As consumers we value our money and deserve confidence in what we’re buying. We want an understanding of why what we’re buying costs what it does. Much of the buying process for your Professional Liability Policy is comparing quotes then ultimately choosing the quote that best fits your budget. While an insured or potential insured compares their quotes, Protexure is often presented with a common question – Why do I pay more than this other firm that’s just like mine?
At Protexure we understand you may have colleagues whose practices are similar to yours but your policy is more expensive and you don’t understand why. The explanation is easier than you may think.
Your policy premium is largely impacted by the carrier’s historical loss experience. Insurance carriers assign rating modifiers to premiums based on their loss history with law firms similar to yours and the likelihood you could experience similar risks or losses. These rating modifiers can be attributed to many characteristics of the firm such as: firm and attorney retro dates, number of full and part time attorneys, where your practice is domiciled, area of practice, and policy limits.
Number of attorneys
The first firm characteristic that can impact your premium is the number of attorneys with the firm. Typically, when there are more attorneys with a firm, the firm is able to take on more clients. But, with every client that walks through the door, the firm's overall risk increases. An increase in risk results in an increase in exposure for the carrier and causes an increase in premium.
Additionally, underwriters will evaluate the number of support staff, firm revenue and case volume to determine if the number of attorneys with the firm is appropriate for the level of business.
The rating modifier for the number of attorneys is also impacted by the hours worked by each attorney. Many carriers will have a standard rating for full time attorneys while having lower rates for part time attorneys. Some carries may even not charge for part time attorneys.
The firm’s location will always have an impact on the cost of the policy. This is largely driven by the carriers claim experience within a specific state or county. If claims activity is historically high, that location will be rated higher for risk, resulting in an increase in premium. Claim trends can change over time, while one location can be considered risky today, tomorrow that may not be the case.
Claim trends can even vary from carrier to carrier. One carrier may have more favorable losses than another carrier which would more than likely create an unequal rating.
Furthermore, the firm location can also impact how a carrier will rate certain areas of practice. If a carrier is experiencing significant losses in a location but only from a specific AOP, that carrier may increase rates for only that area of practice in that location.
Areas of Practice
A firm's area of practice (AOP) has maybe the biggest impact on your policy premium. Certain practice areas generate a higher frequency or severity of loss, and insurance companies consider this when setting their premium rates.
Each AOP has a specific rating modifier determined by the risk associated with it. Similar to the rating modifiers for location, the riskier the AOP, the higher the modifier. A higher modifier will result in higher premiums.
Risk is determined by the nature of the practice and/or historical claim history for that type of practice. Insurance companies will evaluate their loss experience to determine practice areas that impact the frequency and severity of losses.
Step rate has a big influence on a law firms professional liability insurance. At the inception of your law firm's first policy, you’re written RDI aka Retro Date Inception. The insurance carrier has no risk or exposure at the inception of a policy. But, for each proceeding renewal, the insurance carrier is assuming more risk, as more years of your business are being covered. There is an increase in premiums associated with additional exposure created. Your insurance rate increases each year at a declining percentage for five years, until the firm is considered mature. Protexure, like most carriers, has a five year step rate process.
While we are on the topic of step rate, it is also important to mention a few key details about retro dates.
Retro dates are not only assigned to the firm, but also attorneys at the firm. Typically, each attorney’s individual retro date will be the date in which they joined the firm. This means that even if the firm is considered to be “mature” all of the attorneys may not be, causing the policy to still be in step rate. Step rate is one of the most common reasons premiums vary from firm to firm even if the law firms are seemingly identical.
Limits and Policy Additions
When it comes to insurance, your premium is directly correlated to the limited and policy additions you select (i.e. the “amount” of insurance you purchase). The lower the policy limit a firm chooses, the lower the premium will be.
The deductible chosen will impact the premium as well but with an inverse relationship. The higher the deductible, the lower the premium will be.
The limits and deductible carried by a firm should be selected based on the firm's individual needs not based on price or influenced by other seemingly identical firms.
Even two similar practices may need different limits based on location, size of cases, number of attorneys or claim history.
Much like any other type of insurance, filing a claim could affect your malpractice insurance premium. An extensive claim history can cause your premium to be higher than that of a similar firm. This rise in premium is the result of the insurance carrier viewing the firm as a higher risk than before.
It is important to keep in mind that filing a claim does not automatically mean your premiums will increase. Every insurance carrier handles claims differently and has a different philosophy on how they impact premiums. While each carrier is different, so is every claim. The severity of the claim, the number of claims over a given period of time and the overall claim scenario will affect how the carrier views the firm going forward in terms of risk.
Discretionary Pricing Modifiers
In addition to rating modifiers, a carrier may choose to apply discretionary pricing modifiers that could either increase or decrease your policy premium. Underwriting characteristics such as a focused versus non focused practice, attorney experience, firm management protocols and claim history are the drivers. A firm's ability to have favorable underwriting characteristics allows for a greater chance at keeping their annual premium lower.
What does this mean for you?
The next time you find your professional liability insurance premium is more than your friend who has the “same” practice, remember there are many factors that go into the premium you’re paying. Comparing your insurance premiums to firms similar to yours can help you get an idea of what you should be paying, but it is not an apples to apple comparison.
When making these comparisons I do not recommend solely looking at jurisdiction and AOP’s to determine if you feel you’re overpaying. Although Jurisdiction and AOP’s play a part in your premium, the overall profile, practice and Carriers need to be considered when comparing two firms premiums.