In the realm of professional liability insurance, particularly within the healthcare and senior living sectors, understanding claims-made policies is crucial for both insurers and insureds. One of the key components of these policies is the concept of step factors, which play a significant role in determining premium costs over the initial years of coverage.
Claims-made step factors are actuarially determined mechanisms that adjust a policy’s premium to reflect the increasing exposure associated with the provision of professional services over time. Typically, these step factors are applied at annual renewals for a period of 3 to 5 years following the first year of coverage, until the premium is considered mature. This adjustment can impact not only new policies but also any new exposures added to existing policies.
To illustrate how step factors work, let’s consider a sample of common claims-made step factors found in senior living or healthcare professional liability policies:
|
Claims-Made Year |
1 |
2 |
3 |
4 |
5 |
|
Step Factor |
.35 |
.65 |
.85 |
.95 |
1.0 |
|
Premium Increase |
N/A |
+ 85.71 |
+ 30.77 |
+ 11.76 |
+ 5.26 |
The premium increases associated with these step factors are significant. For instance, moving from the first to the second-year results in an 85.71% increase in premium, calculated by taking the difference in step factors (0.65 – 0.35 = 0.30) and dividing it by the first-year step factor (0.30 / 0.35). Subsequent years see smaller increases, with the third year resulting in a 30.77% increase, the fourth year at 11.76%, and the fifth year at 5.26%.
Understanding these step factors is essential for policyholders as they plan their budgets and assess their insurance needs. It’s important to note that before canceling a claims-made policy or removing an exposure, insureds must consider the implications of tail coverage, also known as extended reporting period coverage. This coverage is vital for protecting against claims that may arise after a policy has been canceled, ensuring that professionals are not left vulnerable to potential liabilities.
By grasping these concepts, insureds can better prepare for the financial implications of their policies and safeguard their senior living or healthcare practices. To learn how we can minimize risk while maximizing health for your senior living organization, check our senior living practice.
