Hospitals and hospital groups should seek clarity from their malpractice insurers on the loading applied to premiums to account for claims inflation, according to Lloyd’s insurer Beazley.
Specialist insurer Beazley is advising that applying an across-the-board annual percentage loading to hospital professional liability (HPL) premiums to account for claims inflation could result in some hospitals being overcharged by a large margin.
Beazley insures many hospitals in the United States. The insurer says its claims database is one of the most extensive in existence, covering more than 455,000 claims made against more than 1,400 hospitals since 1998.
In the absence of such data, it is likely that an insurer would have to apply a single percentage loading for anticipated claims inflation when renewing coverage, no matter where the hospital is located, according to Beazley. The figure typically levied is six percent and Beazley said its research confirms that median inflation on claims of more than $500 in the period 2001 to 2010 was six percent.
However, this concealed a wide divergence from the median in some states, according to the insurer.
In Cook County, Illinois, for example, median claims over the period grew by 9.5 percent annually. That means an insurer charging local hospitals a burning cost premium (i.e. just sufficient to cover the actuarial expected cost of claims) and increasing that premium by only six percent annually, would be charging a sum that fell short of the expected cost of claims in Cook County by 25 percent a decade later.
In contrast, hospitals in Cuyahoga County, Ohio, saw the median cost of claims actually fall between 2001 and 2010, by five percent annually. A hypothetical insurer applying a standard six percent claims inflation loading to the premiums paid by hospitals in Cuyahoga County would be charging over 2.5 times the burning cost after a decade.
Across the state of Michigan, median claims inflation from 2001 to 2010 rose at only 2.5 percent, less than half the national rate. In this case, an insurer applying a six percent claims inflation loading over the period would be charging 35 percent more than the burning cost by the end of the period.
“As in all markets, prices move over time towards an equilibrium that reconciles supply with demand,” said Nat Cross, head of Beazley’s healthcare team. “But in hospital professional liability insurance the information held by a number of the suppliers of insurance is very imperfect and can lead to lasting and widespread price distortions.”
Cross said insurers do take “some account” of the impact of tort reform on anticipated claims inflation, as was the case in Cuyahoga County, Ohio, but there are “other, subtler differences” between states and – even more so – between individual hospitals that mean that claims inflation can vary quite widely from the median. “This puts new entrants to the insurance market at grave risk of adverse selection as they herd towards inadequately priced risks that better informed insurers avoid,” said Cross.
Cross argues that hospitals are frequently better off insuring with data-rich insurers for two reasons.
“If they are in a low claims inflation region, they are less likely to be penalized by a claims inflation loading that is based on a market-wide median. If they are in a high claims inflation region, they may benefit for a short while, but they will also run a far greater risk that losses will drive their insurer to pull out of writing HPL insurance altogether. When this happens, the claims that the insurer is still responsible for are unlikely to receive the care and service they require. Given that HPL insurance claims take an average of 2.2 years to be settled after the incident occurred, this is a real danger,” the Beazley executive said.
Specialist insurer Beazley has operations in Europe, the U.S., Asia and Australia. Beazley manages five Lloyd’s syndicates and, in 2010, underwrote gross premiums worldwide of $1,741.6 million.
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