Tag Archives: reinsurance

Terrorism Insurance

Property owners may decide to purchase terrorism insurance to guard against potential financial losses should they be victims of terrorist activity.

Insurance companies in general exclude terrorism from casualty and property insurance. Otherwise they require special endorsements to provide such cover. The predictability of terrorist activity is difficult.  Calculating the potential liability is challenging. For example, the September 11, 2001 attacks resulted in an estimated $31.7 billion loss. Due to these factors, setting a feasible premium therefore is a daunting task for any insurance company.

In the immediate aftermath of September 11 attacks, US insurers were faced with huge amounts of terrorism exposure from portfolios that had terrorism cover. The insurers had limited possibilities of obtaining reinsurance to cover the losses should a future attack occur. An example of how premiums skyrocketed after 9/11, Chicago’s O’Hare airport carried $750 million terrorism insurance at an annual premium of $125, 000. After 9/11 insurers offered $150 million cover at an annual premium of $6.9 million.

In October 2001, the Insurance Services Office, acting on behalf of insurance companies, filed a request in every state for permission to exclude terrorism cover from all commercial insurance coverage. By early 2002, 45 states permitted insurance companies to exclude terrorism from all their policies except for Worker’s Compensation insurance.  By statute this covers occupational injuries without regard to the peril that caused the injury.

Most insurance companies prefer rather to spread coverage over a wider geographic area. This is the case regarding flood insurance. The World Trade Centre losses were concentrated in one condensed area.  Therefore this important factor determines the availability of terrorism insurance cover.

The Geneva Association (also known as the International Association for the Study of Insurance Economics) compiled a report which stated that a mix of government and private resource could provide a short-term solution to deal with terrorism insurance cover. The government would serve two functions:

Establish rules to act on the capacity shortage;
Be the insurer of last resort.

UNITED STATES

The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law by the President of the United States on 26 December 2007, which extends the Terrorism Risk Insurance Act (TRIA) until 31 December 2014. The law extends the Federal Program. This provides for a system of shared public and private compensation for insured losses caused by acts of terrorism.

During mid-2007, another extension to TRIA was proposed and is known as TRIREA (Terrorism Risk Insurance Revision and Extension Act). TRIREA contained several new provisions including a compulsory made available claim for NCBR coverage (Nuclear, Chemical, Biological and Radiological) and the ending of the distinction between domestic and foreign events.

The full Senate passed S. 2244 in July 2014; The House Financial Services Committee passed H. R. 4871 in June 2014. Each bill would renew TRIA for another seven and 5 years respectively. These bills would modify the current program in different ways.

IRAQ

In Baghdad personal terrorism insurance is available. One company offers such insurance for $90 and if the insured is a victim of terrorism in the next year, it pays the heirs $3, 500.

UNITED KINGDOM

All UK insurers stopped including terrorism cover on their commercial insurance policies with effect from 1 January 1993 (home insurance policies were unaffected). The government and insurance industry hence established Pool Re. Funded by premiums paid by policyholders, the government guarantees the fund although only such support must be repaid from future premiums.

Medical malpractice

Medical malpractice is professional negligence by act or omission by a health care provider.  The treatment provided falls below the accepted standard of practice in the medical community and causes injury or death to the patient.

The Need for Purchasing Insurance:

Physicians are very aware of the need for buying medical malpractice insurance. They are less familiar with many of the details. The insurance business is complex.  As a result few physicians understand the vocabulary.  Medical practitioners must have professional liability insurance.  This protects their assets and careers.

Insurance is big business.   Billions of dollars are spent annually.  Although this is a small part of the almost $300 billion in total U. S. tort litigation costs, it is equal to about 3% of total health care costs.

MPLI:

Medical professional liability insurance (MPLI) is bought to protect a physician or health care institution.  The physician is therefore protected from the results of a patient’s claim for negligence. Medical malpractice insurance is purchased through an agreement called the policy.

The insurance company agrees to financial responsibility.    As a result the agreement covers  legal fees and payment of claims against the physician.  There is a fixed maximum dollar amount of coverage (liability limit).  However only for a specified length of time.

Excluded coverage:

The policy specifies certain excluded coverage. This condition lists actions not covered by medical malpractice insurance, i. e. intentional misconduct – acts that fall outside of the actual practice of medicine.

Insurance companies want to insure as many physicians as possible therefore they spread the risk.  The premiums are based on considerations of numerous issues.  For instance physician speciality and practice patterns.  Also to be considered are past claims history and geographical location.  Insurers  consider “experience ratings”.  A history of medical malpractice claims will result in higher premiums.

Calculating premiums:

Premiums are calculated using complex formulations.  Dollars  however have to be set aside in reserves and costs of business.  Further considerations are desired financial margins and any returns on invested premium dollars.  Insurers believe a predictor of future claims is a history of past claims.  Premium dollars are thus invested in order to generate additional reserve dollars and maximise investment income.

Reinsurance:

Insurers also buy insurance, called reinsurance. Reinsurance is thus  a sharing of loss between insurers. A primary insurer assigns part of its total loss exposure to the reinsurer.  In a world filled with risks and unpredictable jury awards,  secondary insurers are thus hard to find. If available, rates are high, requiring primary insurers to collect more in premium dollars to bolster reserves.

Prior to the 1970s, medical malpractice insurance was entirely provided through occurrence policies. Occurrence policies cover all claims that arise from incidents that take place during a given policy period.

Claims Made policies:

There is a new insurance product referred to as “claims made”.   Claims made policies allow insurers to more accurately adjust premiums.   They reserve dollars based on trends and projections in various markets and business lines.

Claims have to be asserted against a physician before the end of the insurer-insured relationship.  The incident being reported must have occurred after the physician first purchased a policy.  The policy typically does not cover “prior acts”.

Policy cancellation:

The physician and the insurer have a right to non-renew or cancel a policy.   Therefore appropriate notice has to be given. This notice is typically 90 days. Insurance companies must act in good faith and have a “cause”. Some reasons for cancelling a policy include false or fraudulent statements on an insurance application. Changes in a medical practice that creates unacceptable exposure to claims. Furthermore, failure to comply with the business relationship, i. e. not paying a premium, or loss of a licence to practice medicine.

Different coverage:

Some medical malpractice policies only cover direct patient care and exclude care outside of geographical boundaries, i. e. state or nation. Some policies allow for coverage in work related activities.  Medical malpractice insurance may assist with legal expenses related to adverse actions against the physician’s credentials or licence.

New York is again the highest state in terms of per capita payouts at $36.15 paid out for every individual residing in the state. The northeast as a whole had a per capita payout rate of $28.20, which is more than 3 times greater than the next highest region (the Midwest).