One of the most popular questions we get each day from Insureds is, “Why did my malpractice insurance pricing increase?” It’s a fair question.
Maybe it’s your first renewal and you’re left wondering if the insurance company lured you with too-good-to-be-true pricing, only to raise your rate the next year.
Perhaps it’s your tenth renewal and you’re not sure why your premium increased if your practice has stayed the same.
The truth is, there are many reasons why your premium can increase year after year. Some factors are in your control while others are not. So, what are some of the reasons your renewal premium increased this year?
One of the biggest factors in determining your premium is the type of law you practice. Insurance companies ask you to provide a breakdown of your areas of practice each year. Some areas of law, such as criminal defense, pose less of a risk to insurance companies than something like real estate law. If you are seeing an increase this year, ask yourself if your areas of practice have changed much over the last year.
For example, let’s say last year, your firm handled 100% criminal defense cases. This year, your firm was about 50% criminal defense and 50% real estate closings. Since real estate is seen as a larger risk by the malpractice insurance company, they take that into account when pricing your updated malpractice premium. In this case, your premium will increase accordingly. Conversely, if the opposite were true, law firms should expect a decrease in their premium, barring all other factors.
If you haven’t carried a policy previously or haven’t carried one continuously, your premium increases may be the result of step rate. Step rate occurs when you first obtain a malpractice policy. The insurance company provides a discounted rate since they are only covering you for work done in the listed policy period, which is usually a year. Upon renewal, the insurance company is not only covering you for that first year of work, but they are now covering you for the second year. Because they are covering multiple years, the insurance company will increase your premium a certain percentage – this is step rate.
Step rate typically occurs for approximately five years after the inception of your first policy. It is important to remember that each attorney at the firm has their own step rate factor. If you have an attorney that just joined your firm last year, there will be a step rate increase for that attorney the following renewal period.
Step rate is one of the most common causes for an increase in malpractice insurance premium. While it can be frustrating to see a raise in your malpractice insurance premium, step rate is an industry wide practice that accounts for increased risks over time.
It should come as no surprise, but an Insured’s claim history plays an important role in determining pricing, even insurability. Firm’s are often provided with a discount on their policy for a claims-free history.
When reviewing an Insured’s claim history, underwriters will focus not only on the number of claims a firm has had, but also the severity of those claims. A firm with a few claims with small payouts may be looked at just as unfavorably as a firm with one very large claim. In either scenario, an insurance company needs to recoup some of those losses.
Even if an Insured is not found liable for any wrongdoing, the insurance company may still have to pay out to defend the claim, which may result in a higher renewal premium.
With claims on file, firms can lose their discount for a claims-free history. Furthermore, they may even have some additional premium tacked on depending on the severity of the claim. If you’ve had a claim since your last renewal, you can reasonably expect that will negatively impact your malpractice insurance premium the following renewal period.
While the firm has control over some factors that affect their premium, there are unfortunately some factors that are out of the firm’s control.
In order to maintain a profitable business and acceptable loss-ratios, insurance companies must routinely review their filed rates. Rates vary for different states, different counties and different areas of practice, along with multiple other factors.
If an insurance company finds that there have been a lot of claims in a specific state in a specific area of practice, they can choose to increase rates for both of those factors. For example, if there was a large rise in the number of claims resulting from real estate transactions in Florida, the insurance company may choose to raise rates for law firms providing those types of services in the state.
You might be thinking, “…but I haven’t had a claim.” Unfortunately, this is one of those things that is not in your control. Even if nothing has changed about your firm in years, there is the possibility of your renewal being subject to a premium increase as a result of overall rate increases in the state.
While all of the aforementioned information is not an exhaustive list of factors that can increase your malpractice insurance premium for your next renewal, it is some of the most common reasons. If any of the reasons above apply to your firm, know that you can possibly expect your premium to jump up during your renewal. If after reviewing the information above, you can’t quite figure out what it is that caused your premium to increase, don’t be afraid to ask your agent.