Basic Guide To Insurance Reciprocals
INTRODUCTION
In
today’s increasingly complex medical malpractice insurance environment, it
is more important than ever that physicians are well-informed as to the
choices they face in obtaining protection against, as well as mitigating,
potential malpractice loss. During the last major medical malpractice
crisis in the 1970’s, a number of alternative risk financing mechanisms
emerged to fill the gap left by the exit of commercial insurers from the
market - risk purchasing groups, joint underwriting associations,
reciprocals, etc. Over the years one of these mechanisms – the reciprocal
– grew in popularity such that today, reciprocals insure approximately 50%
of all office-based physicians and 36% of all practicing non-government
physicians. Since we have chosen the reciprocal as our operating model, we
have prepared this guide to answer some of the frequently asked questions
about what a reciprocal is, how it operates and why it may be the best
choice for your medical malpractice insurance needs.
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WHAT IS AN INSURANCE
RECIPROCAL?
A reciprocal is one of the
oldest forms of insurance, pre-dating stock and mutual insurance
companies. It is defined as "an unincorporated association of individuals,
who, through a common Attorney-in-Fact, exchange contracts of insurance."
Reciprocals have basic fundamental benefits including governance by
policyholders and sharing of profits with policyholders. In short, the
reciprocal is managed by an Attorney-in-Fact (an insurance professional)
and owned by its physician policyholders.
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HOW DOES A RECIPROCAL
OPERATE?
A reciprocal operates much
like any other insurance company. Each policyholder, called a subscriber,
is both an insurer and an insured in a reciprocal. The relationship is
created by the Subscriber's Agreement and Power of Attorney authorizing
the Attorney-in-Fact to do certain things on behalf of the Board of
Governors, such as collect premium, invest monies, pay claims and expenses
and all other day-to-day functions associated with operating an insurance
company. The Attorney-in-Fact is the sole service provider to the Board of
Governors. All subsidiary services are sub-contracted by the
Attorney-in-Fact, which provides immediate cost benefits and efficiency of
scale.
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HOW DOES A RECIPROCAL SHARE
PROFITS?
Insurance companies earn
profits from two sources. One is underwriting profits (loss) and the other
is investment income. Accumulated profits become the policyholder surplus
of the insurer and in the case of a reciprocal, these profits become the
property of the policyholders. Adequate policyholder surplus is required
to maintain a financially stable insurance company and to meet regulatory
requirements. To the extent the company maintains surplus levels needed to
meet internal and regulatory financial requirements, the Board of
Governors will make decisions about the return of profits directly to
policyholders.
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ARE POLICYHOLDERS SUBJECT
TO ASSESSMENTS IN ADDITION TO THEIR PREMIUM AND SURPLUS CONTRIBUTION?
No, unless the reciprocal has
chosen to be assessable. We plan to organize Conventus with sufficient
capital so that policyholders are not obligated to pay additional money
for past losses for which reserves are inadequate.
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WHY IS A RECIPROCAL THE
BEST CHOICE FOR MY MEDICAL MALPRACTICE INSURANCE NEEDS?
In short, because you own the
company! As a policyholder-owner you have direct input, through the
Attorney-in-Fact and Board of Governors, into the management and operation
of the reciprocal and you share in any profits that are realized. In a
stock insurance company management loyalty is to the shareholders, not the
policyholders. This can lead to operational, underwriting and investment
decisions that are not always in the best interests of policyholders.
Because reciprocals are not profit-oriented, they write insurance at cost
and base premiums on projected losses, as recommended by independent
actuaries. Any premium collected but not used to pay claims or reinforce
the Company's financial position is returned to the policyholders in the
form of dividends. Period.
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WHAT TYPES OF COVERAGE DOES
CONVENTUS PLAN TO OFFER?
Today, almost all professional
liability insurance coverage is provided by claims-made policies.
