All Companies Writing Medical Professional Liability Insurance in Illinois : Illinois Medical Professional Liability Insurance Schedule Rating Plan Guidelines

Illinois Department of Insurance

PAT QUINN

MICHAEL T. McRAITH

Governor

Director

TO:

ALL COMPANIES WRITiNG MEDICAL PROFESSIONAL LIABILITY

INSURANCE IN ILLINOIS

FROM:

MICHAEL T. MCRAITH

DATE:

MAY 11,2011

RE:

COMPANY BULLETIN 201 1-05

ILLINOIS MEDICAL PROFESSIONAL LIABILITY INSURANCE

SCHEDULE RATING PLAN GUIDELINES

The purpose ofthis Bulletin is to advise insurers of the Department’s procedures and guidelines

for implementing and administering the use ofschedule rating plans for medical professional

liability coverage in Illinois.

Executive Summary

Insurers providing medical professional liability insurance are allowed to use schedule rating

plans when rating policies. Some insurers have increased the frequency and magnitude ofthe

scheduled debits/credits being offered. Many times insurers submit rating plans to the Illinois

Department of Insurance (Department) that lackjustification for the proposed schedule rating

plans and contain subjective and unverifiable criteria to assigned scheduled debits/credits.

Pursuant to Section 155.18 ofthe Illinois Insurance Code (215 ILCS 5/155.18(b)(4)), rating

plans “establish standards for measuring variations in hazards or expense provisions, or both.”

In order to comply with 215 ILCS 5/155.18 insurers must adhere to certain procedures when

applying debits/credits, and to limit the amount of debits/credits offered by insurers. Starting in

March 2012, the maximum permissible size of the total premium adjustments will be 25%. Rate

filings submitted prior to March 2012 that fail to meet the guidelines ofthis bulletin will be

subjected to enhanced scrutiny. This Bulletin does not restrict or limit an insurer’s ability to file

additional rating factors in its manual rating plan to reflect the impact of characteristics formerly

contemplated in the schedule rating plan. In fact, the Department strongly encourages the

consideration of reflecting quantifiable, predictive rating factors and characteristics in an

insurer’s manual rating plans and/or experience rating plans

es not restrict or limit an insurer’s ability to file

additional rating factors in its manual rating plan to reflect the impact of characteristics formerly

contemplated in the schedule rating plan. In fact, the Department strongly encourages the

consideration of reflecting quantifiable, predictive rating factors and characteristics in an

insurer’s manual rating plans and/or experience rating plans.

320 West Washington St.

Springfield, Illinois 62767-0001

(217) 782-4515

insurance.ilhnois.gov

Background

A schedule rating plan is any rating plan whereby an insurer’s manual rating plan is adjusted or

modified based upon a schedule of debits/credits. This schedule reflects observable rating

characteristics, which are unique to a risk and not reflected in the manual rating plan or other rate

adjustment mechanisms, such as an experience rating plan. Schedule rating plans are intended to

reflect only factors that are not defined by manual rating or experience rating plans. While

insurers have other methods by which to adjust the premium charged to an insured based on an

insured’s previous loss history, scheduled debits/credits are applied by an underwriter at the time

the premium for the policy is quoted, independent and subsequent to manual rating and any

adjustments for prior loss experience.

The following issues require the Department to release this Bulletin.

Avoiding Statutory Rate Filing Requirements: Once an insurer provides the insured

with a scheduled debit/credit, generally, there is no regulatory constraint imposed to

prevent an insurer from materially changing that debit/credit as the policy is renewed

thereby avoiding the statutory rate filing requirement. This can cause a material rate

change for the individual insured without regulatory review and without a material

change in loss exposure. In some cases, the implied rate increase can be over 50%

edit, generally, there is no regulatory constraint imposed to

prevent an insurer from materially changing that debit/credit as the policy is renewed

thereby avoiding the statutory rate filing requirement. This can cause a material rate

change for the individual insured without regulatory review and without a material

change in loss exposure. In some cases, the implied rate increase can be over 50%.

•

Avoiding Unfair Discrimination: Section 5/155.18 ofthe competitive rating statute

provides that rates in a competitive market shall not be excessive, inadequate or unfairly

discriminatory. Under this provision, pricing differentials are allowed to the degree they

reflect differences in expected losses or expenses with reasonable accuracy. The degree

of accuracy needed for approval ofscheduled debits/credits can be achieved through

well-articulated, written, observable standards in schedule rating plans which are

logically related to differences in loss exposures and differences in expenses, and to the

extent these standards are applied to individual risks with a high degree of consistency.

