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How Does ISMIE Determine Its Rates? |
Since ISMIE policyholders have experienced a base rate increase 15
percent this year, you may be wondering how ISMIE determines its
rates. ISMIE’s premium rates are neither arbitrary nor simply a reflection
of what the market will bear; rather, our rate determining process
is based on complex actuarial analysis of the company’s three - year loss history and claims projections for the upcoming policy year.
Anyone who has studied economics, invested in the stock market, or
spun a roulette wheel, has attained a basic understanding of predictability and risk. ISMIE’s underwriters and claims analysts are
skilled at determining risk – which individual policyholders and specialties are good risks, which claims are defensible, and above all, the projected losses the company will incur in a year’s period.
ISMIE’s formal rate–setting process begins in February in preparation for the next policy year
(July 1–June 30). Two teams of outside actuaries review claims along with ISMIE’s in-house
actuary for each specialty by Illinois county that have been filed over the past three years.
These analyses provide a perspective on trends over time while ensuring that each group supports its own losses. A family physician in Jefferson County, for example, does not subsidize the losses of a physician in Cook County nor vice versa. ISMIE’s actuaries examine trends in claims severity, frequency, and defense costs to ensure that total indemnity, defense and DDA (Death, Disability and Retirement) reserves remain adequate to meet the company’s fiscal responsibilities.
Actuaries set a new “base” rate each year, representing the specialty having the greatest number of policyholders in Illinois (currently a family physician in Cook County). That physician profile then becomes the benchmark from which to compare the relative risks faced by all other
Illinois physicians. By using a Cook County family physician as the basis of “one,” other specialties can be assigned one of twenty numerical values that accurately reflect their risk of being sued. Since a neurosurgeon in Chicago always faces a high probability of being sued, he or she will be assigned a higher number reflecting that risk, while an allergist in Kankakee, representing a much lower risk, will receive a lower number and pay significantly less premium.
When determining a given specialty’s premium, ISMIE considers the loss history of that specialty by county. Clearly, some specialties suffer more than others when it comes to huge verdict awards. In 2002, for example, ISMIE’s OB/GYNs withstood the highest losses – almost $34 million. Other specialties associated with high risk include family practice, general surgery, radiology, and orthopedic surgery.
High–risk specialties can improve their relative risk factors through risk management, technology, or a new standard of care based on a combination of the two. For example, premium rates for anesthesiologists dropped dramatically after the introduction and acceptance of the finger pulse oximeter.
In addition to creating rate classes by specialty, there are distinctly different risks for practicing medicine in various Illinois counties. ISMIE’s actuaries divide Illinois into six noncontiguous territories sharing similar risk factors. Here, judicial climate plays an influential role in territorial risk factors. Rates are higher in Cook, Madison and St. Clair counties, because they are known for physician–unfriendly judges and juries. All of Illinois’ counties and territories are reviewed annually for loss activities, and a trend, either higher or lower, can change a territory’s rating.
In a final step to ensure consistency, all findings from the actuarial teams a rereviewed by an ISMIE physician committee, and then by the ISMIE Board, which has the final say in determining the figures that will be used for the upcoming policy year.
Ultimately, an ISMIE policyholder can fall into 20 classes and six territories (for a total of 120 underwriting factors), thus ensuring that the physician’s premium accurately reflects his or her practice situation. ISMIE’s actuarial process groups physicians with similar histories and
situations to allow them to fairly share risk with others in like circumstances. By fairly determining risk, ISMIE represents the needs of all policyholders while maintaining the financial stability of the company – when it matters most.