For over 100 years in Australia, medical defence organisations — mutual associations of doctors — provided medical indemnity cover to doctors. As the indemnities provided by these organisations were discretionary, rather than under a contract of insurance, the organisations were not subject to regulation by the Commonwealth’s insurance legislation.
The medical indemnity insurance industry is a small but critical part of an effective health system. Its absence would leave patients without redress or compensation in the event of medical error or negligence. Medical practitioners would be constantly at financial risk, to the extent that they would be unlikely to practice.
In the years leading up to April 2002, the medical defence organisations began to put substantial liabilities on their balance sheets for outstanding claims that had previously gone unrecognised. There was also pressure to bring the industry under the same regulatory regime as the providers of other insurance products.
In common with some other medical indemnity providers, UMP did not include its IBNR liability on its balance sheet. In April 2002, UMP, which was the largest provider in the market, applied to be placed into provisional liquidation. This was a result of a combination of factors: large-scale market expansion, chronic underpricing and reserving, overdependence on a reinsurer that became insolvent, an increase in claims stimulated by tort law reform in New South Wales and the inclusion of its IBNR liability on its balance sheet. Potentially, a large number of doctors in Australia were without indemnity cover.
Adding to the turmoil following UMP’s collapse, premiums for high-risk specialities were increasing with a move to pure risk rating. Many doctors were considering leaving the profession or ceasing to perform high-risk procedures, such as deliveries. Either development would place patients requiring these medical services at risk.
In the face of this turmoil, the Government led a number of initiatives in the following years to stabilise the industry and create an environment in which the industry could operate successfully. These initiatives were to encourage state governments to introduce significant tort reform (which New South Wales had already undertaken) and to provide a number of measures to reduce the impact of large claims. The Government also provided support to those specialist practitioners for whom the market cost of medical indemnity insurance would be such as to make practice uneconomic. These initiatives applied right across the industry.
In addition, to allow doctors who were United members to continue to practice, the Government assumed UMP’s IBNR liability at April 2002 and enabled it to return to the market place. It also guaranteed cover to United’s members while United was in provisional liquidation.
The Government’s original intention was to recover its support from United’s members through an annual levy over a long period. After negotiation, the Government agreed to fund around three quarters of the IBNR claims as they emerged.
At the time of the Government indemnity, UMP’s IBNR liability was around $460 million.
United was in the hands of a provisional liquidator from April 2002 to November 2003. It is now trading profitably. In the past two financial years, it has accumulated net assets of $175 million, approaching twice the minimum capital requirement set for general insurers by the Australian Prudential Regulation Authority (APRA).1
United is still the dominant medical indemnity insurance provider with around 34 per cent of the market, although this is down from around 60 per cent at its peak. It dominates in New South Wales, Queensland and the Australian Capital Territory.
On 4 November 2004, UMP announced that its licensed insurer, AMIL, would make significant reductions in premiums for 2005. AMIL was to reduce premiums by an average 20 per cent, but premiums for some groups in some states were to fall by 30 per cent.
United suggests that a number of factors have had a major impact on its prices, including the loyalty of its members and the various measures introduced by the Government, but primarily tort law reform. United argues that all of these factors have helped it to recapitalise and consolidate its operations.
Other medical indemnity providers argue that the Government’s assistance to United has helped it reduce its premiums. They say that they do not have the capacity to match United’s premiums in their states. They suggest that United’s premiums do not fully account for the cost of claims and overheads in those states or that the Government’s assistance has reduced its cost base.
The Government commissioned this review to inquire into whether the assistance it has given to the medical indemnity insurance industry has created a bias in the industry that has benefited some players more than others and, if so, to advise on options to redress the imbalance. (See Appendix A for the review’s terms of reference.) Since the practical outcome of any bias in competitive neutrality is in pricing, this review has also looked at pricing practices in the industry.
The industry strongly supported this review, making available a wide range of highly confidential commercial information to allow the reviewer to form conclusions.
1 The minimum capital requirement is the minimum level of capital to ensure solvency. APRA requires an ongoing business to maintain a percentage of capital above this level as a buffer against poor experience or other adverse circumstances. APRA requires medical indemnity insurers to keep their capital at 150 per cent of the minimum at least, because of the long term nature of their business and the risks associated with being a single-line insurer. Most major insurers actually target 200 per cent of the minimum capital requirement in order to ensure a strong level of support from their stakeholders.