25 years of stability in medical malpractice
Physicians Reciprocal Exchange stresses risk control for doctors & hospitals, adds captive
By Michael J. Moody, MBA, ARM
Pricing within the insurance industry is infamous for its cyclical nature. For years, the industry has “treated” its customers to a rating mechanism that rivals any roller coaster in the country. Going from affordability and even availability issues one year to rating decreases just a few years later has become a hallmark of the industry.
While the industry as a whole is guilty of this roller coaster pricing model, the medical malpractice segment is the poster child for pricing extremes. This pricing has caused some doctors to move to other states in order to be able to obtain medical malpractice coverage, while others have been forced to retire early because they could not find affordable malpractice coverage—to be followed within several years by competitive rates from new players.
But one of the positives that has emerged from the various medical malpractice insurance “crises” has been the movement towards alternative risk transfer (ART) options. Since the mid-1970s, which spawned the first “bed-pan” mutuals, to the current movement to captives, rent-a-captives and risk retention groups (RRGs), the medical profession has been actively involved with the ART market. Frequently, during the intervening years, state doctor and hospital groups have been forced into developing their own solutions to weathering the storm of price increases that periodically hit the market. They have been forced to find solutions to their own problems.
In the beginning
Twenty-five years ago, doctors in New York found themselves in a pricing storm and decided to take things into their own hands by starting Physicians’ Reciprocal Insurers (PRI). PRI was established as a doctor-owned, doctor-operated reciprocal insurance company that was licensed in New York. Doctors realized early on that to succeed in New York, they needed something different. That something different turned out to be the “claims-made” policy form. While claims-made policies had been introduced and were being used in other parts of the country, PRI was the first to introduce the coverage in New York.
Over the years, PRI has been successfully writing medical malpractice throughout New York. During this period, carriers have come and gone, so that today there are only two medical malpractice underwriters remaining in New York. Currently, PRI has about 40% of the New York market and, in addition to being the second largest medical malpractice writer in the state, they are in the top 10 nationwide. Today, PRI insures well over 13,000 New York state physicians in a wide variety of specialties and has over $350 million in annual premiums.
One problem that has plagued New York medical malpractice underwriters is that the doctors’ rates are regulated, and thus set by the state. Many medical malpractice insurers have left the state, due in large part to this regulatory issue. As previously noted, currently there are only two major malpractice insurers that are actively involved in New York, one of which is PRI.
Like many medical malpractice underwriters that have managed to succeed for 25 years, PRI has excelled at the basics of the business. Since it is a doctor-owned, doctor-operated organization, the doctors have been active since they started PRI and they continue to be represented on the board. Over the years, the company has managed to strike a balance between prudent underwriting and steady, measured growth.
Along the way, PRI developed a value-added risk management program that is aimed at mitigating losses. This award-winning risk management education program, which gives doctors greater control over their costs, is based primarily on information that is gathered from actual claims experience. This data then forms the basis of the major portion of the risk management program, the aim of which is to reduce the chances of being sued.
Another of PRI’s key cost control methods is its aggressive approach to claims handling. From the start, the firm has believed in an early and aggressive position with regard to claims. The claims staff works closely and directly with insureds from the beginning of the litigation through its conclusion.
A critical aspect of the claims management process is that the majority of claims representatives are either registered nurses or other paramedical professionals. This approach has resulted in an extremely high successful resolution rate at trial. Currently, 80% of PRI’s cases that are tried result in verdicts for the defense. As a result of maintaining these insurance company basics, PRI’s claims frequency and severity have stabilized, more or less, and is predictable.
Maturing gracefully
For the most part, PRI has stuck to its organizers’ original game plan of insuring New York doctors, although several changes along the way have slightly modified its mission. One of the greatest changes, according to Jeanne H. Braun, executive vice president for Hospitals and Special Programs, was the decision to insure hospitals and other health care facilities. She points out that in 1993, the board recognized that “we needed to follow the doctors.”
