A carrier’s annual report and other financial statements should help you evaluate a company’s net written premium, loss reserves, and surplus, as explained below.

Net written premium

Net written premium is the premium retained by a company after it has paid for reinsurance. This item is usually shown on the annual report’s statement of income. Since medical liability carriers typically pay out 100 percent or more of premium in the form of losses and expenses, net written premium can be compared to surplus to make sure the company is not becoming over- leveraged by writing too much business for its capital base (surplus) to support.

Loss reserves

Loss reserves are the amount set aside to pay for unpaid claims, both reported and unreported. This amount is an estimated liability—the company’s best estimate of what it will pay for claims, including indemnity payments to injured parties plus all costs associated with litigation.

Loss reserves are necessary because medical malpractice insurers do not know actual claims costs until after claims are paid—sometimes years after loss reserves are set aside. Reserves are key to the evaluation of an insurer’s financial condition because they signal whether the company will be around to honor its financial obligation to claimants.

Surplus

Surplus is an important financial element because it is the amount by which a company’s assets exceed its liabilities—and is actually the company’s working capital. Surplus is required by regulators before companies are allowed to accept premium and must meet minimum legal standards. However, prospective policyholders will want their company’s surplus to exceed minimum standards. Surplus is necessary to allow a company to grow and cover unanticipated loss costs. Thus, a secure company accumulates substantial surplus to assume risk and to pay for unanticipated losses, thereby assuring its ability to maintain its strength and fiscal integrity.

Financial and operating strength

Financial and operating strength are indicated by the insurer’s ratings from insurance industry analysts such as A.M. Best Company or Fitch Ratings. A company’s rating is an assessment of its ability to pay future claims, but it is also based on the profitability and margins achieved. Thus, higher-rated companies are financially sound and profitable. From the policyholder’s point of view, the financial security of an insurance company is critical.

On the other hand, individual policyholders may be less concerned with the size of a company’s profits. Company size is a critical component of financial security that is not directly reflected in these ratings. For example, a small company could end up with equal or even higher ratings than a company with hundreds of millions of dollars in surplus—because of higher profit margins. Yet, the smaller company may also be unable to withstand large-scale losses. It is important that your company have a secure rating. Beyond that, context is extremely important in interpreting individual ratings.

Underwriting standards

Well-managed carriers are staffed by experienced underwriters who have thorough knowledge of the medical procedures necessary to properly evaluate doctors’ applications for coverage. A financially stable carrier exercises a firm hand in refusing coverage for doctors who are unqualified or whose practices might result in indefensible claims. Such claims would imperil the assets of the company and, in the case of a doctor-owned company, the security of the insureds.

Claims management

Few things in a doctor’s professional life generate more stress and disruption than an allegation of medical malpractice. Effective claims management starts with the prompt review of a claim by an experienced claims specialist. Select the insurance provider that offers the strongest defense and provides you with individual support to help alleviate the stress and anxiety that accompany a malpractice claim. Policyholders should be vigorously defended against nonmeritorious claims. In those instances where there is negligence, the company should attempt to settle quickly and fairly with the physician’s consent. Where permitted, a guaranteed consent-to-settle provision should be included in the policy. Such a provision requires that the carrier must obtain the physician’s written consent in order to settle any claim. This gives the physician control over how claims are settled. An insurance company should also provide its policyholders with a written explanation of how to proceed in the event of a claim and provide support and guidance to a doctor who experiences a claim.

Patient safety and risk management

A company’s risk management and claims prevention programs should be an integral part of the service provided by a medical liability insurer. Select an insurer that offers the tools and resources you need to help reduce risk and keep your practice safe. Your coverage should include access to CMEs, live seminars, webinars, and on-demand courses; online disclosure resources and health literacy tools; as well as personalized risk management services and patient safety programs—all provided by qualified, experienced clinical risk managers. Make sure your insurer works to identify potential sources of injury and enhance patient safety, and that it takes a data-driven, collaborative approach to helping you reduce adverse events while increasing patient satisfaction.

Actuarial principles

Sound actuarial principles acknowledge probability and statistics, contingencies, loss distribution, risk theory, and forecasting, among other factors. To ensure that premiums are neither insufficient nor excessive, they should be reviewed on an ongoing basis, taking into account the constantly changing nature of the liability environment.

The guidelines suggested here are not rules, do not constitute legal advice, and do not ensure a successful outcome. The ultimate decision regarding the appropriateness of any treatment must be made by each healthcare provider in light of all circumstances prevailing in the individual situation and in accordance with the laws of the jurisdiction in which the care is rendered.