Individual risk rating plans, consent to rate rating plans and other judgmental rating

mechanisms or rules shall not be used to avoid compliance with this Bulletin.

•

Stabilizing the Market: Limiting schedule rating will help stabilize fluctuations in the

market which result from the “insurance cycle.” Carriers are exhibiting a tendency to use

scheduled debits/credits primarily as a marketing (i.e. “pricing”) tool for agents, rather

than as a tool for underwriters to accurately rate an individual risk. By limiting the

maximum size ofany debits/credits and by requiring documentation to prove that the

insured is entitled to the debits/credits based on objective evidence and well-articulated

underwriting criteria, insurers will comply with the statute in a manner that will promote

a stabilized market

ng”) tool for agents, rather

than as a tool for underwriters to accurately rate an individual risk. By limiting the

maximum size ofany debits/credits and by requiring documentation to prove that the

insured is entitled to the debits/credits based on objective evidence and well-articulated

underwriting criteria, insurers will comply with the statute in a manner that will promote

a stabilized market.

•

Manual Rate Integrity: A book ofbusiness that has a significant overall scheduled

debit/credit plan calls into question the appropriateness ofthe manual rate levels and

class rating plan. The frequency of large schedule rating modifications suggest that

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manual rates are not set at appropriate levels or that a key rating element, modifying the

premium for a large category ofrisks, is missing from the rating plan.

•

Encouraging Loss Control: Setting guidelines for schedule rating will help encourage

health care provider efforts in the area of loss control. Health care providers who

implement loss control programs to reduce loss exposure will benefit from these

programs through lower premium charges. Further, by assigning credits using manual

rating factors rather than scheduled debits/credits, insurers will provide strong incentives

for insureds to control future loss exposures.

Reporting Guidelines

For the reasons listed above, the Department is issuing the following guidelines for the use of

schedule rating plans.

•

Use of Schedule Rating Plans Is Discretionary: An Illinois medical professional

liability insurer may modify the premiums for individual risks by utilizing a schedule

rating plan ifthe plan conforms to the guidelines ofthis Bulletin. However, the use of

such plans is at the insurer’s option and is not mandatory.

•

The Schedule Rating Plan Should Be Sufficiently Detailed and Loss-Related: In the

past, debits/credits have been applied based on extremely vague characteristics

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liability insurer may modify the premiums for individual risks by utilizing a schedule

rating plan ifthe plan conforms to the guidelines ofthis Bulletin. However, the use of

such plans is at the insurer’s option and is not mandatory.

•

The Schedule Rating Plan Should Be Sufficiently Detailed and Loss-Related: In the

past, debits/credits have been applied based on extremely vague characteristics. While

such an approach clearly gives insurers a great degree of flexibility, it can also be abused

as a marketing tool and can be discriminatory. These drawbacks can be greatly reduced

by having a written plan which provides sufficient detail as to which loss-related

behaviors will warrant a debit/credit and the magnitude ofthe debit/credit provided. For

example, the Department considers a characteristic defined merely as “Management

Cooperation” would likely be too vague under these guidelines. But the Department

recognizes as sufficiently detailed a characteristic labeled “Management Cooperation

with the Insurer” which allows separate debits/credits with observable articulated criteria

for prompt claims reporting; cooperation with claim investigations and compliance with

loss-control recommendations. The Department will monitor each plan filed after the

issuance ofthe Bulletin for compliance.

•

The Decision to Apply a Debit or Credit Should Be Based Upon Objective Criteria:

In addition to having vaguely defined categories forpremium adjustments, many times a

plan is deficient because the decision regarding whether to award a credit or apply a debit

is not linked to specific facts which can be objectively verified; this has the potential of

becoming discriminatory. Therefore, the description ofthe category should be related to

factors which can be objectively determined.

In order to help assure that debits/credits are based on objective information, schedule

rating plans should require detailed individual worksheets to be completed by

underwriters or field personnel on each risk eligible for schedule rating

this has the potential of

becoming discriminatory. Therefore, the description ofthe category should be related to

factors which can be objectively determined.

