current state of the medical indemnity industry - Australian ...

Review of 

competitive neutrality 

in the medical indemnity 

insurance industry 

Report 

March 2005

© Commonwealth of Australia 2005 

ISBN 0 642 74291 X 

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CONTENTS 

EXECUTIVE SUMMARY ........................................................................................ vii 

INTRODUCTION.............................................................................................................1 

CURRENT STATE OF THE MEDICAL INDEMNITY INDUSTRY......................................5 

United group ........................................................................................................................8 

Medical Indemnity Protection Society group ..................................................................8 

Medical Defence Association of Victoria group ..............................................................9 

MDA National group ..........................................................................................................9 

Medical Insurance Australia group...................................................................................9 

Looking forward ..................................................................................................................9 

IMPACT OF INDIVIDUAL ASSISTANCE.......................................................................11 

Premium support scheme.................................................................................................11 

Exceptional claims scheme ...............................................................................................12 

High cost claims scheme ...................................................................................................13 

Run-off cover scheme ........................................................................................................14 

Reinsurance recoveries......................................................................................................16 

IBNR indemnity scheme ...................................................................................................20 

PREMIUMS AND PRICING ...........................................................................................23 

Setting the premium pool .................................................................................................24 

Premium comparisons ......................................................................................................25 

ASSESSMENT OF COMPETITIVE ADVANTAGE ..........................................................31 

Annual value of competitive advantage.........................................................................32 

REDRESSING THE BALANCE .......................................................................................35 

Options ................................................................................................................................36 

APPENDICES 

Appendix A: Terms of reference.....................................................................................41 

Appendix B: Government assistance to medical indemnity insurers........................43 

Appendix C: Snapshot of the medical indemnity industry ........................................49 

Page iii

The Hon Mal Brough MP 

Minister for Revenue and Assistant Treasurer 

Parliament House 

CANBERRA ACT 2600 

The Hon Tony Abbott MP 

Minister for Health and Ageing 

Parliament House 

CANBERRA ACT 2600 

Dear Ministers 

GRAHAM E. N. ROGERS 

Offley House 

100 Powlett Street 

EAST MELBOURNE VIC 3002 

Telephone: (613) 9486 9444 

Facsimile: (613) 9486 9445 

15 March 2005 

I have pleasure in submitting the report of the review of competitive 

neutrality in the medical indemnity insurance industry, in accordance 

with the terms of reference announced by the Government on 12 

January 2005. 

Yours sincerely 

Graham Rogers 

Page v

EXECUTIVE SUMMARY 

The Australian Government commissioned this review to inquire into whether the 

assistance it has given to the medical indemnity insurance industry has created a bias 

in the industry that has benefited some players more than others and, if so, to advise 

on options to redress the imbalance. 

The conclusions of the review are that: 

1. The assistance given by the Government which extends across the industry — 

the high cost claims scheme, the run-off cover scheme, the exceptional claims 

scheme and the premium support scheme — can have different impacts on 

different insurers from time to time but they do not have any systemic 

competitive bias. The measures have been extremely valuable in stabilising the 

industry. (See Impact of individual assistance.) 

2. The specific assistance to United Medical Protection (UMP) in taking over its 

past ‘incurred but not reported’ (IBNR) liabilities has resulted in a competitive 

advantage to its insurer, Australasian Medical Insurance Limited (AMIL). The 

competitive advantage to UMP and its insurer (the group is referred to in this 

report as United) 1 arises because the Government has taken on all its legacy 

commitments, allowing it to concentrate only on the future. All the other 

organisations in the market place must manage and fully fund their legacy 

obligations, as well as compete in the current market place. (See Assessment of 

competitive advantage.) 

3. The analysis of pricing in this report shows that AMIL’s premiums are well 

below those of its competitors. In general, this is the result of a much more 

bullish view of the future impacts of tort law reform, based on its longer 

experience gained in New South Wales. However, it is extremely unlikely that 

the United group could take such a view prudentially if it did not have the 

comfort of knowing that the Commonwealth had assumed its legacy obligations 

for IBNR claims. (See Premiums and pricing.) 

4. There is, however, no clear evidence that this competitive advantage has been 

translated into predatory pricing in specific targeted areas. Nevertheless, general 

pricing practices in the industry, whilst highly professional at the macro level, 

1 This report will generally refer to the United group as a single entity unless it is necessary to 

refer specifically to UMP, the parent medical defence organisation, or AMIL, the captive 

insurer. These entities have separate boards of directors and are governed by different 

regulations. Nevertheless, they have a common chief executive and interrelated financial 

interests. 

Page vii

Executive summary 

Page viii 

allow for a high degree of tactical gaming, especially in non-core geographic 

areas. This can be destabilising. A significant contributor to this gaming is the 

lack of accurate, accessible, industry-wide information. (See Premiums and 

pricing.) 

