Are You Paying Too Little For Your Malpractice Insurance?
Like most things in life, you get what you pay for. That’s certainly true when it comes to medical malpractice insurance. Unfortunately, while products such as blenders and cars can be replaced when flaws become evident, the same is not true when it comes to malpractice insurance. By the time you find out that your malpractice insurance company can’t cover your claim, it’s too late to do anything about it.
Often times, insurance is viewed as a commodity; one policy is the same as another. Consider automobile and homeowners insurance. Because most people purchase them, these policies are subject to a significant amount of consumer and regulatory oversight. As, these types of policies end up being very similar. The same cannot be said of malpractice insurance policies.
Medical malpractice insurance should not be viewed as a commodity. It is not subject to the same amount of regulatory oversight as homeowners and automobile policies. The vast majority of insurance policies offered to CRNAs currently come from unregulated insurance companies (non-admitted) rather than regulated insurance companies (admitted). It’s important to realize that the financial stability and security of these companies can vary widely.
If you purchase your own malpractice insurance, understand what you’re buying and from whom. Get answers to the following questions:
- What do you know about your malpractice insurance company?
- Has your agent provided you with any financial information about the company?
- Is it regulated (admitted) or unregulated (non-admitted)?
- Has it been rated by A.M. Best?
- Is it financially secure and stable?
Is Your Insurance Company up to the Task?
Anesthesia-related claims can be very large. You expect that your insurance company will be around to defend you and pay any settlements or judgments that you incur. For this reason, you want an insurance company that charges premiums that are adequate to cover its claim payments and expenses now and in the future. Because of this, price should never be the most important factor when buying a malpractice policy.
In most states, a CRNA malpractice policy provides a $1 million per occurrence limit and a $3 million aggregate policy limit. Consider two insurance companies – one that charges $2,000 for its policies and another that charges $4,000. The company that charges $2,000 for its policies must write at least 500 policies (1,000,000/2,000) to pay for a single $1 million per occurrence limit claim, and that wouldn’t include any the insurance company’s other expenses.
The company that writes its policies for $4,000 only has to write half as many policies (250) and takes on half the risk of its cheaper competitor. Let me explain this. In writing 500 policies, the company that only charges $2,000 now has the potential exposure of having to pay out $500 million (500 policies x $1 million) for per occurrence limits claims. When you then consider the aggregate policy limit ($3 million per policy), the cheaper company’s total potential exposure is actually $1.5 billion (500 policies x $3 million). For the company that charges $4,000 for its policies, its total exposure for per occurrence claims is only $250 million, and $750 million for its total aggregate exposure. And remember, at this point each company has only collected $1 million in premiums. Realistically, no malpractice insurance company will have to pay claims out on all of its policies. In addition, most malpractice insurers reduce their exposure by purchasing reinsurance, but the purchase of reinsurance comes with a cost, which reduces the funds available to pay claims. Eventually every insurance company has to pay some claims. How sure are you of your insurance company’s ability to pay claims now and in the future?
Key Indicators to Examine
There are three important indicators that you can look at to help determine an insurance company’s financial strength and stability: Net income is a company’s total earnings. It is calculated by subtracting total expenses from total revenues. If the number is a positive, there is profit. If the number is a negative, there is a loss. Combined ratio is a measure used by insurance companies to help determine their profitability. The ratio is calculated by taking the total of both losses and expenses and then dividing them by the premium. To make it a bit easier to understand, all you really need to know is that a ratio below 100 percent indicates the company is making an underwriting profit while a ratio above 100 percent means the company is paying out more in claims than the premiums it is taking in. Policyholder surplus is the difference between an insurance company’s assets and its liabilities. In the simplest of terms, it’s an insurance
company’s net worth.
A.M. Best Rating
When choosing any insurance company, you should also consider that company’s A.M. Best rating. Founded in 1899, A.M. Best Company is the oldest and most widely recognized rating agency dedicated to the insurance industry. Best was the first insurance rating organization and is recognized as the industry leader. It is independent and receives no funding from insurance companies. A.M. Best normally assigns a rating to all insurance companies. The Best’s Rating represents an opinion based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance, and business profile. Best’s rating opinions are divided into two broad categories— secure and vulnerable. There are generally two reasons why a company might not be rated by Best. The first is that Best does not have access to the necessary financial information in order to develop a rating. The second is the insurance company has requested that Best not rate it.
For questions or concerns about the financial stability of your insurance company or any of your other malpractice insurance-related questions, contact us. Email us at firstname.lastname@example.org or call 800-343-1368.
John Fetcho, CPCU, ARM Director, AANA Insurance Services
This article was previously published in the September 2016 issue of AANA NewsBulletin. The AANA NewsBulletin ceased publication in July 2020.