Insurance costs must cover three items:
1: The claims paid out
2: The costs of running the insurer
3: Any profit required by investors
In addition insurers collect an insurance premium tax which is currently 12% for the government.
This is very similar to VAT but it is completely separate from VAT and cannot be offset against VAT.
How much is malpractice insurance for dentists? A breakdown
The price of dental indemnity is determined by these factors.
The claims paid out
There is a different price for indemnity for a dentist who has a track record without claim. As discussed in the section on cover provided by malpractice insurance, even claims that are successfully defended can run up significant costs to an indemnity provider and this will be recorded as a claim.
Beyond known claims, the activity profile of the dentist is analysed to assess the propensity for a claim – this will be the other determining factor in the claims pricing component.
This assessment of future claims will be uncertain. Commercial insurers need to account for this uncertainty through a general reserve called incurred but not reported (IBNR).
The calculation methods for, and amount, of IBNR that a regulated commercial insurer holds is tightly regulated as it keeps the business table and able to pay claims.
The discretionary mutual organisations are not regulated and therefore do not have to carry IBNR in their financial reserves.
Our reading of the financial statements of each of these organisations is that they do not have IBNR reserves and we believe that this is a cause of some of the swings in pricing.
If unexpected volumes of claims occur then the membership organisation has to adjust pricing instantaneously to cover it. A commercial insurer will be capable of smoothing pricing through the IBNR reserve.
The costs of running the insurer
All entities will have a cost to maintaining their operations. Embedded in this is an additional cost to assessing and paying claims.
This means that if an indemnity provider is likely to pay out a small amount as a claim it is not worthwhile for the buyer.
As there is a cost to paying the claim, the insurer needs around £1.30 for each £1.00 of claims it pays and this must come from the premium.
If small claims of say £2,000 are likely then it is best for the insured to keep this cost as an excess on the policy rather than have the insurer collect the premium and repay it out at an increased cost.
This gives rise to an excess on an insurance policy – which is ultimately there to reduce the cost.
Insurers also like an excess, which is typical on all insurance such as home and motor policies, as they believe it gives the insured an interest in preventing losses.
Excesses are very much a standard feature of all insurance and have arisen to reduce cost.
Several insurers provide dental indemnity cover. Competitive pressures, combined with a regulatory requirement to treat customers ensures that cost ratios are reasonable.
Any profits required by the investors
Arguably, the discretionary mutual providers do not have investors and therefore do not need to produce an excess to pay a return to investors.
Typically a commercial insurer provides a 15% return on capital to its investors and requires a premium to capital ratio of around 3:1.
This means that about 5% of the premium is paid to investors.
Example costs of malpractice insurance
Cover for him, his practice nurses and his practice is around £4,200 plus tax of 12%.
A dentist has a significant claim against him.
In our view this was due to poor defence. His premium was over £20,000 plus tax. This has been progressively reduced to under £12,500 plus tax despite some incidents that were reported to insurers.
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