5. It is appropriate to act to address the competitive advantage of United. 

However, action should be taken with consideration to all the stakeholders 

involved, if the increasing stability in the industry is to be maintained and 

enhanced. (See Redressing the balance.) 

The source of the competitive advantage is the assumption by the Commonwealth of 

UMP’s IBNR liability. The Australian Government Actuary assessed the value of the 

IBNR liability as $253 million at 30 June 2004, allowing for the effect of recoveries from 

the high cost claims and run-off cover schemes. 

To redress the balance it is necessary for United to make a regular series of payments 

to compensate the Commonwealth for the assumption of the obligations. To do so, it is 

necessary to address a range of issues. These include the amount of the initial 

payment, the form of the payment, the minimum provisos governing the payment and 

the need in this still settling market place to recognise the interests of all the 

stakeholders. The report considers these issues.

INTRODUCTION 

For over 100 years in Australia, medical defence organisations — mutual associations 

of doctors — provided medical indemnity cover to doctors. As the indemnities 

provided by these organisations were discretionary, rather than under a contract of 

insurance, the organisations were not subject to regulation by the Commonwealth’s 

insurance legislation. 

The medical indemnity insurance industry is a small but critical part of an effective 

health system. Its absence would leave patients without redress or compensation in the 

event of medical error or negligence. Medical practitioners would be constantly at 

financial risk, to the extent that they would be unlikely to practice. 

In the years leading up to April 2002, the medical defence organisations began to put 

substantial liabilities on their balance sheets for outstanding claims that had previously 

gone unrecognised. There was also pressure to bring the industry under the same 

regulatory regime as the providers of other insurance products. 

In common with some other medical indemnity providers, UMP did not include its 

IBNR liability on its balance sheet. In April 2002, UMP, which was the largest provider 

in the market, applied to be placed into provisional liquidation. This was a result of a 

combination of factors: large-scale market expansion, chronic underpricing and 

reserving, overdependence on a reinsurer that became insolvent, an increase in claims 

stimulated by tort law reform in New South Wales and the inclusion of its IBNR 

liability on its balance sheet. Potentially, a large number of doctors in Australia were 

without indemnity cover. 

Adding to the turmoil following UMP’s collapse, premiums for high-risk specialities 

were increasing with a move to pure risk rating. Many doctors were considering 

leaving the profession or ceasing to perform high-risk procedures, such as deliveries. 

Either development would place patients requiring these medical services at risk. 

In the face of this turmoil, the Government led a number of initiatives in the following 

years to stabilise the industry and create an environment in which the industry could 

operate successfully. These initiatives were to encourage state governments to 

introduce significant tort reform (which New South Wales had already undertaken) 

and to provide a number of measures to reduce the impact of large claims. The 

Government also provided support to those specialist practitioners for whom the 

market cost of medical indemnity insurance would be such as to make practice 

uneconomic. These initiatives applied right across the industry. 

Page 1

Introduction 

In addition, to allow doctors who were United members to continue to practice, the 

Government assumed UMP’s IBNR liability at April 2002 and enabled it to return to 

the market place. It also guaranteed cover to United’s members while United was in 

provisional liquidation. 

The Government’s original intention was to recover its support from United’s 

members through an annual levy over a long period. After negotiation, the 

Government agreed to fund around three quarters of the IBNR claims as they 

emerged. 

At the time of the Government indemnity, UMP’s IBNR liability was around 

$460 million. 

United was in the hands of a provisional liquidator from April 2002 to November 2003. 

It is now trading profitably. In the past two financial years, it has accumulated net 

assets of $175 million, approaching twice the minimum capital requirement set for 

general insurers by the Australian Prudential Regulation Authority (APRA). 1 

United is still the dominant medical indemnity insurance provider with around 

34 per cent of the market, although this is down from around 60 per cent at its peak. It 

dominates in New South Wales, Queensland and the Australian Capital Territory. 

On 4 November 2004, UMP announced that its licensed insurer, AMIL, would make 

significant reductions in premiums for 2005. AMIL was to reduce premiums by an 

average 20 per cent, but premiums for some groups in some states were to fall by 

30 per cent. 

United suggests that a number of factors have had a major impact on its prices, 

including the loyalty of its members and the various measures introduced by the 

Government, but primarily tort law reform. United argues that all of these factors have 

helped it to recapitalise and consolidate its operations. 

Other medical indemnity providers argue that the Government’s assistance to United 

has helped it reduce its premiums. They say that they do not have the capacity to 

match United’s premiums in their states. They suggest that United’s premiums do not 

fully account for the cost of claims and overheads in those states or that the 

Government’s assistance has reduced its cost base. 

1 The minimum capital requirement is the minimum level of capital to ensure solvency. APRA 

requires an ongoing business to maintain a percentage of capital above this level as a buffer 

against poor experience or other adverse circumstances. APRA requires medical indemnity 

insurers to keep their capital at 150 per cent of the minimum at least, because of the long 

term nature of their business and the risks associated with being a single-line insurer. Most 

major insurers actually target 200 per cent of the minimum capital requirement in order to 

ensure a strong level of support from their stakeholders. 

