Provided By: Healthcare Providers Insurance Exchange
Types of Insurance Companies
A stock insurance company is formed as a public, for-profit corporation with stockholders who have invested capital. As with any such company, its primary goal must be the enhancement of stockholder wealth.
A mutual insurance company has no stockholders. It holds the company’s assets, and the company is owned by its policyholders.
A reciprocal insurance company, or interinsurance exchange, is an unincorporated association. Like a mutual company, its assets are owned by its policyholders, who are members of (or subscribers to) the exchange. The fundamental difference between mutual and reciprocal companies is that insurance laws and regulations require that reciprocals be operated by an attorney-in-fact that functions on behalf of the policyholders.
Joint underwriting associations (JUAs) are state-sponsored programs for physicians who have no access to other sources of professional liability insurance, typically as a result of some problem that causes the standard medical malpractice insurers to refuse to insure them. Some JUA insureds bear infinite assessability for losses incurred by the organization during prior years of insurance activity. In some states in which JUAs operate, all casualty insurers in the state are assessable. In others, only the insured doctors are assessable. In those instances in which only the insureds of the JUA are assessable, ultimate financial obligations are unpredictable and can be significant.
Risk retention groups (RRGs) came into existence as a result of the federal Risk Retention Act of 1986, which allows a group to form as an insurance company and requires that it follow the insurance laws of at least one state. When first joining an RRG, a physician is typically required to pay a capital contribution in addition to the annual insurance premium. An RRG is governed by the regulations of the state in which it is domiciled. If an RRG is appropriately capitalized and operated, it can be a viable insurance alternative. Due to less regulatory scrutiny in some states, however, an RRG can be inadequately capitalized by charging inadequate premiums. As a result, insolvencies imperiling the financial assets of the insureds have occurred among RRGs. A risk retention group must file an annual financial statement in its chartering state and in all states which it operates. Doctors considering purchasing insurance from an RRG should review the group’s financial statements. They should also carefully evaluate the degree to which the state in which the RRG is domiciled requires that RRGs meet the high standards of solvency and effective management necessary to ensure that the company is able to fulfill its insurance obligations.
Risk Purchasing Groups (RPGs) also came into existence as a result of the Risk Retention Act of 1986. Unlike an RRG, an RPG is not an insurance company but an association of insurance buyers with a common identity, such as a medical specialty society, who form an organization to purchase liability insurance as a group. Since an RPG purchases coverage from an insurance carrier, no capital contributions are required in order to join. The company from which the RPG purchases insurance need not be licensed in every state. The purchasing group’s insurer must indicate how much premium was generated by the purchasing group in each state in its National Association of Insurance Commissioners’ Annual Statement. Physicians considering purchasing insurance through an RPG should inquire about the strength of the insurance company that provides coverage to the purchasing group.
Absolute Liability - Liability regardless of fault.
Accident-year Basis - The annual accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.
Adjudication – The act of determining an issue or settling a dispute in court.
Admitted Assets – See Assets.
Allocated Loss Adjustment Expenses (ALAE) - Expenses directly attributable to specific claims. Includes payments for defense attorneys, medical evaluation of patients, expert medical reviews and witnesses, investigation, record copying, etc.
Annual Aggregate Limit (claims made) - The maximum amount the carrier will pay for all claims arising from incidents that occurred and were reported during a given policy year.
Annual Aggregate Limit (occurrence) - The maximum amount the carrier will pay for all claims arising from incidents that occurred during a given policy year.
Assessability - A policyholder’s obligation to pay additional money, in excess of premiums, to cover past company losses for which reserves have proven to be inadequate. Trust arrangements and joint underwriting associations are generally assessable. (See also "Nonassessable.")
Assets - All the property and financial resources owned by an insurance company. Admitted Assets are those assets that are liquefiable to raise cash to pay claims. Nonadmitted Assets are assets, such as real estate (other than home office), furniture, and other equipment that are not liquefiable.
Assumed Premium - The consideration or payment an insurance company receives for providing reinsurance for another company.
Attorney-in-Fact - The entity that manages an interinsurance or reciprocal exchange and to whom each subscriber (policyholder/owner) gives authority to exchange insurance among the subscribers.
Bundling - The practice of grouping several individual procedures or services together for the purpose of paying for them as one package.
Claim - A written notice, demand, lawsuit, arbitration proceeding or screening panel in which a demand is made for money or a bill reduction.
Claims-Made Coverage - The most common type of professional liability coverage available, it provides protection for claims that occur and are reported while the policy is in effect (coverage period). Within the conditions of a claims-made policy, a claim must be reported to the carrier in writing by the insured. Tail coverage, or a Reporting Endorsement, provides coverage for claims that occur during the coverage period but are reported after the policy terminates.