Conventus’ coverage will be written on this basis. Under a claims-made
policy, policyholders are covered for any incident that takes place -- and
that is reported -- to the carrier on or after the earliest date to
which a specific insurance policy applies, as long as the policy is still
in force. That date may be the effective (inception) date of the policy,
or it may be an earlier (retroactive) date, which results from the
purchase of retroactive (prior acts) coverage for doctors transferring
from one claims-made carrier to another. The advantage of claims-made
coverage is that premiums are based on actual past and current experience,
excluding anticipated future liability beyond the current year of
insurance. As a result, current policyholders do not pay premiums in
advance for future liability that is difficult to project.
Another advantage of
claims-made coverage is that physicians are able to increase liability
limits to reflect changes in the professional liability climate. Fifteen
or twenty years ago, an incident may have been adequately covered by a
$300,000 policy. Today, that same incident could result in a much larger
settlement, so policy limits of $1,000,000 or more may be necessary.
About Claims Made
Coverage
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WHAT IS A CLAIMS-MADE POLICY?
A claims-made policy is a form of insurance that provides coverage to an
insured only if the policy is in force on the date the claim is first
reported to the carrier and the incident causing the claim occurred after
the “retroactive date” on the policy, usually the first date claims-made
coverage was purchased from this insurance company. Conventus plans to
write only claims-made policies.
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WHAT IS AN OCCURRENCE POLICY?
An occurrence policy is a form of insurance that provides coverage for all
claims arising from medical incidents that occur while the policy is in
force, regardless of when the claim is ultimately reported. "Tail"
coverage is not needed upon cancellation.
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ARE THERE
BENEFITS TO A CLAIMS-MADE POLICY?
Yes. First, claims-made policies are generally less expensive than
occurrence policies because claims-made carriers can more accurately
predict the frequency and severity of claims that will be reported during
the current year. Occurrence carriers, on the other hand, must predict not
only how many claims will arise from services rendered this year and how
severe they'll be, but also when they'll be reported and whether inflation
will increase the cost of such claims. Second, claims-made policies are
step-rated, described further below, so there is an additional cost
savings during the first few years of claims-made coverage. Third,
occurrence policies are not always readily available; many carriers that
once offered them are now insolvent and many others have discontinued
offering occurrence policies. Finally, there is essentially no difference
between the kinds of injuries and damages that are covered by occurrence
and claims-made policies; both offer the same type of protection.
As long as you remain continuously insured under your claims-made policy,
you will be covered for new claims arising from services rendered since
your retroactive date. And, because of the availability of "tail"
coverage, you may continue to be insured for them long after you cancel
your policy -- just like you would under an occurrence policy.
A
claims-made policy also provides an increased level of protection to the
policyholder against inflation. This is because the policy limits
available for a loss are the limits in place when the claim is made. If a
claim today arises from an occurrence ten years ago, today’s claims made
policy limits are available to fund the loss. The same loss under an
occurrence policy would be covered by the limits purchased ten years ago.
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WHAT IS A RETROACTIVE DATE?
The retroactive date is the date on which coverage begins. Any claim that
arises from an incident occurring on or after the retroactive date and
reported while the policy is in force will be covered by the policy
(subject to the terms and conditions of your policy).
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IS
THE RETROACTIVE DATE THE DATE I START A CLAIMS-MADE POLICY?
Not always. If your policy includes prior acts coverage, the retroactive
date may be the date you joined your prior carrier (or the date of your
prior acts coverage with that carrier). If you were previously insured
under an occurrence policy, purchased "tail" coverage from your previous
carrier, or are new to practice, you may not need prior acts coverage or
your new carrier may not offer prior acts coverage. In that case, your
retroactive date will be the date you start a claims made policy.
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WHAT IS PRIOR ACTS COVERAGE?
Prior acts coverage, also referred to as "nose" coverage, is an extension
of coverage in which your new carrier agrees to insure you for new,
unreported claims arising from services you rendered while you were
insured with your previous claims-made carrier. By purchasing prior acts
coverage from your new carrier you eliminate the need to purchase an
extended reporting period endorsement from your previous carrier.
However, the new carrier will require you to submit any claims you are
already aware of to the prior carrier.
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WHAT IS
AN EXTENDED REPORTING PERIOD ENDORSEMENT ("TAIL")?