Page 2

Introduction 

The Government commissioned this review to inquire into whether the assistance it 

has given to the medical indemnity insurance industry has created a bias in the 

industry that has benefited some players more than others and, if so, to advise on 

options to redress the imbalance. (See Appendix A for the review’s terms of reference.) Since 

the practical outcome of any bias in competitive neutrality is in pricing, this review has 

also looked at pricing practices in the industry. 

The industry strongly supported this review, making available a wide range of highly 

confidential commercial information to allow the reviewer to form conclusions. 

Page 3

CURRENT STATE OF THE MEDICAL INDEMNITY 

INDUSTRY 

In March 2005, it is clear that the sum total of all the initiatives introduced by both state 

and federal governments, the oversight of the regulators, APRA and the Australian 

Competition and Consumer Commission (ACCC) and, most importantly, by the 

medical indemnity industry itself, has brought the industry back to a state of health 

surprisingly quickly. All the insurers have reached — or are well on the way to 

reaching — the capital APRA requires. Tort law reform seems to have had a significant 

effect in reining in the previous trends to ever escalating claims. There is a strong spirit 

of both cooperation and healthy competition in the industry. 

Medical indemnity is a long-term business. The insurers operate by making promises 

that they will not need to meet for many years. Pricing and reserving, no matter how 

professionally handled, rely on making estimates of an unknown future. The new tort 

law arrangements will take some years to settle down. It would therefore be unwise to 

assume too early that all the problems are resolved. 

Traditionally, the medical defence organisations that offered medical indemnity cover 

were not-for-profit mutuals. After 1 July 2003, regulatory arrangements allowed only 

authorised general insurers to offer medical indemnity insurance. To comply with the 

new arrangements the organisations established medical indemnity insurers, or 

captive insurers, to meet their members’ ongoing needs. There are currently 

five insurers (see Appendix C), which are fully owned by their respective organisations. 

The industry has increased its financial stability through a range of measures. These 

include: 

• Moving to claims made from claims incurred. 

– The first organisation to change was MDA National in 1997 and all the others 

changed by 1 July 2003. 

• A more rigorous approach to pricing, including capital calls and the inclusion of 

components in the price to deliberately fund past liabilities. 

– The industry has steadily built up the overall premium pool as it faced the need 

to return to health. The ACCC’s review into pricing in the medical indemnity 

industry reported that it expected approximately 26 per cent of premiums 

collected in 2004-05 to be surplus. 

Page 5

Current state of the medical indemnity industry 

• Government initiatives, including the high cost claims scheme and the run-off cover 

scheme. 

– The impact of these is dealt with in more detail in the next section. 

The liabilities of the medical indemnity industry have grown significantly in the last 

six years (see Chart 1). In 2002, the industry reported the same amount of assets as 

liabilities. Recently, insurers have been aiming to make profits in order to build capital 

reserves. This has led to an improved financial position in 2003 and 2004. Table 1 

shows that the medical indemnity industry increased net assets from $11 million at 

30 June 2002 to $280 million at 30 June 2004. 

Chart 2 shows the change in the net assets of the medical indemnity groups from 

30 June 1998 to 30 June 2004. United reported a large drop in net assets at 30 June 2002, 

following the spike in claims made in New South Wales with the commencement of 

tort law reform. Since 2002, United has considerably improved its financial position. 

The MDA National group (MDAN group) and the Medical Indemnity Protection 

Society (MIPS) have gradually improved their net assets from 1999. When IBNR 

liabilities are considered the Medical Insurance Australia group (MIA group) reported 

negative net assets at 30 June 2002, but has improved its financial position in the 

subsequent years. The Medical Defence Association of Victoria group (MDAV group) 

had negative net assets in 2001, due to the loss of reinsurance recoveries following the 

collapse of HIH, and zero net assets at 30 June 2002. Its position has also since 

improved. 

2,000 

1,500 

1,000 

Page 6 

Chart 1: Liabilities and assets of the medical indemnity industry 

$million $million 

2,500 

2,500 

500 

1999 2000 2001 2002 2003 2004 

Year ending 30 June 

Total Liabilities Total Assets 

2,000 

1,500 

1,000 

500

200 

150 

100 

50 

0 

-50 


Chart 2: Medical indemnity industry groups’ net asset position 1 

(showing the IBNR liabilities when the insurer first reported on them) 

Net assets ($million) Net assets ($million) 

1998 1999 2000 2001 2002 2003 2004 

MIPS (MDO only) MIA group 

MDAN group MDAV group 

United 

Table 1: Net assets of medical indemnity industry groups (including 

IBNR liabilities) 2 

($million) 30 June 2002 30 June 2003 30 June 2004 

United –1.2 78.9 175.1 

MIPS MDO (MIPS group) 3 9.7 (n/a) 14.0 (n/a) 23.6 (38.0) 

MDAV group 0.0 4.1 22.8 

MDAN group 10.7 21.4 44.5 

MIA group –7.8 0.9 14.7 

Industry total 11.4 119.3 280.7 

1 United’s net asset position reflects the guarantee of its IBNR liability. 

2 Source: Medical indemnity insurers’ annual reports. Note that inconsistencies in accounting 

treatment across insurers mean the net assets are not directly comparable. For example, net 

assets for some years may not reflect prudential margins for the insurer’s outstanding claims 

liability. Also, United’s net asset position reflects the guarantee of its IBNR liability. 