Claims-Paid Coverage - Under a claims-paid policy, premiums are based only on claims settled during the previous year and projected to be settled in the coming year. Many claims-paid policies are assessable for a number of years, or even indefinitely, after a physician has terminated the policy.
Claims Reserves (claims-made policy) - Funds set aside to satisfy those claims that have been reported to the company but not yet resolved or paid.
Claims Reserves (occurrence policy) - An additional reserve must be set aside for incidents that occurred but were not formally reported during the policy year and are expected to be reported after the close of the policy year.
Claim Severity - Refers to the amount of financial liability resulting from settling a claim. A claim that is settled with no payment for damages is generally considered to have a "small" claim severity, while a claim in which the carrier pays the full limits of a policy is a "large" severity claim. Trends in claims severity on a specialty-by-specialty basis are important factors in setting rates each year.
Composite Rate - A composite rate is a unique component of claims-made insurance coverage. Composite rates are used by actuaries to calculate premiums in specific cases in which the future claims risk has been significantly reduced or increased.
Credentialing Report – Provides up-to-date information on a physician’s policy and claims experience.
Date of Incident - The date on which a situation of alleged malpractice took place. Also called "date of occurrence."
Date of Reporting - The date of reporting is the date on which the incident was reported to the insurance company.
Declaration - Also called "Declarations Page," this portion of the policy states information such as the name and address of the insured, the policy period, the amount of insurance coverage, premiums due for the policy period, and any coverage restrictions.
Deductible (voluntary) - Allows the insured to pay an amount of the "first dollars" of a claim payment and to pay a lower premium for assuming this risk.
Deductible (involuntary) - Is imposed by the insurance company due to the adverse risk characteristics of an insured. Involuntary deductibles do not include a premium reduction.
Deductible (straight) - Provides that all loss payments are reduced by the amount of the underlying deductible with no other considerations.
Deductible (franchise or quota share) - Provides that the insured and the insurance company split all costs within the deductible amount, such as on a 50-50 basis.
Direct Written Premium - A carrier's gross premium written, adjusted for cancellations, before deducting any premiums paid or ceded to a reinsurer.
Dividend - A partial return of premium to policyholders.
Domiciled - Refers to the state in which an insurance company receives a license to operate. The company is then regulated by that state's Department of Insurance.
Earned Premium - The portion of premium that applies to an actual coverage period. Insureds usually pay a calendar quarter or more in advance of the actual coverage period; initially the advance payment is unearned and becomes earned incrementally during the ensuing coverage period.
Economic Damages - Out-of-pocket damages, such as incurred medical expenses, lost wages, etc.
Endorsement - An amendment, sometimes referred to as a rider, added in writing to an insurance contract or policy.
Excess Insurance - A separate insurance policy with limits above the primary (or "first dollar") policy.
Exemplary Damages – See Punitive Damages.
Experience Rating - The system of rating or pricing insurance in which the future premium reflects actual past loss experience of the insured.
Extended Reporting Coverage - See "Tail Coverage."
Hold-harmless Clause - A hold-harmless clause (also known as an indemnification clause) attempts to shift liability from one party to another (e.g., from an HMO to an employed physician).
Incident - An occurrence that the plaintiff claims has led to culpable injury.
Incurred But Not Reported Losses (IBNR) - An estimate of losses for incidents that have occurred during a policy period (usually a year) but have not yet been reported to the company.
Incurred Losses - Includes both paid and unpaid (reserved) losses.
Indemnity - An insurance company's payment to a plaintiff in settlement or adjudication of a claim.
Indemnity Reserves - Claims reserves that are set aside to pay the portion of claims costs paid directly to claimants.
Informed Consent - An agreement obtained voluntarily from a patient for the performance of specific medical, surgical or research procedures after the material risks and benefits of these procedures and their alternatives have been fully explained in non-technical terms.
Insurance Gap - When a physician has professional liability insurance under a claims-made policy, once the coverage period has expired without renewal, claims that have not yet been made and reported to the carrier (insurance company) during the "active" policy period are not covered. In such cases, a physician is said to be "bare" (uninsured), unless he or she has purchased an extended reporting endorsement (tail coverage) from the former carrier, or has obtained "prior acts" (nose) coverage from a new carrier.
Limit - The maximum amount paid under the terms of a policy. A professional liability insurance policy usually has two limits, a per-claim limit and an annual aggregate limit. (See "Annual Aggregate Limit.")
Locum Tenens - A substitute physician who temporarily takes the place of a named insured policyholder or physician member of a medical group. This coverage may be contingent upon the policyholder or member physician not practicing during the period in which the Locum Tenens coverage is in effect.
