For healthcare staffing organizations, understanding claims-made policies is essential, particularly when it comes to the role of step factors. These elements influence how premium costs develop during the early years of coverage, impacting both the insurers and insureds.
What are claims-made step factors?
Claims-made step factors are actuarially calculated adjustments that modify a policy’s premium to reflect the compounding exposure over time associated with providing professional services. Because claims reporting can be delayed, sometimes taking years after an incident, the step factors help insurers account for this lag. Each year a policy remains active, it accumulates additional exposure, which could lead to future claims that are not yet reported and/or fully developed.
Typically, step factors are applied annually during policy renewals, often spanning the first three to five years after coverage begins. The goal is to reach a “mature” premium that accurately reflects the insured’s ongoing risk exposures. It is important to note that these step factors impact not only new policies but also any new exposures added to existing policies.
How do step factors work?
To better understand how claims-made step factors work, below is a hypothetical example of step factors based on typical medical staffing professional liability policies:
| Claims-Made Year | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Step Factor | .35 | .65 | .85 | .95 | 1.0 |
| Premium Increase | N/A | +85.7% | +30.8% | +11.8% | +5.3% |
*This table is a hypothetical scenario and merely for illustration purposes to demonstrate how a step factor could materialize. Actual application varies among insurance providers within the healthcare staffing industry.
In this example, the jump from Year 1 to Year 2 results in an 85.7% increase in premium. This is calculated by taking the difference in step factors (0.65 – 0.35 = 0.30) and dividing it by the Year 1 step factor (0.30 / 0.35). Subsequent years see smaller increases, reflecting the gradual approach toward full risk exposure:
- Year 3: 30.77%
- Year 4: 11.76%
- Year 5: 5.26%
Why are step factors important?
Understanding these step factors is vital for policyholders when planning budgets and assessing insurance needs. Before cancelling 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 protects against claims that may be reported after a policy has been canceled, ensuring that professionals are not left vulnerable to potential liabilities.
Understanding the concepts of step factors enables insureds to better prepare for the financial implications of their policies and safeguard their healthcare staffing practices. To learn how Marsh McLennan Agency (MMA) can help minimize risk and maximize health for your healthcare staffing organization, explore our healthcare staffing toolkit or contact an MMA advisor today.