3 A consistent consolidated figure for the MIPS group is only available for 30 June 2004. 

200 

150 

100 

50 

0 

-50 

Page 7


UNITED GROUP 

United is Australia’s largest medical indemnity insurer with around 34 per cent of the 

market and most of the market in New South Wales and Queensland. The medical 

defence organisation UMP provides customer services to its members as well as 

holding liabilities for old claims and AMIL, the captive insurer, issues new insurance 

policies. 

On 3 May 2002, a provisional liquidator was appointed to United, after it was clear 

that United could not meet the full cost of its claims. United reported a large drop in 

net assets due to the New South Wales claims spike and at 30 June 2002 had negative 

net assets of $1.2 million (see Chart 2). It only recovered from this position due to the 

Government’s IBNR indemnity scheme. United was released from provisional 

liquidation on 14 November 2003. Now United has improved its capital position, with 

net assets of $175 million at 30 June 2004. Part of that capital growth was an effect of 

significant capital losses. 

United drastically reduced its reinsurance costs from 2001-02 to 2002-03, partly due to 

the Government’s guarantee and the IBNR scheme, but also through the renegotiation 

of its reinsurance arrangements (see Chart 5). The same pattern of results is apparent 

for reinsurance costs as a proportion of premium income (see Chart 6). 

MEDICAL INDEMNITY PROTECTION SOCIETY GROUP 

The Medical Indemnity Protection Society group (MIPS group) has a large number of 

members in New South Wales, Victoria, Queensland and Tasmania, making a national 

market share of 23 per cent. MIPS fully owns its captive insurer, Health Professional 

Insurance Australia (HPIA). HPIA also writes policies for doctors who are MIPS 

members and who were members of the Medical Protection Society of Tasmania 

(MPST) or the Queensland Doctors’ Mutual (QDM). 

MIPS, MPST and QDM have other arrangements for run-off claims. Professional 

Insurance Australia (PIA) deals with run-off claims from these three organisations that 

were reported prior to 30 June 2003. The Medical Defence Association of Victoria 

(MDAV) also holds a large share of PIA. 

HPIA was the only medical insurer not to use a provisional period to gain capital 

adequacy. Chart 2 shows that the medical defence organisation, MIPS, has increased 

its net assets consistently from 1999. The whole group had net assets of $38 million at 

30 June 2004. 

Page 8


MEDICAL DEFENCE ASSOCIATION OF VICTORIA GROUP 

The largest Victorian medical indemnity insurer is the MDAV group, with a national 

market share of 18 per cent. MDAV reinstated its insurer, Professional Indemnity 

Insurance Company Australia (PIICA) in July 2003, to issue insurance policies as a 

general insurer. As with MIPS, PIA deals with some of MDAV’s run-off claims. At 

30 June 2002, MDAV reported zero net assets. The group’s balance sheet has improved 

over the last two years and at 30 June 2004 it had $22.8 million in net assets. 

MDA NATIONAL GROUP 

The MDAN group formed in Western Australia, but has recently increased its business 

in the eastern states and holds 16 per cent of the national market. MDA National 

(formerly called the Medical Defence Association of Western Australia) is the medical 

defence organisation and MDA National Insurance is the captive insurer. MDAN 

group was the first medical indemnity provider to move to claims made cover, in 1997, 

and the first to report IBNR liabilities. At 30 June 2004, MDAN group reported 

$175.6 million in assets and $131.1 million in liabilities, equating to $44.5 million in net 

assets (up from $21.4 million in 2003). 

MEDICAL INSURANCE AUSTRALIA GROUP 

The MIA group dominates South Australia and has a nationwide market share of 

9 per cent. The Medical Defence Association of South Australia (MDASA) owns the 

insurer Medical Insurance Australia (MIA). 

At 30 June 2002, MDASA reported an unfunded IBNR liability. The group’s financial 

position has since improved. At 30 June 2003, MIA group reported $75 million in 

assets, $74 million in liabilities and net assets of around $1 million. By 30 June 2004 it 

was reporting $108 million in assets, $93 million in liabilities and net assets of 

$15 million. 

