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How Does ISMIE Set Its Rates? |
Anyone who has ever had to pay insurance premiums sometimes wonders how these rates are set. Given the relative size of premiums physicians pay for professional liability insurance, ISMIE is sure
that from time to time our policyholders wonder the same about our rates. Be assured that it’s a bit more complicated than drawing numbers from a "black box." It is a complex process, highly structured, very methodical and, unless you’re really into numbers, probably boring to most. However, as we begin our rate-making process for the 2000-2001 policy year, we thought we’d try to shed a little light on this process.
First and foremost, because of ISMIE’s physician-first philosophy, unlike commercial insurance companies, ISMIE’s rate making process is founded on our belief of fairness to all policyholders. Our goal is to provide each and every policyholder with the fairest rate possible
while also ensuring ISMIE’s long-term financial stability. Two key ISMIE fairness factors are specialty and practice territory; each are looked at separately in order to support its own losses. This means that a family physician will not be paying for the losses of a neurosurgeon, and a physician in Jefferson County will not be paying the losses of a physician in Cook County, and vice-versa.
While rates and trends are continuously monitored, the formal rate making process for the next policy year (July 1st through June 30th of each year) begins each February. Using a team that includes not only our in-house actuary but two outside independent actuaries, we begin to review claims created and paid during a seven-year "window." This provides us with a perspective on trends in various specialties over time, to assure that each specialty supports its own losses.
To begin this complex rate making process, ISMIE calculates a "base" premium. This calculation is developed according to general industry practices, based primarily on the following:
Base physician. A "base" physician profile is developed, determined by specialty and practice territory of the majority of ISMIE policyholders.
Claims frequency. Based on actuarial assumptions, we project the number of claims that will be filed in the next year, as well as the projected disposition of those claims: closed with indemnity with related defense expense; closed with no indemnity or expense; or closed with only defense expense.
Claims severity. Historical losses are analyzed in order to actuarially determine indemnity and defense expenditures that will result from the expected claims.
From these, pure premium is calculated. This is done by adding indemnity payments to our expense payments and dividing that by the number of our policyholders. Following that, we apply what is known as the present value discount factor. This discounts the premium to take into account the interest income ISMIE earns on premium payments that we have taken in but not yet needed too pay out. We then factor in unallocated loss adjustment expense, which adjusts the premium to cover the personnel and office-related expenses necessary to handle and settle all pending claims, as well as the costs associated with "tail" exposure and a reserve for contingencies. This assures that when you need it, we will be there to serve you in the event of a future claim covered by your policy.
These factors and adjustments bring us to the "base" premium, at which every policyholder starts out, regardless of specialty, geographical location, and/or discounts.
Clearly, the aforementioned base physician profile does not match every physician policyholder. There are variable-value factors that further affect premium, such as higher or lower risk specialty (remember, specialties do not subsidize one another at ISMIE), a practice within a higher or lower risk geographic area, a higher limits policy, or being at a different "step" in their claims-made coverage. As a result, each of these variances are also considered through analysis of historical trends and actuarial assumptions, with the base premium adjusted accordingly.
There are some additional considerations that go into the final premium determination made for each ISMIE policyholder. For example, some of the aforementioned relativities, particularly claim frequency and severity, are reviewed annually to discern any risk associated with a particular specialty or territory. If these relativities increase in a given year, premium rates may have to increase to meet the demands of the claims received. If they decrease, then premium rates may decrease. Also, ISMIE offers a range of discount programs which affect premium. Some are actuarially based (such as discounts for new physicians because claims typically take several years to develop), while others are applied directly to premium (such as our loss-free discount). This results in the gross premium rates set for the next policy year.
We hope this simplified explanation has helped you to better understand how your ISMIE premium rates are set. The bottom-line of our rate setting process is to provide each policyholder in every specialty with the fairest premium possible and to assure the company’s long-term stability — so we’re there when you need us most.