In order to help assure that debits/credits are based on objective information, schedule

rating plans should require detailed individual worksheets to be completed by

underwriters or field personnel on each risk eligible for schedule rating. Schedule rating

plans must be sufficiently detailed describing how the risk modification criteria are to be

evaluated and an objective analysis ofthe risk shall be based on factual information that

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supports the rating and shall be included in the underwriting file. This documentation of

the schedule ofdebits/credits applied shall be sufficient for market conduct examinations

to verify that the schedule rating plan has been applied objectively and consistently.

•

The Schedule Rating Plan Shall Be Applied Uniformly: A rating plan is

discriminatory if it does not apply equally to all similarly-situated insureds. The simplest

way for an insurer to assure uniformity is to file one plan and have it apply uniformly to

all Illinois insureds. Any lesser degree of applicability must be thoroughly explained in

writing to the Department when the rate plan is filed.

•

The Schedule Rating Plan Must Be Filed with the Department: In accordance with

the provision ofSection 5/155.18, medical professional liability insurers must file their

schedule rating plans with the Department not later than thirty days afterthe first day of

being used. Insurers having questions regarding compliance are invited to contact the

Department. A company’s filings shall include, at a minimum, the written terms ofthe

schedule rating plan, sample notification materials, and any worksheets to be used in the

plan’s implementation.

The above requirements shall also apply to any subsequent modifications ofthose plans

previously filed

first day of

being used. Insurers having questions regarding compliance are invited to contact the

Department. A company’s filings shall include, at a minimum, the written terms ofthe

schedule rating plan, sample notification materials, and any worksheets to be used in the

plan’s implementation.

The above requirements shall also apply to any subsequent modifications ofthose plans

previously filed. Insurers are encouraged to file initially the maximum debit/credit levels,

in order to avoid the need to re-file a plan each time a new effective date arrives.

•

The Insureds Shall Be Given Certain Notification by the Insurer: Nothing in this

bulletin shall relieve an insurer of any notification requirements concerning changes in

premium ofthe State ofIllinois.

•

The Schedule Rating Process Should Be Documented: An insurer shall retain a copy

ofany written schedule rating notices mailed to an insured, and a copy ofany worksheets

used to apply the scheduled debits/credits and to calculate any schedule rating

adjustment. For all new business and when a policy is renewed, the application of a

scheduled debit/credit must be supported by evidence documented in the underwriting

file. These documents shall remain in the insurer’s files related to that insured for not less

than the period of two calendar years after the policy is cancelled/non-renewed by either

the insurer or the insured. The Department’s Market Conduct staffwill review these

documents as part ofthe normal examinations. This documentation of the scheduled

debits/creditsapplied should be sufficient for market conduct examinations to verify that

the schedule rating plan has been applied objectively and consistently.

•

Effective Date of Scheduled Debits and Credits: No scheduled debit or credit shall take

effect until the evidence supporting the adjustment is in the appropriate policy file or

other files of the insurer

s documentation of the scheduled

debits/creditsapplied should be sufficient for market conduct examinations to verify that

the schedule rating plan has been applied objectively and consistently.

•

Effective Date of Scheduled Debits and Credits: No scheduled debit or credit shall take

effect until the evidence supporting the adjustment is in the appropriate policy file or

other files of the insurer.

•

Maximum Debits and Credits: Schedule rating plans must allow for both scheduled

debits/credits, and must be limited to a maximum level of25% for all medical

professional liability insurance risks. For insurers who currentlyhave greater

debits/credits than are allowed by this Bulletin, the Department will require insurers to

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reduce current maximum adjustment levels to a maximum level of25% for all medical

professional liability insurance risks according to the following schedule:

Policy Year

Beginning

March 1, 2012

(and thereafter)

Maximum

Credit/Debit

+/-25%

This schedule allows an adjustment period for insurers with current scheduled debits/credits

greater than allowed by this Bulletin. Insurers should not raise the magnitude of their

current scheduled debits/credits during this adjustment period.

•

Method of Calculating Debits or Credits: Insurers shall calculate the amount of any

scheduled debit/credit in a multiplicative manner.

Any changes to the Schedule Rating Plan that causes an increase in premium shall be in

compliance with the Insurance Code including 215 ILCS 5/l43.17a.

Questions or Comments: Insurance companies should send any questions or comments

regarding this Bulletin, including modifications to-existing schedule rating plans to:

Neetha Mamoottile

Actuarial Analyst

Illinois Department ofInsurance

(217) 557-1397

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Submission of filings shall be directed to the Property and Casualty Compliance Unit.

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