LOOKING FORWARD 

The industry aims to continue to be prudent. Funding plans submitted to APRA report 

the aim for industry-wide net capital coverage of 200 per cent of the minimum capital 

requirement. This is well above APRA’s statutory minimum capital requirements for 

the whole insurance industry of 120 per cent, as well as the minimum capital 

requirements that APRA has designated as appropriate for the medical indemnity 

industry of 150 per cent (see Chart 3). 

Page 9


500 

400 

300 

200 

100 

0 

Page 10 

Chart 3: Insurers’ capital base and minimum capital 

requirement coverage 

(2003 and 2004 actual, 2005 and onwards projected) 

Capital base ($million) Per cent of MCR 

600 

240% 

2003 2004 2005 2006 2007 2008 


Capital base MCR coverage 

APRA’s statutory MCR APRA’s designated MCR 

220% 

200% 

180% 

160% 

140% 

120% 

100% 

80% 

60% 

40% 

20% 

0%

IMPACT OF INDIVIDUAL ASSISTANCE 

The premium support scheme, high cost claims scheme, run-off cover scheme and 

exceptional claims scheme extend to all the medical indemnity insurers. (Appendix B 

outlines the assistance provided by the Government in more detail.) The impact of 

these schemes on a given insurer or in a particular state can vary from time to time, for 

example, with the impact of a claims spike generated by tort law reform. However, 

these variations are expected to be short lived. There is no evidence that any one of 

these schemes offers a systemic advantage to any one medical indemnity provider or 

insurer. 

Each of the insurers has estimated the potential benefit receivable from each of these 

schemes up to 2008. The impact of these measures for each insurer has been reported 

in $A, as a proportion of 2003-04 subscriptions (premiums and membership fee), and 

per member. The ‘proportion of subscriptions’ measure is affected by how long an 

insurer has been providing claims made cover, and the ‘per-member’ measure does 

not account for an insurer’s risk profile. However, these measures together provide a 

useful measure of the impact of the assistance on each insurer, taking into account 

their size. 

It is clear that these subsidies have been extremely important in allowing the industry 

to regain a degree of financial stability. Any sharp change would reintroduce 

instability that would not assist the industry or the medical profession that it serves. 

PREMIUM SUPPORT SCHEME 

The premium support scheme helps eligible doctors with the costs of their medical 

indemnity insurance. In general, where a doctor’s gross medical indemnity costs 

exceed 7.5 per cent of gross private medical income, the doctor pays only 20 cents in 

the dollar for the cost of the premium beyond the threshold limit. 

Table 2 shows payments by the Health Insurance Commission (HIC) to medical 

indemnity groups at 1 March 2005. HIC has paid a total of $16.3 million to doctors 

through four insurers. These payments represent 4 to 8 per cent of 2003-04 subscription 

revenue. The average payment per doctor ranges from $163 to $553 across the insurers. 

The differing level of payments represents the insurers’ differing speciality profiles. 

In addition to the support payments, HIC paid $4 million to medical indemnity 

insurers to implement and administer the premium support scheme. The industry 

agreed to a formula for calculating the implementation costs and administration fee 

Page 11

Impact of individual assistance 

based on the relative numbers of members. These fees introduce no competitive 

advantage. 

While the medical indemnity insurers administer the premium support scheme, the 

scheme provides the benefit directly to the doctors by way of a reduction in their 

invoiced premium. As such, this scheme does not benefit one insurer more than 

another. 

Table 2: Premium support payments made by HIC to medical indemnity 

insurers 1 

Page 12 

Payment in year to 

date ($m) 

Payment as a 

proportion of 

2003-04 

subscriptions 

Average payment 

per member ($) 

United 8.89 0.07 505 

MIPS group Not applicable 

MDAV group 1.52 0.04 163 

MDAN group 3.36 0.06 405 

MIA group 2.56 0.08 553 

Total/industry average 16.34 0.06 409 

EXCEPTIONAL CLAIMS SCHEME 

The exceptional claims scheme covers doctors for the cost of medical indemnity claims 

that exceed the limit of their contract of insurance. For the scheme to apply, the doctor 

must have medical indemnity insurance cover to at least $20 million. 

It is unlikely that a medical indemnity claim will exceed the $20 million limit in the 

current environment. Where a claim costs more than $20 million, any amount that 

exceeds the threshold would be paid to the doctor or to an insurer to directly pass onto 

the plaintiff. Insurers get no direct benefit from this policy. Furthermore, as the 

exceptional claims threshold equals the policy limit offered by insurers, the insurers 

have no liability for claims over their $20 million policy limit. Advice from the 

insurers’ actuaries confirms this to be the case. 

Some insurers report that they would continue to offer insurance with a maximum 

$20 million limit if the exceptional claim scheme was removed. If so, there is no 

reinsurance or capital adequacy benefit from this scheme. 

In short, the exceptional claims scheme has no impact on insurers. 

1 Payments as at 1 March 2005 provided by HIC. Payments are expected to be made to MIPS 

group when systems are established.