Loss Ratio - A paid loss ratio is the amount of premium a policyholder has paid to the carrier
through the years versus the amount the carrier has paid out on his or her behalf for defense and
indemnity. For instance, a paid loss ratio of 50% means the carrier has paid out 50% of what
they've received in premium from a particular policyholder. However, the loss ratio doesn't take
into consideration the carrier's expense costs, which usually run an additional 25-35%. As a
result, a loss ratio greater than 75% usually means the carrier is losing money.
An incurred loss ratio is the amount the carrier has paid out (defense and indemnity) plus the amount they expect to pay out (reserves) for a particular policyholder versus the amount of premium a policyholder has paid throughout the years. A policyholder that has never filed a claim has a 0% incurred loss ratio.
Loss Reserves - Amount set aside to pay for reported and unreported claims. For an individual claim, a case reserve or estimate of the expected loss is set aside.
Malpractice or Professional Negligence - An abrogation of a duty owed by a health care provider to the patient; the failure to exercise the degree of care used by reasonably careful practitioners of like qualifications in the same or similar circumstances. For a plaintiff to collect damages in a court of law, the plaintiff's attorney must show that the provider owed the patient a duty and that the provider's violation of the standards of practice caused the patient's injury.
Mature Premium - A step rating system may be used to set premiums for its claims-made
policies. The mature premium is the fee a policyholder will pay during the year the policy matures,
generally the 5th through the 7th year.
The first level premium is substantially lower than a mature premium. It is designed for policyholders that are new to practice and therefore have no claims history. The mature-level rate reflects the fact that the majority of claims are filed within four to five years of an incident.
MICRA - Medical Injury Compensation Reform Act of 1975. Among other things, MICRA places a $250,000 cap on non-economic damages (pain and suffering), limits attorney contingency fees, allows periodic payments of future damages in excess of $50,000 and establishes a statute of limitations of three years from an injury or of one year from the discovery of an injury and its negligent cause.
Net Earned Premium - Net written premium (plus assumed premium for reinsuring risk) minus unearned premium.
Net Written Premium - Direct written premium minus payments to reinsurers.
Non-assessable - A condition under which an insurance company is sufficiently sound so that policyholders are not obligated to pay additional money for past losses for which reserves are inadequate.
Noneconomic Damages - Pain, suffering, inconvenience, loss of consortium, physical impairment, disfigurement, and other non-pecuniary damages.
Nonstandard Risk - Those persons or entities that must pay higher premiums and be subject to special coverage restrictions based on underwriting standards.
Nose Coverage - Nose coverage covers claims first made against the physician after the effective date of coverage on the policy. To be covered, such claims must arise out of the physician's acts or omissions prior to the policy's effective date and after its retroactive date. (Both dates are shown on the declarations page of the policy.) Note: Nose coverage is also known as retroactive coverage or prior acts coverage.
Occurrence Insurance - A type of policy in which the insured is covered for any incident that occurs (or occurred) while the policy is (or was) in force, regardless of when the incident is reported or when it becomes a claim. Occurrence insurance for medical liability coverage is rarely offered today because of the difficulty in projecting long-term claims costs under this type of policy.
Paid Losses - The amount paid in losses during a specified time period.
Policy - The contract between an insurance company and its insured. The policy defines what the company agrees to cover for what period of time and describes the obligations and responsibilities of the insured.
Policy Term - The length of time for which a policy is written.
Premium - The amount of money a policyholder pays for insurance protection. The amount is deemed necessary to pay current losses, to set aside reserves for anticipated losses, and to pay expenses and taxes necessary to operate the company during the time period for which the policies are in force. Premiums allow the company to generate a reasonable profit that reinforces future solvency and contributes to the company's growth. In the case of a reciprocal insurer, the premiums allow the company to offer insurance to new applicants without the need for additional capital contributions.
Premium Credits - A credit included in the premium computation that recognizes a reduction in hazard, which makes the account a better risk.
Premium-to-Surplus Ratio (P/S) - The ratio of net written premium to surplus. This ratio reflects a company's financial strength and future solvency. The ratio should not exceed 3:1.
Profit or Loss - Underwriting results are combined with investment income, expenses and taxes to calculate profit or loss. Actual profit results from underwriting profit plus investment income that exceeds losses, expenses, and taxes or from investment income that offsets the underwriting loss expenses and taxes. Actual loss results if the investment income does not offset the underwriting loss, expenses, and taxes. Actual losses must be offset by drawing on the company's surplus. Companies offering assessable policies can impose payments on their policyholders to amend the loss. (See also "Underwriting Results.")
Punitive Damages - Also called "Exemplary Damages." Optionally covered by professional liability insurers. A few states require that punitive damages be covered. Other state laws prohibit insurance companies from covering punitive damages because such damages are intended to punish the defendant for willful, fraudulent, oppressive, malicious, or otherwise outrageous behavior that should not be covered by insurance.
