1. 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)

2. Agenda What makes insurance profits different
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

3. Background on Insurance:
Basic Accounting Is Different
Premiums
Incurred Losses (a.k.a. Loss Reserves)
Expenses
Profit / Net Income

4. Illustration of Typical Income Statement
Premiums $100
Less:
Loss reserves ($70)
Expenses ($35)
Underwriting Income (Loss) ($ 5)
Investment Income $10
Net Income (Loss) $ 5

5. Impact of Under-Reserving on Income Statement
Premiums $100
Less:
Loss reserves ($70) ($50)
Expenses ($35)
Underwriting Income (Loss) ($ 5) $15
Investment Income $10
Net Income (Loss) $ $25

6. Inherent Pitfalls With Medical Malpractice 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)

7. Inherent Pitfalls With Medical Malpractice 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

8. Inherent Pitfalls With Medical Malpractice 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

9. Inherent Pitfalls With Medical Malpractice 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.

10. Therefore Bigger Isn’t Necessarily Better
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.

11. Important Terms To Understand in Evaluating Financial Condition
Surplus (can be known as “Total Adjusted Capital”)
Reserve Development
Reinsurance
A.M. Best Rating

12. Surplus
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

13. Reserve Development
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”)

14. Reinsurance 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

15. Importance of A.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

16. MIIX A.M. Best Rating History
MIIX Case Study
MIIX A.M. Best Rating History

17. 2 Types of Policy Forms 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

18. Cost Comparison of Policy Forms
Cost Comparison of Policy Forms* Claims-made Versus Occurrence-type Without Claims-made Tail Purchase
*For comparison
purposes only;
based on a $10K
mature rate; rate
increases are not
included.

19. Will A Physician Receive a Free 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.

20. Important Case Law That Affects NJ Physicians
Johnson v. Braddy Case Study (2006)
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.

21. Carter Lincoln-Mercury v. Emar Group Inc. (1994)
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)

22. Important case law that helps answer the question, " How much insurance should I buy?”
Rova Farms (1974)– Bad Faith and Its Impact on Consent to Settle Clause
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

23. “Crisis” may not be over
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.

24. Cumulative Rate Increases Since January 1, 2003
Sources: Perr & Knight. Rate filings based on A.M. Best and N.J. Department of Banking and Insurance Rate Filing Information.

25. Risk Retention Groups (RRG’s)
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

26. Carrier Comparison