HIGH COST CLAIMS SCHEME 


Under the high cost claims scheme, the Government reimburses medical indemnity 

insurers, on a per claim basis, half of an insurance payout above $300,000, up to the 

limit of the doctor’s cover. 

Table 3 shows the amount of claims notified that each insurer expects to be paid out by 

the high cost claims scheme, claims notified as a proportion of their 2003-04 

subscriptions and claims notified per member. In 2004-05 a total of $45.7 million claims 

notified in that year are expected to be assumed by the high cost claims scheme. 2 This 

amount increases to $67.7 million in 2007-08. Recoveries for claims notified in 2004-05 

as a proportion of subscriptions average 0.178 and vary from 0.127 to 0.402. Recoveries 

per member in 2004-05 average $1,142 and vary from $805 to $1,817. 

The frequency and average cost of large claims within each insurer affects the level of 

benefit from the scheme. The primary jurisdiction of the insurer, the insurer’s claims 

handling approach and their focus on risk management initiatives significantly affect 

these factors. 

In 2003-04, the number of claims per member is comparatively high for the MDAV 

group. This represents higher than average high cost claims scheme recoveries after a 

spike in claims in Victoria due to tort law reform. The high cost claims scheme assisted 

MDAV group past the claims spike. The number of claims per member will move back 

towards the industry average over time. 

Apart from MDAV group’s large recoveries in 2003-04, the average benefit per 

member for each insurer hovers around the industry average. In conclusion, the high 

cost claims scheme has different impacts on different insurers from time to time, but it 

does not have any systemic bias. 

2 This excludes HPIA, for which figures were not provided. 

Page 13


Table 3: Estimated recoveries from the high cost claims scheme for each 

medical indemnity insurer 3 

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 

United 

Claims notified/2003-04 

subscriptions 0.000 0.035 0.130 0.142 0.177 0.215 

Average benefit per member ($) 

MIPS group 

0 256 955 1,040 1,295 1,574 


subscriptions Not provided 


MDAV group 


subscriptions 4 0.118 0.946 0.402 0.437 0.482 0.532 


MDAN group 

534 4,275 1,817 1,977 2,180 2,405 


Not provided 

subscriptions 0.127 0.155 0.179 0.207 


MIA group 

808 993 1,146 1,320 




Total/industry average 

108 367 1,121 1,229 1,315 1,401 

Total recoveries from claims 

notified ($m) 


5.5 46.2 45.7 50.7 58.8 67.7 


Average benefit per member ($) 180 1,513 1,146 1,272 1,474 1,696 

RUN-OFF COVER SCHEME 

The run-off cover scheme meets the cost of medical indemnity claims against doctors 

aged 65 or more and permanently retired from the medical workforce, on maternity 

leave, retired for more than three years, retired due to disablement, or the estates of 

those that have died. 

3 Insurers’ actuaries provided recoveries for claims notified based on a central estimate in 

nominal dollars. Estimates are subject to a high degree of uncertainty. United’s estimates 

were provided on a calendar year basis and allocated to a financial year, for example, 

2003 was allocated to 2003-04. 

4 MDAV group’s 2003-04 subscriptions were first year claims made, which is around 

55 per cent less than mature claims made premiums. As such, this overestimates the impact 

of this scheme on MDAV group. 

Page 14


Table 4 shows the amount of claims notified that each insurer expects to be paid out by 

the run-off cover scheme, claims notified as a proportion of their 2003-04 subscriptions 

and claims notified per member. In 2004-05 a total of $3.2 million in claims notified in 

that year are expected to be eligible to be paid by the run-off cover scheme. 5 This 

amount increases to $9 million in 2007-08. In 2004-05, eligible claims as a proportion of 

subscriptions average 0.012 and vary from 0.004 to 0.043. Across the industry, eligible 

claims notified in 2004-05 per member average $80 and vary from $24 to $192. 

Generally, the run-off cover scheme represents a small proportion of the liabilities all 

insurers. The estimates of recoveries from this scheme vary slightly between insurers. 

However, there is no systematic bias to any one insurer. 

5 This excludes MIPS group, for which figures were not provided. 

Page 15


Table 4: Estimated recoveries from the run-off cover scheme for each 

medical indemnity insurer 6 

United 

Page 16 

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 


subscriptions 0 0 0.006 0.014 0.017 0.021 


MIPS group 

0 0 45 102 125 153 


subscriptions 


MDAV group 


Not provided 

subscriptions 7 0 0 0.043 0.059 0.076 0.090 


MDAN group 

0 0 192 267 342 406 




MIA group 

0 0 24 69 107 166 




Total/industry average 

0 0 86 216 237 259 

Total recoveries from claims 

notified ($m) 


0 0 3.2 5.9 7.4 9.1 


Average benefit per member ($) 0 0 80.3 147.2 185.2 227.5 

REINSURANCE RECOVERIES 

This measurement of reinsurance costs is necessarily a simplification, as it does not 

take into account the security of the reinsurance program and its value per member. 

