Reinsurance - the Hidden Equation

Medical liability insurance. Property insurance. Life insurance. These insurance sectors may seem like apples and oranges, but they’re linked together in a crucial way. All depend on reinsurance – the proverbial security blanket for insurance companies.

Reinsurance is the financial safety net that shields insurance companies from crippling financial volatility. By assuming responsibility for predetermined “layers” of risk, reinsurance weaves a web across multiple industries, smoothing out the financial bumps and jolts by diversification.

The reinsurance world received the jolt of a lifetime on September 11, 2001 . Since then, reinsurance companies have been grappling with over $50 billion in claims stemming from those attacks. 9/11 also sent global financial markets into a tailspin, driving down markets and slashing investment income, on which reinsurance companies rely to pay claims.

As a result, reinsurance companies have lobbied for federal legislation to shield them from the financial fallout of future attacks. And, in an effort to recover from the enormous claims costs from the attacks, they have raised their rates significantly – even for sectors not directly affected by 9/11.

In a sector like medical liability insurance, reinsurance rates were already climbing, reflecting the frequency and severity of big-dollar jury verdict awards. Now, however, reinsurance rate increases make already expensive medical liability premiums even more costly.

Keeping reinsurance rates under control, therefore, is extremely important for physicians. What can an insurance company do to keep reinsurance rates stable?

When analyzing an insurance company, the first qualities reinsurers look for are financial stability and manageable risk. An insurance company must demonstrate its financial strength; that is done by collecting adequate premium, and wise investment. Companies that undercut
competitors by low-balling premiums are going to experience financial volatility, and their financial ratings will suffer as a result.

And, a company must be able to demonstrate that underwriting is done in a manner that avoids unnecessary risk. Reinsurers do this by reviewing a company’s claims history, especially the number of big-dollar verdict awards, which directly affects reinsurers.

After risk factors and histories are taken into account, reinsurers calculate an insurance company’s reinsurance rates for the upcoming policy year. That rate, in turn, must be factored into the premium rates paid by physicians. ISMIE’s strengths, however, help keep reinsurance
costs in check.

• ISMIE is renowned for prudent underwriting, which means the company can meet the needs of its physician policyholders for years down the road.
  
  
• ISMIE carefully manages its financial reserves – literally the ballast of the ship – so increased claims volatility can be addressed without rocking the boat.
  
  
• ISMIE aggressively defends cases it deems to be without merit. Defending physicians is expensive, but not defending physicians results in even bigger jury verdict awards.

In the eyes of the reinsurers, ISMIE is a well-managed company with some serious financial muscle. That was reflected in last year’s reinsurance negotiations, when ISMIE was able to retain its current rate for a second year. While it’s still unclear how next year’s negotiations will turn out, the reinsurance world has demonstrated that it approves of ISMIE’s long-term commitment to Illinois physicians.