Options for purchasing provider excess insurance

Healthcare Financial Management, July, 1996 by William D. Dyer, Ira J. Forkish

* Broker service. Brokers should be provider excess insurance specialists who do more for their clients than submit the organization's risk data to the insurance company and await the insurance company's quotation. Brokers should help design coverage that meets client needs, aggressively negotiate final pricing, and ensure that claims are paid in a timely, efficient manner.

* Healthcare acumen. The broker should take an interest in the healthcare organization's business plans, and show the organization how to use stop-loss coverage in business situations other than capitated contracting.

Healthcare provider organizations that screen brokers sometimes send out copies of their request for a quote to numerous insurance brokers, many of whom may work for the same insurance companies. If several brokers send an organization's risk data to the same insurance company, the company's underwriter may determine that none of the brokers has control of the account or the authority to negotiate price. As a result, there is a strong chance that the underwriter will quote an off-the-shelf rate, and the provider organization may pay full retail price for its coverage.

A better strategy is for a healthcare organization to screen an initial list of prospective brokers carefully and limit its final selection to two or three reputable provider excess insurance brokers. The selected brokers should be asked to submit the organization's risk data exclusively and to no more than two or three insurance companies so that the company's underwriters will not receive multiple submissions.

Exercising Due Diligence

Provider organizations should make sure that their search is limited to brokers that represent insurance companies that are "admitted," ie, licensed to sell insurance by the state's department of insurance. Nonadmitted insurance companies are not subject to the financial solvency regulations and enforcement policies that apply to admitted insurance companies. In addition, nonadmitted insurance companies do not contribute to any of the insurance guarantee fund pools created by the state's admitted insurers. As a result, these funds are not available to pay a provider organization's claims or protect the organization's assets if a nonadmitted insurance company becomes insolvent and is unable to make payments as promised.

In many states, insurance brokers are required to disclose to their clients in writing that the coverage they are offering is from a nonadmitted insurer. Selecting a nonadmitted insurer exposes the organization to unnecessary risk. For additional information about any insurance company, including its size and financial rating, provider organizations should contact their state's department of insurance or refer to the A.M. Best Ratings Guide.

One provider organization that did not exercise due diligence invested more than $2 million to purchase coverage from a European insurance society that was not admitted to the state's department of insurance and was not financially rated by the insurance rating authorities. The provider organization had a dispute with the broker that was processing the European insurance society's claims, but the organization had no policy or any other verifiable proof of coverage from the broker. Its only correspondence was a one-page letter from the broker that outlined a confusing reimbursement formula. Clearly, the provider organization did not understand what it was purchasing and the broker was not serving the provider organization appropriately.