Reinsurance programs are complex and can differ from one insurer to another. For 

example, the cost of reinsurance links directly to the degree of retrospective exposure 

in the program. The reinsurer’s rating or the insurer’s exposure to losses (such as 

6 Insurer actuaries provided the estimates for recoveries for claims notified based on a central 

estimate in nominal dollars. Estimates are subject to a high degree of uncertainty. United’s 

estimates were provided on a calendar year basis and allocated to a financial year, 

for example, 2003 was allocated to 2003-04. 



of this scheme on MDAV group.


through the collapse of HIH) reflect this. For the same reason, the reinsurance expense 

in the accounts for a particular year is unlikely to relate perfectly to the cost of buying 

that year’s reinsurance. For example, reinsurance premiums can alter after the event if 

claims experience in a year is particularly bad or if the premiums were set on a 

burning cost basis. 

Chart 4 shows reinsurance expenses (as reported in annual reports) by medical 

indemnity group. For four out of five insurers, reinsurance expenses have consistently 

increased from 1999 to 2003 then reduced slightly in 2004. United’s reinsurance 

expenses increased to 2002 then decreased significantly in 2003. 

100 

80 

60 

40 

20 

0 

-20 

-40 

Chart 4: Medical indemnity groups’ reinsurance expenses 

Reinsurance expenses ($million) 

2000 2001 2002 2003 2004 


MDAN group MIA group MIPS group 

United MDAV group 

Chart 5 shows reinsurance expenses as a proportion of 2003-04 subscriptions. 

Reinsurance expenses as a proportion of subscriptions collected for four out of five 

insurers have gradually decreased from 2002. United’s reinsurance expenses as a 

proportion of subscriptions dropped drastically in 2003. 

100 

80 

60 

40 

20 

0 

-20 

-40 

Page 17


100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

-10% 

-20% 

Page 18 

Chart 5: Medical indemnity groups’ reinsurance expenses 

as a proportion of subscriptions collected in 2003-04 8 

Reinsurance expenses as a proportion of subscription income (%) 

2000 2001 2002 2003 2004 


MIA group MIPS group United 

MDAV group MDAN group 

100% 

Some of the reduction in reinsurance cost is due to the Government schemes. Table 5 

shows the reinsurance savings for the high cost claims and run-off cover schemes. 

In 2004-05, a total of $24.2 million reinsurance savings was due to the high cost claims 

scheme and the run-off cover scheme. 9 This amount increases to $32.1 million in 

2007-08. In 2004-05, the industry average for reinsurance savings as a proportion of 

subscriptions is 0.094, and ranges from 0.049 to 0.227. Reinsurance savings per member 

average $607 and vary from $358 to $1,026. 

In short, all insurers receive reinsurance savings from the high cost claims scheme and 

run-off cover scheme. The overall level of impact of these schemes is competitively 

neutral. 

8 Source: Medical indemnity insurers’ annual reports. United’s reinsurance expenses were 

negative in 2003-04 due to burning cost adjustments from previous years. 

9 This excludes MIPS group, for which figures were not provided. 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

-10% 

-20%


Table 5: Estimated reinsurance recoveries from the high cost claims 

scheme and run-off cover scheme for each medical indemnity insurer 10 

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 

United 

Reinsurance savings/2003-04 

subscriptions 

Reinsurance savings per member 

0 0.067 0.049 0.049 0.051 0.064 

($) 

MIPS group 

0 489 358 358 375 466 


subscriptions 


($) 

MDAV group 


Not provided 

subscriptions 11 Reinsurance savings per member 

0.106 0.243 0.227 0.213 0.307 0.106 

($) 

MDAN group 

481 1,101 1,026 962 1,389 481 


Not provided 

subscriptions 


0.068 0.076 0.083 0.092 

($) 

MIA group 


437 482 533 589 

subscriptions 


0.015 0.030 0.121 0.152 0.167 0.182 

($) 

Total/Industry average 

108 216 862 1,078 1,186 1,294 

Total reinsurance savings ($m) 0.5 14.1 24.2 24.9 25.5 32.1 




($) 16 462 607 624 640 804 

10 Insurer actuaries provided the estimates of reinsurance savings. United’s estimates were 

provided on a calendar year basis and allocated to a financial year, for example, 2003 was 

allocated to 2003-04. While this chart is based on the relevant annual reports, care should be 

taken in interpreting it as reinsurance programs are complex and can differ from one 

insurer to another. 



of this scheme on MDAV group. 

Page 19


IBNR INDEMNITY SCHEME 

Under the IBNR indemnity scheme, the Government funds the IBNR liabilities of 

participating medical defence organisations that did not have sufficient funds to cover 

these liabilities at 30 June 2002. UMP is the only medical defence organisation 

participating in this scheme. 

Table 6 shows that the present value of United’s IBNR scheme liability has reduced to 

$356 million. This is partly funded by the high cost claims scheme and the run-off 

cover scheme. 

