Medical malpractice insurance is a must-have for healthcare providers in any specialty. 75% of physicians in low-risk specialties and 99% in high-risk specialties will face a medical malpractice claim by age 65. Medical malpractice insurance can help lessen the financial costs of lawsuits, but only if the insurance carrier is solvent enough to cover their customers.
Insurance companies typically generate revenue through insurance policies for their customers. Collecting insurance premiums and any returns from investment activity can also be counted as revenue.
Like most businesses, carriers have daily operating costs. Unlike many companies, they also pay out insurance claims. These figures can cut into their profit margins. This profit margin can help determine their business performance and whether they can reasonably provide sufficient coverage.
A financially healthy carrier can pay out damages better than an unstable one. Inadequate protection from liability can cause significant financial harm, and before choosing a medical malpractice insurance carrier, a provider should research how solvent the insurer is.
Three factors that should be considered when determining the financial strength of a medical malpractice insurance carrier are:
- Net income
- Combined ratio
- Policyholder surplus
1. Financial Strength Factor: Net Income
A carrier’s net income is its net earnings after the costs of goods sold. Net income is calculated by subtracting total expenses from total revenues. If the number is positive, the carrier is making a profit. If the number is negative, the carrier is suffering a monetary loss.
Net income equals the total revenue minus the total expenses. Here is a very simplified example:
- A carrier’s total revenue is $10,000,000.
- Their total expenses are ($7,500,000).
- The carrier’s net income is $2,500,000, indicating the carrier has made a profit.
Looking at another simple example shows a monetary loss:
- A carrier’s total revenue is $5,000,000.
- Their expenses equal ($8,500,000).
- The carrier’s net income is -$2,500,000, which means the carrier has experienced a monetary loss and is not profitable for the year.
A carrier’s earnings can originate from premiums paid and any investments the carrier has made. Expenses include administrative costs, operating fees, taxes, advertising and marketing services, supplies, and payouts. Calculating a carrier’s net income is important because it shows a profit if one exists or a loss when considering all the aspects of the company.
2. Financial Strength Factor: Combined Ratio
A combined ratio is the measure insurance carriers use to help determine their profitability. The ratio is calculated by combining a carrier’s losses and expenses and dividing that amount by the total collected premiums.
A combined ratio resting below 100% indicates that the carrier is making an underwriting profit. A combined ratio resting above 100% means that the carrier is paying more money in claims than it receives from premiums. If the combined ratio is above 100%, a carrier can still be profitable because the ratio does not include income from investments.
A combined ratio equals total losses and expenses, divided by collected premiums, for example:
- A carrier must pay out $2,000,000 in claims and claim-related expenses. They also have $7,500,000 in operating costs. These two amounts add up to $9,500,000.
- The carrier has collected $10,000,000 in premiums.
- $9,500,000 divided by $10,000,000 equals 0.95 or 95%, which means the carrier is making an underwriting profit.
This example of a combined ratio shows a carrier at a loss for the year:
- A carrier’s claim and expense total is $25,000,000.
- They have collected $9,000,000 in policy premiums.
- $25,000,000 divided by $9,000,000 is approximately 2.78, or 278%, which means the carrier pays out more than it receives in premiums.
A combined ratio shouldn’t be confused with a loss ratio, a similar measurement. A loss ratio is calculated by dividing the total incurred losses by collected premiums. A loss ratio does not take expenses into account. While a loss ratio can measure an insurance carrier’s profitability, it should not be compared to a combined ratio when evaluating a carrier.
A combined ratio can provide an all-inclusive measure of a carrier’s profitability that does not include any income generated through investments. This figure can show how efficiently a carrier runs its business. If a carrier can manage their money well and has an acceptable combined ratio, they might be able to afford any payout that might stem from medical malpractice lawsuits.
3. Financial Strength Factor: Policyholder Surplus
Policyholder surplus is an insurance carrier’s net worth. Policyholder surplus is calculated by subtracting a carrier’s assets and liabilities. This figure can give a carrier an additional source of funds if the carrier must unexpectedly pay more claims than usual.
A carrier’s policyholder surplus equals the carrier’s assets minus its liabilities; for example:
- A carrier’s assets total $22,500,000.
- Their liabilities total ($9,500,000).
- Their surplus is $13,000,000.
The inverse can be seen in the following example:
- A carrier’s assets total $5,000,000.
- Their liabilities total ($15,000,000).
- The carrier has no surplus and might be unable to manage a sudden increase of claims they must pay.
Since malpractice lawsuits may take years to be resolved, a carrier should be stable enough to support their customers should a payout be necessary. Carriers with a large surplus can adapt better to any downturns in business. They can increase their longevity, which can be great for their customers who might need them in the future. Researching an insurance carrier’s financial strength throughout your business relationship would be best.
A company’s fortunes can change quickly, from profitable one day to a significant downturn the next. Knowing when a company cannot cover its policies can help providers decide whether to subscribe to that carrier.
It is worth noting that checking only one year of a carrier’s financial figures cannot indicate how well or poorly the carrier is doing. Looking over several years of financial data can offer a more detailed idea of the carrier’s finances. A carrier might have a bad year.
Healthcare providers might want to keep up with their medical malpractice carrier’s financial performance to ensure sufficient coverage. Providers might want to check a carrier’s financial health when it is time to renew a policy. Providers shouldn’t assume their medical malpractice insurer will be there when they need them. By being proactive and evaluating a carrier’s finances in real-time, healthcare providers can help protect their assets if they face a medical malpractice lawsuit.
Read more about good questions to ask when purchasing a medical malpractice policy by reading the article Top 5 Questions To Ask When Purchasing A Medical Malpractice Policy.
More information about Fifth Avenue Agency
Fifth Avenue Agency specializes in MPLI and medical malpractice insurance, serving 1000s of providers nationwide. Fifth Avenue Agency is part of the Fifth Avenue Healthcare Services family. Sister companies include 5ACVO (credentialing and primary source verification specialists) and Primoris Credentialing Network (credentialing and provider enrollment specialists with 54+ health plan and network provider enrollment options).
Fifth Avenue Agency initially published this article here. For information on Fifth Avenue Agency, please visit FifthAvenueAgency.com or Contact Us.
