an insurance carrier is in financial distress is the expense of comprehensive reinsurance


Importance of a m best ratings
Importance of ConditionA.M. Best Ratings

  • Oldest rating bureau in the world

  • Evaluates insurance carriers based on their financial results

  • Carriers must be in business for five years to quality for an A.M. Best Rating


Miix case study
MIIX Case Study Condition

MIIXA.M. Best Rating History


2 types of policy forms
2 Types of Policy Forms Condition

Occurrence-type

  • Covers Losses That Occurred While the Physician was Insured with the Carrier, Even if the Claim is Made After Termination of the Policy

    Claims-made

  • Covers claims only if two conditions are met: (1) You had a policy in-effect at the time of the incident AND (2) you have a policy in-effect at the time that the claim is made against you.

  • You can be covered for claims after you terminate coverage if you pay for a “tail” endorsement at termination of policy which is usually equal to 200+% of expiring premium

  • Common mistake by physicians: free tail conditions – and the effect rate increases

  • BOTTOM LINE: Accountability


Cost Comparison of Policy Forms* ConditionClaims-made Versus Occurrence-type Without Claims-made TailPurchase

*For comparison

purposes only;

based on a $10K

mature rate; rate

increases are not

included.


Will a physician receive a free tail
Will A Physician Receive a ConditionFree Tail?

  • In order to receive a free tail the physician must be deceased, completely disabled, or meet the following three requirements: be 55, 60, or 65 years of age (depending on the carrier), retire from practice and never see a patient again, and be insured with the carrier for five consecutive years. Most doctors never meet these requirements.

  • According to ProNational’s (Claims-made policies only) financial statements, only 2.9% of their physician policyholders will receive a free tail each year.

  • KEY TO REMEMBER: NOT A UNILATERAL CHOICE BY THE PHYSICIAN

  • If the physician’s carrier decides to non-renew the policy the physician will not receive a free tail.

  • If the physician’s carrier discontinues writing business in NJ the physician will not receive a free tail.


Important case law that affects nj physicians
Important Case Law That Affects ConditionNJ Physicians

  • This legal case upheld that when an insurance carrier becomes insolvent the personal assets of the insured are at risk to pay for claims in excess of the $300,000 provided by the PLIGA fund.

  • Lesson to Physicians: Be aware of medical malpractice insurance carrier’s financial condition. MIIX can happen to them.

  • Physicians NEED independent research – Remember it is the physician’s assets that are at risk, and there are few physicians without a financial interest in their decision.

Johnson v. Braddy Case Study (2006)


Carter lincoln mercury v emar group inc 1994
Carter Lincoln-Mercury v. Emar Group Inc. (1994) Condition

  • Insurance agents and brokers, when acting on behalf of an insured, owe the insured a duty of due care

  • Broker’s and Agent’s have a duty to investigate the financial security of a carrier for which it places the insured

  • Foreseeability - a duty of care is also owed to foreseeable parties injured by the broker’s or agent’s negligence. (ex. patient)


Important case law that helps answer the question how much insurance should i buy
Important case law that helps Conditionanswer the question, " How muchinsurance should I buy?”

  • 1974 Rova Farms case is the single most cited case for NJ plaintiff attorneys

  • Established “bad faith” when an insurance carrier fails to reasonably settle a claim and exposes insured

  • Bad law for insurance companies, but provides protection for insured physicians

  • “Consent to Settle” clauses can expose physicians if exercised

Rova Farms (1974)– Bad Faith and Its Impact on Consent to Settle Clause


Crisis may not be over
“Crisis” may not be over Condition

Worse before it becomes better for two reasons:

  • MIIX reported -$306 million in surplus as of 3rd Quarter of 2004, stating it had $542 million remaining, while over $848 million in liabilities paid out at a rate of $27 million/month in verdicts in 2004, but slowing at a rate of $41 million paid from 9/04 to 12/04. Estimated that a maximum of 40 months before assets deplete.

  • MLMIC (Princeton’s Parent Company) recently reported -$457 Million in Total Adjusted Capital. This is $750 Million shy of the “seizure” requirement guideline set by the NAIC Model Act.


Cumulative rate increases since january 1 2003
Cumulative Rate Increases Since January 1, 2003 Condition

Sources: Perr & Knight. Rate filings based on A.M. Best and N.J. Department of Banking and Insurance Rate Filing Information.


Risk retention groups rrg s
Risk Retention Groups (RRG’s) Condition

1981 – Products Liability Risk Retention Act

1986 – RRG’s allowed to write insurance in all 50 states

BUT Notable Differences of an RRG:

Less regulatory oversight – no forms or rates requiring approval

Less regulatory oversight in non-chartering state for financial condition

No PLIGA (Property and Liability Insurance Guaranty Association) Protection

What you may find in an RRG Policy:

Assessable Policy Clauses

Non-Binding Arbitrations Clauses

Physician Responsibility to Pay Defense Attorney Fees



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