When physicians are faced with shopping a current professional liability policy or purchasing a new policy, they will be presented options from many different types of carriers that each has advantages and disadvantages. Often, the needs of the physician and his or her practice will lend itself to a specific type of insurance carrier. In this article, we will provide insight into the different kinds of companies and what they can offer to the healthcare community, in terms of benefits and financial responsibility.
Most insurance carriers fall into one of two categories, standard market or excess and surplus (E & S) lines. The primary difference between the two is that standard market carriers are admitted carriers, which are required to follow guidelines that are established by the Department of Insurance (DOI) in the state(s) that the carrier does business. Due to the admitted status, the standard carriers’ rates, business practices, advertisements and cash reserves are closely monitored by the state and any modifications require DOI approval. The majority of US physicians are currently covered under a standard policy, either commercial or mutual. Additionally, standard market policyholders are protected against company insolvency through the states guaranty fund. Typically, admitted carriers choose to insure lower risk physicians and can exclude specific practice areas and procedures if the exposures are considered “high risk”. Overall, admitted carriers offer the “traditional” coverage some physicians prefer. Due to their rigid rate calculation guidelines, they do not always offer discretionary credits but offset the higher premiums with policyholder benefits, such as risk management programs and credits and dividend credits.
Excess and surplus (E & S) lines are non-admitted carriers; therefore, they are not subject to licensing or regulation by the states in which they do business. For this reason, they can offer policies with more flexible terms, competitive pricing, and broader coverage. In the past, E & S lines were perceived to be more “risky,” in terms of financial solvency, but that is no longer true. Although those insured with non-admitted carriers do not have the protection of the state guaranty fund, most E & S carriers are very financially stable, due to their relationships with thier reinsurers, and have the ability to tailor policies to a physicians specific needs. In order to write a policy with a surplus lines carrier, a broker or agent will have to show “diligent effort” in placing the business in the standard market before they can access the E & S market. Many physicians seek coverage in the surplus lines market due to loss history, cancellations, practice procedures or locations, or similar reasons which make placement in traditional markets costly and/or difficult.
Outside of the standard and surplus lines markets are risk retention groups (RRG) and risk purchasing groups (RPG), both of which are types of captive groups. These markets have experienced rapid growth in the last few years due to the restricted marketplace and physicians looking for an alternative to traditional carriers. Both RRG’s and RPG’s are formed when a group of insured’s with similar exposures come together to insure their risks by either forming their own insurance company (RRG) or as a group to negotiate and purchase insurance from a traditional provider.
Risk retention groups have gained traction in the market after the insurance crisis of 1986 when professional liability rates began to skyrocket at the same time that many large, standard carriers were leaving the market. In response to the crisis, the federal Liability and Risk Retention Act was created as an alternative for healthcare providers. As of 2013, 261 RRG’s existed, compared to the 65 RRG’s in 2000. In the medical malpractice community, an RRG is formed when a group of medical professionals choose to self-insure the professional liability exposures of its members. Creation of an RRG requires an exorbitant amount of capital and they are subject to the regulations and requirements of the state in which they are domiciled. Most physicians choose to join an existing RRG rather than forming their own. Whereas the profit is the main goal of traditional insurance carriers, RRG’s focus on retaining members through lower rates, effective loss control/risk management programs, participation by RRG members in favorable loss experience, access to reinsurance markets, and stability of coverage and rates. Although there is no guaranty fund available to members, many RRG’s have multiple layers of reinsurance to protect their insured’s. Membership in a RRG requires a capital contribution, which is set by the RRG, and they do have the ability to assess their members. Due to the high cost and barriers associated with obtaining an A.M. Best rating, many RRG’s chose not to pursue a financial rating or they use a rating entity like Demotech, who is better suited to smaller, less traditional insurance companies.
Another type of captive in the in medical malpractice marketplace is the risk purchasing group, or RPG. A RPG is composed of a group of professionals with a similar exposure that join together to purchase insurance in order to lower liability costs. There is power in groups, and the RPG’s recognize this power and use it to negotiate the best premium and terms from traditional providers. They also have the ability to tailor policies to their members at a much lower cost than if the individual went directly through the insurance company. Additionally, RPG’s do not require a capital contribution since they are not retaining the risk. RPG’s are very attractive to traditional carriers as a way to increase profitability while reducing loss potential.
Joint Underwriting Associations, or JUA’s, are a risk-pooling groups, established by state regulations in order to provide insurance to physicians who are unable to insure their exposure in other traditional markets. Unfortunately, some physicians are faced with the inability to obtain quality insurance due to claims activity, high indemnity payouts, cancellations, and other avoidable reasons. In order to offset this crisis, many states formed JUA’s in order to provide that coverage, often at a much higher premium and with the ability to assess its insured’s for overhead costs. Obtaining coverage through a JUA is often viewed as a ‘last resort’ for physicians and should only be considered on a short-term basis.
The overwhelming number of carrier options available to physicians can be confusing. In order to find the best coverage, a professional insurance agent or broker can help sort out the advantages and disadvantages of all the carriers to find the best fit for a physician or physician practice. As the market changes immensely from one year to the next, it is advantageous to have an agent review the current policy and needs of the provider each policy year and well before the policy expiration date. This allows the agent to acquire all the necessary information and to approach all carriers in order to provide the most cost-effective coverage for the physician.
Barry B. Cepelewicz, MD, JD and Stacey P. Klein, JD and Robert O’Connor, CPCU. Is a Risk Retention Group Right for Your Medical Malpractice Insurance Needs? Journal of Medical Economics; February 2013.
Thomas B. Fleeter, MD. Managing Medical Liability with Risk Retention Groups. American Association of Orthopedic Surgeons; February 2012.
Denise Johnson. Understanding the Difference Between Standard and Excess/Surplus Lines. Claims Journal Online; July 2014.To contact the author, call 800-457-7790 and ask for John Plant.