Pricing indemnity is a difficult task owing to the legal environment, medical claims inflation, discount rate and the prospect of a state-backed indemnity scheme.
There are myriad factors affecting the provision of medical indemnity. These include the current legal environment, medical claims inflation, the ‘long-tail’ nature of medical indemnity and changes in the wider environment – such as the significant movement in the discount rate. Then there’s the Department of Heath’s announcement that a new state-backed indemnity scheme for General Practitioners would come into force on 1 April 2019.
Medical claims inflation is currently running at up to 10% per year.
Such factors make pricing indemnity a difficult task, particularly when considering individual practitioners who traditionally have been indemnified by the Medical Defence Organisations (MDOs), who are hampered by the basis on which they offer indemnity – ie, ‘occurrence’. (An MDO pays claims for coverage given in the year the incident that led to the claim takes place as opposed to the year the claim is made. This makes pricing the risk difficult as there can be several years between an incident occurring and a claim being made.)
Let’s look at each of these factors in turn.
1. The current legal environment
At present the courts make awards based on care in the private sector, as opposed to the NHS; this has significant cost implications. In addition, the contingent fees charged by claimant law firms put a heavy loading on costs, meaning that relatively small claims can incur significant costs. Both the MDOs and the insurance market are actively lobbying for judicial review.
2. Medical claims inflation
This is currently running at up to 10% per year. Advances in medicine and the availability of specialist high-cost treatment means that the restorative treatment required for an incident of patient harm can cost significantly more in the year it is required than the year the harm occurred. This has to be built into the pricing of risk and is a fundamental problem when pricing ‘occurrence’ indemnity.
3. Changes in the wider environment – the discount rate
We saw the first review of the discount rate in 2017 (the mechanism through which the courts can measure the future value of monetary awards for bodily injury claims). The rate moved from 2.5% to -0.75%, a 3.25% shift that meant that the MDOs and insurers had to review and adjust their existing and future reserves for claims. The discount rate is currently under review and it is expected that the rate will be reset at between 0% and 1%. In any event the adjustment that the MDOs have had to make has put them in a challenging financial position.
4. Changes in the indemnity environment
The Department of Heath announced a new state-backed indemnity scheme for GPs that 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 loss of this revenue will challenge the financial position of MDOs.
For more information, please contact Andrew Cornish on:
+44 (0)20 7933 2874