Liability Review
Q & A
Arizona Department of Insurance talks about medical liability insurance
Q: What is the overall view of the DOI regarding medical liability insurers?
A: Generally, Arizona is in better shape than is the rest of the nation because Arizona has the Mutual Insurance Company of Arizona ("MICA"), the one medical malpractice liability ("MM") insurer that: (1) is domesticated in and has its entire administrative operation in this state; (2) is committed to doing business in this state; (3) writes almost all of its business in this state; (4) is a monoline insurer (i.e., it only writes medical malpractice liability insurance); (5) is actively working with doctors and other interested parties in Arizona to find solutions that will mitigate or solve the problem; and (6) is financially solvent and voluntarily takes on the risks of many physicians in Arizona who would not otherwise have MM insurance.
Q: Can you explain the difference between admitted carriers and non-admitted carriers?
A: An "admitted carrier or insurer" is one that has a certificate of authority (i.e., a license) to transact the type of insurance business designated on its certificate of authority in a given state. It must conform to stringent capital and surplus and other state law financial requirements and must file rates and forms in accordance with applicable law. Admitted insurers pay assessments to the state's guaranty funds and their policyholders' claims are covered to the extent that they do not exceed the statutory maximum (currently in Arizona the statutory maximum is $100,000 per covered claim) by the state's guaranty fund in the event of their insolvency.
In contrast, "non-admitted insurers," commonly referred to as "surplus lines insurers" ("SL") (1) do not have a certificate of authority; (2) do not have to file their rates and forms with the Arizona Department of Insurance ("ADOI"); (3) are not subject to many of Arizona's insurance laws; and (4) the state's guaranty fund does not cover their claims if they become insolvent. For these reasons, the SL market is often characterized as a "buyer beware" market. An SL policy must contain a disclosure notice stating that the "policy is issued by an insurer that does not possess a certificate of authority . . . [and that if the insurer that issued the] policy becomes insolvent, insureds or claimants will not be eligible for insurance guaranty fund protection . . ." As in many other states, Arizona law provides only minimal financial requirements in order for SL insurers to qualify for the ADOI's List of Qualified Surplus Lines Insurers ("LQSLI") permitted to write surplus lines insurance in Arizona.
SL insurance includes MM, but also includes any type of insurance that an applicant cannot obtain in the admitted insurance market. An applicant with three coverage denials from three admitted insurers is eligible for SL insurance; however, because some insurance lines are so difficult to obtain in the admitted market, the statute permits ADOI to designate those lines on a Recognized Surplus Lines List ("RSLL"). If the line of insurance appears on the RSLL (MM is currently on the RSLL), the applicant may go immediately to an SL insurer without the three coverage denials from three admitted insurers.
See ADOI's web site (www.id.state.az.us) for further information on SL insurance, and LQSLI and RSLL information.
Q: Does the ADOI have control over the rates set by insurers, or underwriting decisions?
A: An explanation of the legislative history on MM rates is perhaps the best way to illustrate the ADOI's authority in this regard. Prior to 1996, Title 20, Chapter 2, Article 4's "File and Use" rating system governed MM rates. The "File and Use" rating law required an insurer to file its rates with the ADOI 15 days before the insurer could use the rates in the marketplace. During the 15-day period, the ADOI had the authority to disapprove the rates without first holding a hearing. In 1996, some insurers (who no longer write MM in Arizona) successfully lobbied the legislature to transfer MM rate regulation from Article 4 to Title 20, Chapter 2, Article 4.1.
The significance of the transfer to Article 4.1 was the application of a modernized speed to market "Use and File" rating system in Arizona. Under Article 4.1, an insurer may immediately use a particular insurance rate, as long as it files the rate with ADOI within 30 days after the insurer first uses the rate. Article 4.1 further sets forth the rating requirements and extensive procedures the director must follow to disapprove a particular insurance rate. More importantly, unlike Article 4, Article 4.1 includes a statutory presumption that no rate is excessive as long as rate differentials and reasonable price competition exist in the market (A.R.S. § 20-383(B). To find that competition does not exist, the director must first issue an order specifying the reasons why ADOI believes a particular rate does not comply with the rate standards specified in A.R.S. § 20-383 and then hold a hearing to determine whether price competition exists in the marketplace. If the hearing results in a determination that price competition does not exist, the director then has the authority to issue an order establishing an allowable percentage of rate increase for a particular line, subline or class of business. Such an order would expire no later than one year after its effective date and would require insurers to file their rates at least 30 days before using the rates in the marketplace. See A.R.S. § 20-383(B) & A.R.S. § 20-385(G).
