Mr. Angoff has a new report claiming that the Washington based Physicians Insurance is over reserving and should release reserves (so as to lower prices). The company, a mutual insurer has reduced its over reserving the last couple of years, but let’s think about three things.
First, reserves are there to protect third parties injured by a covered physician’s negligence. The higher the reserves the higher the protection afforded the injured third party, but the higher the insurance premium to the physician. Apparently Mr. Angoff’s values the physician’s interests over that of the injured third parties.
Second, the insurer is a mutual. That means if a company is over-reserved and the firm eventually releases reserves, the member physicians receive a rebate of premiums or a dividend. Not the shareholders— the physicians. A mutual's surplus is like a long term CD for the physician. If claims are less than predicted the physician gets his or her money back with interest.
Finally, A.M. Bests rates the company a B++ with a negative outlook. A B++ rating, while good, is not a stellar rating and implies that the company has a higher risk of default than an A rated company. The fact that there is a negative outlook suggests the company probably should not reduce its reserves. If the insurer were to lower its reserves and then go bankrupt because it could pay its claims to innocent third parties, we’ll see these so-called consumer advocates complaining about the insurer’s poor management too.
I might have some sympathy for this over reserving argument if the company were a stock company and had an A++ rating. It could be that an insurer needs to hold too much capital in reserve to obtain A++ rating and it may be costly (in terms of opportunity costs) for the firm to obtain that level of a rating. Thus, the reserves should be reduced. However, when we are looking at a physician owned mutual company with a B++ rating this argument does not make any sense. The physicians own the company so the excess reserves belong to them and they will get it back with interest if the firm is truly over reserved.
What Mr. Angoff’s report overlooks is why the firm behaves the way it does. A med mal mutual tends to be less diversified in its product lines and its geographical dispersion. Further, it does not have access to capital markets the way a publicly traded stock company does. This makes the company have a lower appetite for risk and thus higher reserves.
What motivation does the mutual have to over charge itself for med mal insurance if it gives the surplus back when it is not needed? None — as higher profits mean higher dividends to the member physicians. The real question is what motivation does Mr. Angoff’s group have in increasing the insurer’s insolvency prospects by forcing it to reduce its reserves.