At that time, some doctors were beginning to be employed by hospitals, while others hospitals were beginning to purchase primary practice programs. So the natural move, says Braun, was, “We had to respond to our base.” Since then, PRI has added more than 100 hospitals and other health care facilities. And while the board initially proceeded cautiously, she says, “It turned out well for us.”
Today, in addition to medical malpractice coverage, hospitals can also obtain general liability coverage from PRI. One of the reasons that adding health care facilities to the program has been good for the overall performance of PRI, Braun notes, is that unlike the doctor rates, which are regulated and set by the state, hospital rates are not. Hospital rates are loss driven and can be set at a more appropriate level depending on the actual loss experience of the health care facility.
Another significant change for PRI occurred when the firm founded a captive insurance company, which became operational in 2000. The captive, Futuro Insurance Company, Ltd., was licensed in Bermuda as a Class III, rent-a-captive facility. The captive is a wholly owned subsidiary of PRI. Braun points out that the captive was started “to provide an option for the hospitals and large doctor groups that were interested in doing some risk sharing.”
She indicates that the board felt it was important to have a viable alternative “for those insureds that would like to take their favorable loss experience one step further.” Moreover, Braun says, “Health care providers needing medical malpractice coverage have always been drawn to captives.” And because the other major medical malpractice writer in the state did not offer any ART solutions, it appeared to be a good idea and somewhat groundbreaking for a reciprocal.
Interest in the rent-a-captive has been high from the start, despite the fact that a group practice needs to have a minimum of about 100 physicians and have total premiums in the $1 million range, or include a hospital together with its employed medical staff. PRI gets numerous applications for the rent-a-captive each year. The risk-sharing concept has been attractive to many doctors because Futuro’s dividends are structured to be commensurate with loss experience. Issuing dividends is not guaranteed, a point not to be overlooked, according to Braun.
She indicates that the captive has been “a large draw,” despite its strict eligibility requirements. However, after doing an underwriting analysis on each applicant, “we have found that most prospects do not qualify for inclusion within the captive or lack the financial resources to participate.” In a number of instances, doctor groups would attempt to structure programs with no financial risk at all, raising questions about their commitment to a risk-sharing concept. For those that have gone in that direction, the clients opted to use their own captives, having already anticipated their desire to risk share with a specialty carrier. “Such opportunities are welcomed by PRI,” she adds, “but we’d like to see a greater level of understanding about captives and the pluses and minuses of taking risk.” Efforts to educate doctors and hospitals are generally on a case-by-case basis.
Braun says, however, that “using Futuro remains a top priority but we believe it is really important to develop a long-term relationship with doctors and hospitals that is based on a good loss ratio.” And she indicates that to a large extent, “you generally need a sizeable spread of specialties in order to maintain a good loss ratio for the group as a whole.”
She also notes that PRI still believes that Futuro will provide doctors and/or hospitals with better-than-average claims experience and an opportunity to share their risks in the captive, reducing their total cost of risk. PRI thinks that Futuro allows its insureds and prospects the flexibility they need to compete in the medical community. As a result, PRI continued to entertain applications into Futuro and feel strongly that Bermuda’s venue is a perfect fit.
Conclusion
Over the past 25 years, PRI has remained true to its organizers’ vision: providing a stable market for New York doctors to obtain medical malpractice coverage. PRI realized it could not be an insurance company that was all things to all people. So, for the most part, the firm has written medical malpractice on a monoline basis (with the exception of GL for hospitals) and remained primarily in New York. Additionally, while PRI does insure a variety of specialties and now hospitals, their spread of risk has remained similar by design.
The introduction of PRI’s captive was a strategic move that continues to garner significant interest. “I think we have been a little ahead of the curve here,” Braun notes, “by rolling out a rent-a-captive before the concept became popular. We find ourselves being imitated by other more formidable carriers,” she adds, noting that PRI’s credibility in the field of professional liability is widely acknowledged. “We are always looking for new ways to manage our risks, and this is just one piece of the puzzle,” Braun notes.