 |
PHICO Founders Claims Storm Sinks Company |
2001 was a catastrophic year for insurance companies in many different industries, forcing even the largest carriers to reassess, and in some cases, alter their business practices. St. Paul's exit from the medical malpractice market nationwide is just a recent example of a large commercial carrier opting for radical surgery to staunch heavy financial bleeding.
Other insurance companies, however, bled to death from self-inflicted wounds. Many insurers adopted a growth-at-all-costs mentality in the 1990s, aggressively expanding operations without adequately assessing the risks involved. Combine that with unrealistic underwriting practices, inadequate financial reserves, and a little "fuzzy" bookkeeping and you have a disaster waiting to happen.
PHICO combined all the above and it cost them dearly. Back in 1996, PHICO's management vowed to grow the company (then the #17 med mal insurer in the US) into a top-ten contender. After obtaining insurance licenses for all 50 states, PHICO began aggressively grabbing market share by offering unrealistically discounted premiums. For a few years, PHICO was able to offset underwriting losses through stock market gains, and everything seemed OK.
By the end of 1999, however, a nationwide upsurge in claims frequency and severity caused the PHICO ship to list badly. One auditing firm, sensing an imminent avalanche of claims, urgently recommended that PHICO drastically increase its reserve levels up to one half of the company's value. Still, PHICO executives paid stock dividends to the PHICO's parent company (the PHICO Holding Company, now bankrupt) using money from PHICO's reserve fund, until the Pennsylvania Department of Insurance ordered them to stop in April 2000.
As the losses worsened, PHICO began to mislead policyholders and the Department of Insurance about its losses. For example, by selectively assigning reserves to only the most culpable defendant in multiple-defendant cases, PHICO was able to reduce the magnitude of its losses, on paper, at least, throughout 1999-2000.
By the time the Pennsylvania Department of Insurance put PHICO in rehabilitation in August 2001, reserves had dwindled to $6.8 million - down from $127 million in December 2000. By early 2002, PHICO's reserve deficit hit $250 million, leading the Pennsylvania Insurance Commissioner to liquidate the company in February 2002.
PHICO's leaders haven't emerging unscathed from this debacle: the Pennsylvania State Insurance Commissioner is suing fifteen of PHICO's former officers and directors for negligence and breach of fiduciary duty. Damages could run in the tens of millions
of dollars. Now, other insurance companies operating in Pennsylvania will have to pay for PHICO's reserve deficit through a guarantee fund.
Holding PHICO to the fire, however, is cold comfort for physicians left in the lurch. Former policyholders are now scrambling for insurance, and retired policyholders have lost their "tail" coverage. Pennsylvania's catastrophic loss fund covers verdicts and settlements over $250,000, but former PHICO insureds could be forced to pay that "minimum" from personal assets if they're sued.
PHICO's demise is a cautionary tale for our times, but other companies are heading down the same unfortunate path right now, reeling from aggressive growth strategies pursued during the last decade. There's good reason to be concerned with what's going on in the medical malpractice insurance market, but ISMIE policyholders will never have to wonder what happened to their coverage. ISMIE is the only carrier that's been in continuous operation in Illinois for over 25 years.
During the heady 1990's, when expansion was the rule of the day, ISMIE held its ground, refusing to resort to unrealistic underwriting principles to gain market share. As a result, while many of our competitors suffer from "growing pains" and ratings downgrades, ISMIE has actually retained its "Excellent" rating from A.M. Best. As longtime ISMIE policyholders know, the toughest kid on the block isn't necessarily the biggest.