In addition, "underwriting decisions," if they involve rate-related considerations, are, in fact, rating rules and must be filed with the director pursuant to A.R.S. §§ 20-381 & 20-385.
Q: If a physician has a problem with pricing, renewal, availability of policies, etc., what is their recourse?
A: Contact ADOI's Consumer Affairs Division for assistance, 602-912-8444 or 800-325-2548.
Q: How many admitted carriers are you aware of now compared with a year ago... two years ago... five years ago?
A:
| CY |
# of Insurers Reporting Physicians & Surgeons (PS) Direct Written Premium |
# of Insurers Actually Writing New PS Business in all Specialties |
2004 | 13 | 1 |
| 2003 | 14 | 1 |
| 2002 | 19 | 11 |
| 2001 | 16 | 9 |
| 2000 | 17 | 14 |
| 1999 | 16 | 12 |
All but one of these insurers were foreign insurers. See response to next question below.
Q: Does the ADOI or the state have a plan to attract new carriers?
A: During 2004, the director met with many interested parties to assess the MM crisis and to consider options to make Arizona more attractive to the limited number of insurers now willing to write MM. Neither ADOI, nor any other state insurance department, (of which we are aware), has the authority to require insurers to write MM. Other discussed options, such as the creation of a joint underwriting association ("JUA") and/or an assigned risk plan ("ARP") were eventually rejected, primarily because they could deter insurers from entering the Arizona market. Most JUAs and ARPs in other states, meet the physician's liability insurance needs on a short-term basis, but are generally unattractive to insurers because they include an assessment mechanism, requiring insurers to pay the expenses of JUA or ARP claims. Understandably, insurers dislike and avoid assessments, no matter what the reason. Moreover, states that utilize the JUA or ARP option typically assess insurers based on their pro rata share of all MM premium written in that state. Therefore, insurers having the largest market share would pay the largest assessments, thereby discouraging them from either continuing to write in that state, or increasing their marketing efforts.
Ultimately, ADOI's evaluation of this crisis found that, for a number of reasons, Arizona is already in a better position nationally, to attract those insurers willing to write MM. Arizona's modernized rating law (Article 4.1 described above) is the type of rate law that is most attractive to insurers for a number of reasons, primarily, because they can: (1) price and market their products immediately; (2) exit (cease writing) and enter (begin writing) the market at will; and, (3) charge just about as high (or low) a rate as they want (assuming competition exists and that the rate is not inadequate). This modernized "Use and File" rating system and the current rate of economic and population growth in Arizona already make Arizona an attractive overall insurance market for most insurers.
This is not to say, however, that insurers will willingly engage in a specific market in a particular line of insurance that, for whatever reason, has proven to be non-profitable, or a high risk proposition. Currently, Arizona has over 400 insurers licensed in this state to write "casualty" insurance, which, under Arizona's insurance law, includes MM. Any of these 400 insurers, if they wished, could immediately start writing MM. In other words, Arizona does not need to worry about "attracting" insurers to Arizona, they are already here. The reality is that most of these insurers would not consider writing MM due to the long tail obligations and potential for large losses.
Another important factor to consider is that almost all of these casualty insurers are foreign insurers (i.e., insurers domesticated and domiciled in another state) and, as such, they do not make their corporate decisions based primarily on their Arizona experience, but rather, on their national operation as a whole. A perfect example of this was St. Paul Insurance Company's (previously, the country's largest MM insurer) decision to exit the MM market on a national basis, notwithstanding its particular loss history in Arizona. Foreign insurers will always exit and enter a particular market, or line of insurance, based on many more considerations than whether a particular state is, or is not, attractive. Often Arizona will have little, if any, input regarding these insurers' national decisions. Insurers often make exit decisions giving little warning, or without informing the regulators (in the states in which they are transacting insurance) and, often, without any apparent regard to the consequences to the physicians whose policies are suddenly cancelled or not renewed.
Q: Does the ADOI meet with other state DOI's? If yes, where does medical liability insurance rank on list of concerns?
A: The director attends the National Association of Insurance Commissioner's (NAIC) quarterly meetings, which commonly include discussions regarding regulatory options to address the MM crisis and MM ranks high on this department's list of concerns. The recent NAIC report entitled the "Medical Malpractice Insurance Report: A Study of Market Conditions and Potential Solutions to the Recent Crisis" presents a comprehensive report on these issues. A copy of this 164 page report is available on the NAIC's web site (www.naic.org).
Q: Does the ADOI see medical liability insurance-availability and affordability-as a key concern?
A: Absolutely, as evidenced by the numerous meetings that the director has had with interested parties throughout 2004 and continuing into 2005. She is constantly seeking answers, suggestions, and ideas that will help alleviate the situation in our state.
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