Medical indemnity - a healthy prospect

The UK private healthcare market is growing at a tremendous rate. National Health Service outsourcing, the customer's ability to afford alternatives to state-provided facilities, and a growing desire to seek alternative treatments to the traditional orthodox methods have all contributed to this growth pattern.

Expenditure on private-medical-insurance-backed treatment has increased from £1.2bn to £2.2bn during the period 1992 to 2002, according to information and market intelligence provider Laing & Buisson. Figures from The Association of British Insurers show that the total number of PMI policies reached 3.7 million in 2003, boosted by modest growth in corporate business despite difficult market conditions. An increase in the number of purchasers also supports the growth of private practices.

Furthermore, a Radio Five study suggests that expenditure in complementary and alternative treatments alone stands at £1.6bn annually - a massive growth on the estimated £10m in the early 1980s. While specific figures are difficult to obtain, it is estimated that one in five of the UK population looks to complementary and alternative treatments. The population as a whole spends some £1.6bn per annum on alternative healthcare, and there are now over 50 000 complementary and alternative practitioners in the UK.

Further growth can be identified by the increase in outsourced activities; the Department of Health is seeking to encourage a greater plurality of providers for the NHS and is committed to gaining maximum advantage from links with the private sector. As a result, many functions of the NHS are being outsourced, creating new bespoke suppliers for such functions as radiology, computed tomography and magnetic resonance imaging.

However, with this growth has come a demand for comprehensive, affordable and sustainable insurance protection suitable for the medical sector - a demand as yet unsatisfied by current insurance market capacity - and expertise is in desperately short supply. Where does this leave the future of medical indemnity - a market positively bursting at the seams?

Future of medical indemnity

The medical indemnity market is dominated by a small number of intermediaries and capacity providers. The absence of competition has led the way to remarkable variances in risk evaluation, perception, understanding and, consequently, the scope of cover and the price at which it is provided.

While it is generally accepted that the NHS retains most of the state-provided healthcare risks, those practitioners and institutions involved with the ever-growing private healthcare sector, together with general practitioners, have to source protection via other means.

The mutuals or defence bodies that have offered support and insurance to practitioners since 1885 are not regulated and only offer cover on a discretionary basis, so financial assistance in the event of a claim is by no means guaranteed. Furthermore, these mutuals are collapsing due to financial pressures, unable to fund the level of claims being made upon them. As a result, many practitioners have turned to the greater perceived financial security of traditional insurance on the open market.

The insurance industry has dipped in and out of the market, but is nervous of the historical losses in the sector. As a result, rather than being hailed as the logical alternative to mutuals, practitioners now view insurance with cynicism.

We are now witnessing a growing medical sector that is finding itself neglected - out on a limb with little choice of product or service.

The insurance industry needs to reconsider the preconceived idea that all medical liability business is unprofitable and disregard some of the sensational reporting favoured by the mainstream press if it is ever to realise the potential this market has to offer. The industry also needs to provide practitioners with a suitable product and high service levels at the right, sustainable price. As an industry, it must re-evaluate the needs of the sector and address how it can best serve this market.

The insurance industry has a tremendous opportunity to encourage a shift in practitioners' attitudes away from the defence bodies and towards insurance - provided it sticks to its promises and demonstrates its commitment to help. The industry must embrace the challenge and not only offer the security sought by practitioners, but also offer flexibility, expertise, understanding and sustainability.

Proceed with caution

Arguably, insurers have some good reasons to tread carefully. We have all heard about insurers that have suffered troublesome journeys in this arena, and also those - particularly in the US - that have ceased trading due to adverse underwriting results in this sector. Sensational reporting of court awards involving the medical sector fuels doubts for the UK insurance market, such as the ongoing case of disgraced surgeon Richard Neale and the Bristol heart surgeon James Wisheart.

However, it could be said that many of the past failures are simply a result of insurers entering the market without a specific business plan or the right partner and certainly with a clouded strategy. The medical sector consists of a vast range of risks where selection and a clear understanding of those risks is fundamental to underwriting success - and where the knowledge and expertise of a specialist broker is a must.

A better understanding of the sector and careful segmentation of the risk will lead to the development of a profitable partnership with a sector that is desperately in need of a greater level of support from the insurance market.

So, how can this better level of understanding be reached? First and foremost the insurance industry needs to identify those risks within the sector that are likely to fall within the risk parameters that the market would be happy to consider - select the professional, well-trained, well-managed and so on.

The sector needs to be segmented and the risks of each segment carefully analysed on their own merits to identify those risks that the insurance market finds acceptable; and for these it needs to enable the creation of sustainable, affordable, well-serviced and managed products.

Key questions for identifying suitable risks are listed in the box above.

With the aid of this information, a specialist wholesale broker can work with insurers to develop bespoke policy wordings that provide the correct cover as opposed to relying on generic wordings evolved from unsuitable off-the-peg professional indemnity or public liability wordings, as has previously been the practice.

In this way, and using sound underwriting practices, brokers can develop good, sustainable profitable books of business for sectors that previously would have been dismissed as a poor risk. For practitioners in those sectors this will mean a more detailed and intelligent approach to their individual risk exposure, a bespoke policy and a realistic, sustainably priced policy as a result.

Focus on risk management is also fundamental if insurers are to maintain a sustainable, affordable and profitable book of business. Underwriters should seek partnership ventures with specialist brokers that have the skills and resources to educate the client to implement risk management initiatives. Face-to-face meetings are advisable as part of this process, either with the broker or directly with its clients to coach them on good risk management practices.

If we accept the evidence that private healthcare is a growth area and that a mutual fund administered by a defence body may have a limited lifespan, then it follows that the insurance industry will have to respond to the demands of the medical sector. Many of the barriers to entry into this market are relatively easy to break down through investment in either the right people within the company or the right partnership outside the company. This strategy works equally well for underwriters and intermediaries wishing to diversify into this arena.

Good risk management practices

By working closely with affinity partners and well-respected active associations, the industry can further disseminate the message of the need for good risk management practices and help dispel the fears, cynicisms and false perceptions of medical indemnity insurance through their newsletters, professional publications and mailshots, and by potentially making insurance and risk management part of the continued professional development programmes.

There is no doubt that the medical indemnity market is in remission.

For the specialist broker that has strong relationships with insurers and the skills and knowledge to truly get beneath the skin of the sector to approach the risk intelligently - and is prepared to work collaboratively with the leading trade associations, taking a fresh approach to risk management - there is a sparkling opportunity to make medical indemnity a very healthy prospect indeed.

KEY QUESTIONS FOR IDENTIFYING RISKS

- How well developed is the training of practitioners?

- Are appropriate structures in place to support high-quality training?

- Are proper codes of practice being developed?

- Are appropriate accreditation processes in place to protect the patient?

- Are issues of continued professional development being considered?

- What is the claims history?

- Are obvious risk control factors missing - would these improve the experience?

- Brokers need to understand the buyer's needs and their specific exposure. What are the terms of reference in relation to the statute and moral obligations of the practice? What are the contractual obligations and to what extent are these insurable?