How important should these be when you’re choosing your locum insurance?

How can you tell if the company you’re proposing to use is a good bet?

Loss ratios

In simple terms, this is ‘money in vs money out’: how much does the underwriter receive in premiums (and pay in operating expenses) compared with what has been paid out in claims. It’s one measure – a very important one – of the profitability of the business. It should be reviewed dynamically to keep tabs on what constitutes good business. ‘Good business’ doesn’t mean policies never paying out claims; it means charging the right premium rates so that all genuine claims are paid swiftly and with no quibbling.

An individual client could be forgiven for thinking ‘as long as my claim is paid I don’t give a hoot’.

Well that’s the rub.

If the underwriter’s selection criteria are poor or haphazard or are downright wrong it will inevitably come out in the wash. They will be faced with claims they hadn’t anticipated and hadn’t priced for with the inevitable result that they will have to put up their premiums or they will try to wriggle out of claims or they will withdraw from the market. Whatever happens, it’s bad news for the client.

So what does a decent loss ratio look like?

That’s a good question! If we look at car insurance, for example, loss ratios are often in excess of 100%. Yes, that means for every £1 the underwriters take in, they’re paying more than £1 in claims. Underwriters in this position are forced to dip into reserves to present a positive situation to their shareholders.

Ernst & Young Global Limited were quoted back in June 2014 as saying “.... Sooner or later underlying price rises for consumers will be inevitable for the market to be sustainable."

The locum insurance market is small compared to car insurance but the issues are the same – although whether there are any reserves in place to shore up poorly performing business is a moot point. In locum insurance it’s probably the case that the underwriters would simply walk away at the annual renewal date, leaving clients without cover.

A loss ratio of anything under 50% would be considered exceptional; 50 – 75% is perfectly acceptable. When you ask your provider what theirs is, you probably won’t get an answer but, if you do, make sure it’s the loss ratio for the ‘locum insurance book’ only and that they haven’t included the data on another their more profitable line(s) of business because that’s not how underwriters operate. When underwriters decide whether to increase premiums or pull out of the market, they will be looking at a discrete line of business.

As you would expect, providers’ loss ratios are hard to pin down but ratios of up to 250% are bandied about. Hopefully, the foregoing comments should make it abundantly clear that this is a long way from sustainable and has the potential to result in the imposition of significant increases in premium and a certain reluctance to pay claims.

Author: Lynda Cox, Director, Practice Cover – specialists in locum insurance

The opinions presented in this blog are solely those of the author on behalf of Practice Cover Limited and they do not constitute individual advice. Practice Cover is a trading name of Practice Cover Limited and is authorised and regulated by the Financial Conduct Authority

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