"Tail" coverage, or an extended reporting period endorsement, extends the
time period after cancellation during which you are allowed to report
claims that arise from medical incidents occurring while the policy was in
force. The carrier may offer a limited time period or extend to
perpetuity.
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HOW
DO I DECIDE WHETHER TO
PURCHASE
PRIOR ACTS
FROM MY NEW COMPANY OR A "TAIL" FROM MY PRESENT CARRIER?
If your prior coverage was claims-made, you have two options when you
leave your old company: you can purchase a "tail" to preserve the coverage
you had with that company or you can purchase prior acts coverage from
your new company.
Although, dollar for dollar, "tail" coverage and prior acts coverage
usually cost about the same over a period of time, you will generally
benefit by purchasing the prior acts coverage from your new carrier, when
available, to avoid the burden of the large, out-of-pocket expense of tail
coverage. (Note: most carriers in NJ sold policies with a five year
prepaid tail.)
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WHAT IS A STEP RATE?
As previously explained, claims-made policies insure you only if you're
insured both on the date the incident happened and on the date you report
it to your carrier. Usually, there is a delay between when the incident
happens and when it is ultimately discovered and reported. This delay
typically is at least one year, sometimes many years. For this reason, you
are at less risk of reporting a claim to a carrier during your early years
of coverage with that carrier, and this is why your premiums are much
lower during that time. During the first year, you are insured only for
those cases that occur and are reported during your first year of
coverage. Since the likelihood of your having such a claim is minimal,
your premium is at the lowest level during this first year. In the second
year, your exposure is greater and your premium higher because coverage is
for claims reported in the second year for incidents occurring during
either the first or second year. This progression of upward premium steps
continues until you reach the mature rate.
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WHAT IS MEANT BY A "MATURE"
RATE?
At some point in time, all potential claims arising from services rendered
during the first year of coverage should (theoretically) be reported
already. This point in time is referred to as the mature year. Because the
exposure levels off, premiums level off as well. Generally policies reach
maturity in five years. Note that premiums may increase or decrease during
any year due to overall loss experience or other factors.)
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DO
I ALWAYS START OUT AT A FIRST YEAR STEP THE FIRST YEAR I JOIN A CARRIER?
Not necessarily. Your step rate is determined by your retroactive date. If
you are beginning practice for the first time, transferring from an
occurrence policy, or purchasing a "tail" from your prior carrier, you
will join a new claims-made carrier at a first year step. However, if you
obtain prior acts coverage from your new carrier, your policy will be
rated at whatever step you would be at had you been insured with the new
carrier all along. If you have been insured under a claims-made policy for
more than four years and elect to purchase prior acts coverage from your
new company, you will most likely be rated at the "mature" (fifth year)
rate.
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WHAT
IS THE DIFFERENCE BETWEEN A RATE INCREASE AND A CLAIMS-MADE STEP INCREASE?
A rate increase is an increase in the base premium needed to offset
increases in the frequency or severity of loss trends. (Similarly,
decreases in the frequency or severity of loss trends may result in rate
decreases.) It is 's objective to maintain rate stability over the long
term and to implement increases only when necessary.
Claims-made step increases, as explained earlier, are increases in premium
due to the accumulation of exposures to loss over a given time period and
are a natural progression of the claims-made policy. Step increases are
based on the normal reporting patterns of claims and occur regardless of
the severity or frequency of claims. It is possible that you may
experience a rate increase or decrease in the same year that you
experience a step increase.
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WHAT IS MEANT BY "LIABILITY
LIMITS"?
Liability limits are the maximum dollar amount of indemnity an insurance
carrier will pay on your behalf. Limits are broken down into two
categories: the per claim limit and the aggregate limit. For each medical
incident, the carrier will pay for all damages up to a maximum of the
amount listed as your "per claim" limit. The "aggregate" limit applies to
all claims reported during the policy year or extended reporting period.
For example, if your limits are $1,000,000 per claim/$3,000,000 aggregate,
your carrier will pay up to $1,000,000 in settlement or award for each
professional liability claim or suit and up to $3,000,000 for all claims
reported that year.
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