STAND-ALONE TAIL BUSINESS MAY NOT BE A GOOD THING FOR EVERYONE

Much interest has been generated in the physicians’ med-mal space as stand-alone tail policies become increasingly available for individuals and groups.  At Ethos, we have placed many stand-alone tail policies over the years, often saving our retail customers’ physician clients tens of thousands of dollars.  Obviously, from the perspective of the physician, stand-alone tails can be a very good thing.  But for underwriters, stand-alone tail business may not be such a good thing.

A Simple Matter of Messy Accounting?

One of the disadvantages of writing any kind of insurance policy that allows for claims to be reported at any point in the future (as is done with the unlimited duration stand-alone tail policies in question) is that the carrier can never close the books on the year in which such a policy is written.  Since a claim can be reported against that policy at any time, its ledger is basically always open.  I reached out to a few of my carrier-side friends to find out how big of a deal this actually is.  I learned that while keeping any particular year open indefinitely is certainly an administrative annoyance, in and of itself it is little more than that.

But then any open year invariably carries some kind of incurred-but-not-reported (IBNR) reserve figure, right?  What about the negative financial impact associated with carrying this IBNR?  As it turns out, the actual IBNR figure for any particular year associated with stand-alone physicians’ medical malpractice tail policies is determined in large part by two things:

1. The actual prior experience of the individual risks in the applicable book of business.
2. The overall experience on the carrier’s entire physicians’ med-mal book.

Basically, unless a company writes a large amount of stand-alone tail in any given year and/or the overall experience on that line of coverage has not been good, the IBNR carried for any particular year is not likely to be meaningful.

So far it looks like stand-alone physicians’ medical malpractice tail policies may be a win for everyone.  But wait …

Bet Your Tail On It?

From the carrier’s perspective, one of the attractive aspects of an annual claims-made policy is they can always get off of a risk if experience takes a turn for the worse.  If a carrier writes a claims-made medical malpractice policy on a physician and the claim experience (or anything else about the overall risk profile for that matter) makes the risk undesirable, there are steps that can be taken to eliminate future exposure.  Non-renewal is a good example.  As long as tail isn’t purchased at non-renewal, which it rarely is, the carrier will soon have virtually zero exposure to claims arising from the policy they non-renewed.

But with unlimited stand-alone tails, there is no ability to get off of the risk; no room to maneuver.  You simply get what you get, and it stays with you forever.  Sound familiar?  That’s right – we’re talking about occurrence policies (which is a topic for another time).

Keep Your Tail from Getting Kicked

It gets worse.  Most standard physicians’ medical malpractice policies include a charge for unlimited tail that is anywhere from 200% – 250% of the last year’s annual premium.  In fact, this range is so common in the industry that I can’t help but suspect there is some valid actuarial basis for it.  But then the reason stand-alone tails have been so attractive to the individual physicians and groups that are buying them these days is the tail factor applied is as much as 40% less than that applied by most other carriers.  Remember too that these low tail factors are being applied to the depressed premiums we find here in the depths of the current soft market cycle.

So, the carriers writing unlimited stand-alone physicians’ med-mal tail policies these days are literally taking on, forever, one of the most volatile exposures in the world of professional liability.  In return, they’re charging as little as one-half the premium typically charged in a normal market for this exposure all without the benefit of premium generated in prior policy years.

While I certainly understand why physicians would want to purchase these stand-alone tail policies, I’m not sure this makes a lot of sense for the carriers.  If you have physician clients that might benefit from a stand-alone medical malpractice tail, I suggest you move quickly to put those options on the table.

Give Ethos a call.

Ethos Insights

1. Stand-alone medical malpractice tail policies can be a great option for individual physicians and groups.  So look into available options while the gettin’ is good.
2. At this point in the market cycle, stand-alone medical malpractice tails may not be a good bet for carriers.  As a result, they may not be broadly available for much longer.
3. To determine whether stand-alone tail policies are right for your individual and/or group physician clients, schedule a detailed, insightful discussion with the experts at Ethos Insurance Partners.