Rate Maturation - In the early period of coverage (typically the first four to seven years), claims made insurance rates rise annually until they are considered "mature." Increasing the premium is necessary because the longer the physician is insured, the greater the potential for a claim. That is due to the delay between incidents occurring and patients filing claims from those past incidents.
Reinsurance - An agreement between insurance companies under which one accepts all or part of the risk or loss of the other. Most primary companies insure only part of the risk on any given policy. The amount varies among carriers. The remainder of the policy limits is covered by reinsurance entities. The less primary risk that the company insures, the more premium it has to pay to the reinsurer to cover the remaining policy limits. In general, smaller companies are able to cover only a relatively small proportion of the liability limit. This results in large premium payments to reinsurers. Larger companies can cover a large proportion safely, thus reducing the payments they must cede to reinsurers, which indirectly reduces the cost of insurance to their policyholders.
Reserves - See "Claims Reserves."
Reserves-to-Surplus Ratio (R/S) - A ratio that measures a company's financial ability to pay claims if reserves prove to be inadequate. Such payments must come from the insurer's surplus. This ratio should not exceed 4:1.
Retroactive (Prior Acts) Coverage - Under a claims-made policy, this coverage provides insurance for claims arising from incidents that occurred while a previous claims-made policy or policies were in effect, but that were not reported until that policy (or the last in a succession of policies) was terminated. With retroactive coverage, the new policy covers such claims. With such coverage, purchase of tail coverage from the previous carrier is not necessary. (See also "Tail Coverage.")
Retrospective Rating - A formula of premium computation that reviews the previous loss experience and, after the policy year ends, adjusts the premium up or down based on the loss experience. Some plans provide a guaranteed maximum cost; some guarantee that the premium will not exceed the standard premiums otherwise applicable.
Reunderwriting - The process by which the company re-evaluates policyholders and, as necessary, imposes surcharges, deductibles, or non-renewal in cases where the policyholder's claims history or other experience presents a consistent pattern that creates an undue liability risk.
Risk Classifications - A classification based on the number and amount of losses that can be expected from a physician's specialty and procedures.
Risk Management - A systematic approach used to identify, evaluate, and reduce or eliminate the possibility of an unfavorable deviation from the expected outcome of medical treatment, and thus prevent the injury of patients due to negligence and the loss of financial assets resulting from such injury.
Standard Risk - A person, who, by the company's underwriting standards, is eligible for insurance without restrictions or surcharges.
Stop Loss Insurance - Insurance offered to medical groups and hospitals that hold managed care contracts. This insurance covers the policyholder in case its patients suffer catastrophic medical conditions beyond the standard and customary.
Substandard Risk – A person or entity that must pay higher premiums and is subject to special coverage restrictions based on underwriting standards.
Surplus - The amount by which a company's assets exceed its liabilities. A company's surplus allows it to take on risk and serves as a cushion in the event that the losses from that risk exceed the premiums intended to cover the risk. Stated another way, surplus can be used to make up for deficiencies in loss reserves that were set aside from earned premiums. Thus, surplus serves to provide strength and to maintain fiscal integrity in the face of adverse loss experience that was not actuarially anticipated.
Surplus Contributed and Surplus Earned - Surplus contributed is the amount of capital insureds must provide for a mutual company or reciprocal exchange during the early years of the company's operation. Surplus earned represents the earnings of the company after losses, expenses, and taxes. As the company stabilizes and grows in financial strength, earned surplus from profits is added to the contributed surplus, and the contributed surplus can be returned to the early policyholders.
Tail Coverage - This supplemental insurance covers incidents that occurred during the "active" period of a claims-made policy but are not brought as claims against an insured, nor reported to the insurer, by the time the claims-made policy has been terminated. Needed at various times including when leaving a claims-made carrier, upon the decision to change claims-made carriers, at the time of retirement, or due to death or total disability of the member. Tail coverage is purchased from an insured's previous claims-made carrier and is generally 125% to 250% of the prior year's premium.
Unallocated Loss Adjustment Expenses (ULAE) - Claims expenses of a general nature not directly attributable to specific claims. They include the salaries of claims personnel and the other costs of maintaining a claims department.
Underwriting Results - The profit or loss of the insurance company, computed by subtracting from earned premium those amounts paid out and reserved for losses and expenses. Any residual amount is called an underwriting profit. If those deductions exceed the earned premium this is called an underwriting loss. Underwriting results do not include investment income. (See also "Profit or Loss.")
Unearned Premium - That portion of a premium that is paid in advance of a coverage period. Insureds usually pay a calendar quarter or more in advance of an actual coverage period; the advance payment is initially unearned and starts to become earned on the first day of the coverage period and incrementally thereafter during the ensuing coverage period.
Vicarious Liability - Liability for the acts of someone else.