What will be the cost of malpractice insurance?
Insurance rates are based on three elements:
1. Losses. Carriers normally allow 5% to 10% for claims payouts, or losses.
2. Reinsurance. The cost of reinsurance, where the primary carrier passes some of the risk of their policies to other insurance companies, called reinsurers.
3. Investment income. Carriers normally invest their cash reserves in stocks, bonds and other income producing products to increase their own net profit or return for the benefit of shareholders.
A lawyer may conduct a personal cost-benefit analysis to determine if purchasing a malpractice insurance policy is the right path to take.
For the lawyer:
Cost: How much is the insurance premium? What is the nature of the coverage? Is it a wasting policy, meaning that defense costs reduce the face value of the policy? Questions such as these determine the cost for the lawyer.
Benefit: On the benefit side of the equation is what protection is provided? Will the face value of the policy assure that the personal assets of the lawyer will not be subject to claim? Does the lawyer deal with clients, such as alleged criminals, who statistically are unlikely to bring a malpractice claim? Does the lawyer have valuable assets to protect, such as a house, stocks and bonds, etc. What would be the financial impact of a judgment against the lawyer?
One of the major elements to consider, of course, is the cost of the policy. I’m told that in the current market place, at least in California, the market is “softening.” In other words, there are more companies entering the market, now almost 30, and thus the competition for market share is causing the premiums to be lowered. How long will this last? That is impossible to say. But, one estimate is that the next eighteen months will witness increasing premium rates. Why?
For the carrier:
With the current financial crises unfolding, even if losses remain the same or go lower, and the cost of reinsurance remains stable (an unlikely event given the financial problems of the world), the investment income earned by the carriers is likely to plummet. When that happens in the next few months (if it hasn’t already), the carriers will have to increase their premiums to make up the shortfall in their portfolios.
Thus, no decision about availability of insurance should be made based on the short term, the current market. Decisions must be made on the basis of the longer term availability of insurance.
Tags: Cash Flow - Finances, Management