It is unclear whether MDOs will survive in their current form, and whether they will become regulated.
It is highly likely that medical defence organisations (MDOs) will soon have to take a different approach to medical indemnity.
This is due to various factors, including the current legal environment, medical claims inflation (running at up to 10% per year), the ‘long-tail’ nature of medical indemnity and changes in the wider environment – such as the significant movement in the discount rate.
The changing environment may well encourage further insurance competition, which will be beneficial from a pricing perspective.
Perhaps the single biggest factor is the Department of Heath’s announcement that a new state-backed indemnity scheme for GPs will come into force from 1 April 2019. Membership fees paid by GPs make up a significant proportion of the membership funds for the MDOs – we estimate £450m out of a total of £800m in the UK.
The MDOs operate on a discretionary basis: they are membership organisations who decide each claim on its merits and have the option to provide cover or not. There is no policy wording, no contract and they are not regulated. In the past this has generally worked well for MDOs and the wider medical community.
However, given MDO’s prospective loss of GP income, questions have to be raised about their financial viability and how they can be expected to meet the losses from previous years. It is unclear whether they will survive in their current form, whether they will become regulated, what will happen to the liability ‘tail’, and how this will this affect indemnity fees for members.
Future of indemnity
Our view is that the changing environment will encourage further insurance competition, which will be beneficial from a pricing perspective. The insurance market is replete with capital and healthcare is seen as a sector with new opportunities. Against this background, private-sector providers, the DoH and NHSE, will have the opportunity to shape medical indemnity.
It is worth reflecting on the experience of other professions and how they have managed the change from mutual indemnity to full insurance coverage.
The legal profession is a case in point. In September 2000, the Solicitors’ Indemnity Fund (SIF) ceased to provide indemnity to solicitor practices in England and Wales. At that stage the SIF’s premium pot stood at £240m. The introduction of commercial insurance pushed the premium pot down to around £150m, although it recovered to around £180m the following year. Interestingly, 17 years after the mutual was folded the premium pot is at about the same level as it was in the last year of SIF (about £240m).
Insurance has effectively regulated the profession: firms that could not control their risk found that they could not purchase insurance and were forced into merger or to leave the sector. Firms have been encouraged to introduce new checks and controls and to monitor partners and associates more effectively. In the 17 years since SIF ceased to provide indemnity, the legal sector has grown by an average 4% per year, doubling in size, while the cost of risk has effectively halved. Improved governance, risk management and shared learning are the back story.
The solicitors’ profession and its regulator took the opportunity at the outset to define the insurance cover that should be accepted as a minimum. While they did not stipulate a policy wording, they did set out certain terms that would be mandatory. In a similar fashion, NHSPN, NHSE, DoH and other interested parties have the opportunity to shape the future of indemnity.
For more information, please contact Andrew Cornish on:
+44 (0)20 7933 2874