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Insight: Setting CRICO Premiums — A Recipe for Success

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Insight: Setting CRICO Premiums — A Recipe for Success

By Michael C. Campbell, CRICO

Related to: Emergency Medicine, Primary Care, Obstetrics, Other Specialties, Surgery

The adage from Otto von Bismarck: “Laws are like sausages. It's better not to see them being made,” is not quite the case with determining the correct amount of medical malpractice premium to collect. But there are a lot of ingredients that go into the process.

The goal in rate setting is to charge enough premium to cover the cost of claims. Seems simple enough. So why not just look at the dollar amount of claims paid this year, collect that amount adjusted for inflation for the next year, and be done with it? Unfortunately, it’s not that simple. We joke that an actuary is somebody who takes a cheap guess and calls it an expensive opinion, but, in fact, that leap from guess to informed opinion takes quite a bit of analysis and complex assumptions and estimates to get the right amount of premium. Some of the inputs include loss trends, claims payment patterns, investment and interest rate assumptions, and the costs of running the business.

How it’s Made

Each year the premium rate setting process begins with an actuary analyzing CRICO’s historical loss data. The first goal is to estimate the total loss costs for the upcoming policy year—done by looking to the distant past (how losses have developed in past policy years) and recent past (number and cost of recent claims).

Claims are measured by frequency (cases per 100 physician coverage years). In recent years, for CRICO, this had been declining by about two percent per year. Cost is measured by severity (average incurred loss per claim). Severity has been increasing by more than seven percent per year. Together, these trends provide a total loss cost trend (currently 5.5 percent for CRICO). Combining this trend with the development of past years’ losses, the actuary estimates an average loss cost per physician. This is then multiplied by the projected number of physicians to establish the total premium needed.

We’re done, right?

Not quite. Because CRICO’s cases take years to close, the losses for the upcoming policy year cannot be truly known for years (close to a decade). So we must discount the projected loss cost—under the assumption that investment income on the premium we collect will make up the difference over the years.

Is that it?

No way; we at CRICO/RMF do not work for free. The premium we charge our shareholders also has to cover the cost of running our business. The CRICO/RMF fee, the cost of buying reinsurance, and the cost of running the Cayman and Vermont insurance companies, all add to the premium we need to collect.

Finally, we overlay capital adequacy analysis in our financial planning. That is, in addition to making sure our costs are covered, we also aim to collect enough premium to ensure that CRICO maintains enough surplus to remain a financially healthy company.

At the specialty level, rates are really a reflection of actual loss experience over time. For example, if a specialty has twice the average loss per physician than the CRICO average, one should expect that specialty’s premium to cost twice as much. So while CRICO may be collecting roughly $11,000 per physician to cover the loss cost of the upcoming policy year, actual premiums paid vary widely by specialty.

Membership Has its Privileges—Benefits of CRICO Coverage

So what do CRICO-insured physicians get for the significant premium they pay? Better-than-average coverage for lower-than-average cost. CRICO policies offer $5 million/$10 million limits (i.e., CRICO will pay $5 million on any claim and up to $10 million in any policy year) per insured clinician—including nurses. Nationally, physicians typically carry $1 million/$3 million limits.

Moreover, CRICO specialty rates are lower than most. The most relevant comparison is to ProMutual, the commercial malpractice insurer in the same Massachusetts market. On average, CRICO specialty rates are 35 percent lower than ProMutual’s. Outside Massachusetts, the difference is even greater, especially when compared to “med-mal crisis” states such as Florida, New York, and New Jersey.

Clearly, calculating premium needed and setting specialty rates is complicated, but the simple truth is that—by virtue of excellent practice of medicine by our members, expert claims handling, innovative loss prevention efforts, and sound financial management—the premium fee we need to collect is lower than it otherwise might be. And that’s some good sausage. 



October 1, 2008
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