By Stephanie Dozier
In general, few people really like, understand, or want to spend money on insurance, but it could be the one thing keeping the doors open after an unforeseen event. There are many kinds of insurances that healthcare organizations should consider, but cost is often a key factor in prioritizing this protective cover.
As a medical professional liability insurer, we can share some insight on what goes into the cost, or “premium,” of insurance policies. There are three basic categories driving cost: market conditions (global reactions in the industry), exposure (risks to be covered), and experience (history of losses).
Market Conditions
Market conditions refers to the overall view of a particular product line and is typically cyclical in nature. It is often described as “hard and soft” markets. Social and general inflation drive this market reaction. The soft market is when premiums are low, and competition is fierce between carriers. The premiums are generally low because losses are down and therefore, the majority of carriers are operating profitably, which attracts competition, further driving down premiums. The hard market is when premiums are high and there is less competition as non-specialty carriers exit the line of business.
Hard markets usually occur when losses overall are increasing, creating the need for insurers to set aside more reserves to cover claims, as well as respond to the increasing costs for reinsurance (insurance for high losses). The two factors that contribute to loss activity are frequency (how many claims are occurring) and severity (the value of the claims). There are times in the market where frequency is an issue, but severity remains low. Then there are times when frequency is low, but severity is high. The worst scenario, of course, is when both frequency and severity are high.
The buzz word in the industry is a concept called “social inflation.” Social inflation is being driven by runaway jury verdicts, litigation funding by plaintiff attorneys, as well as an overall anti-corporate sentiment. The unpredictable nature of these costs leads to higher premiums. General inflation also plays a role. Just like every other business, insurance companies are negatively impacted by lower investment returns, increasing labor and supply costs, etc.
Exposure
The type of exposures the healthcare business may have weighs heavily on insurance cost. Exposure can be broken down by classification, type of coverage, and location. Medical malpractice is based on classification. For providers, it is linked to their specialty. For healthcare facilities, it is the type of services they offer; e.g. inpatient (occupied beds), outpatient (visits), emergency room (visits), labor and deliver (number of deliveries), mental health, rehabilitation.
Most professional liability/medical malpractice losses are what are referred to as “long tailed,” while other types of losses like property claims are short term. This refers to the time it takes to settle the loss. Long tail claims typically involve litigation and therefore are costly and time consuming. They can drag on, sometimes three to five years after the incident occurred. The location of the exposure also can affect the premium. Things like legal jurisdiction, tort reform availability, as well as access to state patient compensation funds are factors to take into consideration when pricing the risk.
Experience
The last variable that contributes to premium pricing is the loss experience of the healthcare entity or provider. Typically, most carriers look at loss history going back five to ten years. A loss ratio, or total claims cost divided by premiums, is used to gauge loss experience. Carriers will have target loss ratios for various types of coverage. In professional liability, a client with a 65 to70 percent loss ratio would be favorable. A carrier will want to see loss history, even if it was with another insurer. The main predictor of future losses is analysis of past experience. A longer the history of losses provides a more accurate predictor of future claims.
Obviously, some of these factors are within control of the insured, while others are not. It will be difficult for a facility to be able to impact market conditions, but effective risk management to avoid losses (experience) is an opportunity to materially manage, even offset, rising premiums. Every effort should be made to manage risk well - not just to keep costs down, but more importantly, to protect patients in your care.
Hopefully understanding more about market conditions, exposures, and experience demystifies insurance premiums, and helps you as a consumer understand what can lead to fluctuations in premiums.
Stephanie Dozier serves as Vice President of Underwriting for Inspirien.