Insurance Topics 

By Richard “Rick” Mortimer, Jr.

SHOULD YOU SAY “YES SIR” OR “NO SIR”?

No, I am not talking about being polite to your insurance broker or underwriter! I’m talking about a way you can mitigate increasing costs associated with protecting your group practice, hospital, clinic or laboratory against the financial consequences of professional negligence, or more precisely, medical malpractice insurance cost’s.

Self Insured Retention plans (SIRs) can be effective weapons in the professional administrator’s arsenal deployed to control, or at least minimize, the costs and risks inherent in providing health care in today’s litigious environment. To be sure an SIR is right for you, start by seeking the advice of an insurance broker or consultant experienced in risk management techniques.

The following will help you decide whether you want to say “yes SIR” or “no SIR.”

  • Self Insured Retention plans are different than deductibles.

Many underwriters force deductibles upon their policyholders to distance themselves from payment of small losses, minimize the impact of claims frequency or compensate for premium inadequacy. Unless a policyholder asks for a deductible, insurers seldom offer a reduction in premium for their use.

Malpractice insurance deductibles seldom exceed $50,000 whereas Self Insurance Retentions generally begin at $100,000.

  • Make certain the “cost/benefit” ratio weighs in your favor.

Underwriters will generally offer a substantial reduction in your malpractice insurance premium if you will agree to assume the first $100,000 or more, of each malpractice loss you sustain. The amount of premium reduction depends upon how much premium the insurer wants to provide for full indemnity protection, less the credit for the client taking the SIR risk. If you have a solid risk management plan and loss prevention and minimization program in place, AND have good reason to believe payment of your claims plus the SIR premium savings will, over a period of not less than five years, result in lower overall charge in operating expenses, yes should be your answer.

  • Make certain you have the financial resources to pay at least three times the amount of the proposed retention without jeopardizing the solvency of your facility.

Although it typically can take as many as 18 to 36 months to settle malpractice claims, there is an immediate need to set aside funds to cover the costs of defense and prepare for payment in the event of an unfavorable result. If your current profits margin is slim and you are coping with cash flow strain, you may be better off paying higher insurance premiums rather than coping with the uncertainties of funding an SIR.

Carefully assess the additional costs

You should only consider a self insured retention if you have good cause to believe the odds of your having to pay claims are better then those bet by the insurance carrier. A structured and enforceable risk management program is the only way to tip the odds in your favor. Most insurance companies and specialty brokers offer free risk management advice. It’s the implementation and enforcement of their recommendations which can increase your cost.

SIR proposals

Additional information and details of a well planned SIR program are essential for your review before a plan can be properly evaluated. Most brokers and risk management consultants will produce these facts including a review of past claims experience, a five year cost estimate, special features, i.e. claims handling, actuarial reviews, risk management support, and cash flow charts comparing first dollar premiums versus SIR plans over a five year projection.

Consider “Yes SIR” if you:

  • Are willing to make a long-term commitment to one insurance company
  • Can comply with all reasonable risk management recommendation
  • Have manageable and verifiable loss experience
  • Can afford to take the risk
  • Watch for my next Insurance Topic and some tips on retrospective rating plans.

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Richard “Rick” Mortimer, Jr. is the President of the Brea California division of Brown & Brown, Inc., HCP/HealthCare Professionals’ Insurance Services, providing specialty medical malpractice insurance and risk finance consulting for over 25 years. You can reach them at www.HCPinsurance.com