Table 6: Break-up of the funding methods for United’s IBNR liability 

($m) 30 June 2003 30 June 2004 

High cost claims scheme 120 96 

Run-off cover scheme 6 

Remaining amount 363 253 

Total liability 483 356 

Claims paid by UMP 10 

Table 7 shows the recoveries in non-discounted values that United will receive from 

the IBNR scheme from 2003 to 2008. No other insurer receives a benefit from the IBNR 

scheme. 

Table 7: Estimated recoveries from the IBNR 12 

2003 2004 2005 2006 2007 2008 

United 

Recoveries for claims notified ($m) 38.7 42.4 28.1 18.9 18.7 20.0 

United could not provide an estimate of the amount of reinsurance savings it has 

obtained from the IBNR scheme as it was not possible to isolate that impact from other 

changes to its reinsurance arrangements. However, information from annual reports 

shows that United markedly reduced its reinsurance expenses from 2001-02 to 2004-05 

(see Chart 4). The same pattern of results is apparent for reinsurance expenses as a 

proportion of premium income (see Chart 5). Table 8 shows United’s reinsurance 

premiums after accounting for burning cost adjustments. 

Table 8: United’s reinsurance premiums 13 

2000-01 2001-02 2002-03 2003-04 

Reinsurance premiums ($m) 26.8 27.6 16.5 10.3 

12 United’s actuary provided the recoveries for claims notified based on a central estimate in 

nominal dollars. Estimates are subject to a high degree of uncertainty. 

13 Source: United. Reinsurance premiums do not include the adjustable premiums calculated as 

payable as a result of any reassessment of the ultimate cost of the reinsurance program in 

prior years. 

Page 20


In comparing United’s reinsurance expenses to the pattern of results for other insurers, 

it is clear that United notably reduced its reinsurance expenses. This reduction in 

reinsurance expenses is partly attributable to changes in United’s reinsurance 

arrangements. The basis on which United purchased reinsurance changed over time 

with changing market conditions, playing a part in increased costs in 2001-02 and 

decreased costs in 2002-03. However, government assistance specific to United (that is, 

the Government’s guarantee and the IBNR scheme) also contributed to this decrease. 

Page 21

PREMIUMS AND PRICING 

The most likely place to see any deviation from competitive neutrality would be in 

pricing — either selectively in desired target markets, or across the board in premiums 

that are lower than justified on technical actuarial bases. 

For that reason, the review paid considerable attention to pricing in the industry. In 

particular, it examined the approaches adopted for pricing in non-core geographical 

markets. Most of the five major medical indemnity insurers have a core market in one 

or two states and derive most of their experience of pricing from those states. 

The review compared a range of prices for benchmark practice areas across all states 

and insurers to gain an objective assessment of relative pricing between insurers and to 

assess whether lower prices in one particular state were deliberate or the result of 

lower pricing across the board. The results do not suggest any predatory behaviour. 

The overall approach to pricing especially at the macro level of settling the total 

desired premium pool was highly professional and rigorous across the whole industry. 

All insurers had developed reasonable data to allow appropriately for the relativities 

between specialities. 

However, once the pricing approach was extended to those states outside the core 

area, the process became much more judgmental and much less rigorous. Insurers 

generally claimed that this was because there was much less data outside their core 

area on which they could base their premiums. 

This claim is either ingenuous, given that the primary insurer in that state has 

adequate data and therefore provides a benchmark, or it is a clear signal that there is a 

need for much greater access to information about prices and claim rates across 

insurers. 

It seems curiously difficult to access the prices of most competitors. This reduces 

significantly the effectiveness and efficiency of the market and reduces significantly 

the opportunity for medical practitioners to make comparisons. It also places the 

insurers themselves at risk of setting too low premiums in a particular state and 

accidentally gaining a large segment of unprofitable business. 

There are three suggestions that I would raise for consideration by the industry. 

1. Overall, it would be in the interests of the insurers and their clients for much 

wider pricing information to be readily available. This should be taken up by the 

industry. In addition, the Institute of Actuaries of Australia is currently 

Page 23

Premiums and pricing 

Page 24 

developing medical indemnity premium guidelines. It would be appropriate for 

the institute, in developing those guidelines, to consider how its practitioners 

should test whether rates are appropriate at the individual state and speciality 

level, as well as at the macro level. 

2. The industry should consider whether to move away from setting prices once a 

year. This practice of itself poses considerable risks should subsequent experience 

show the need for price adjustments that would otherwise not be made until the 

end of the year. 

3. The industry should continue its work on collecting claims data. I would 

encourage it to extend this to collecting separate state based data, since it is state 

law that drives tort law reform and it is possible that different experiences will 

emerge in different states. 

SETTING THE PREMIUM POOL 

The actuaries of medical indemnity insurers use extensive liability assessments, pricing 

reports and funding plans and financial forecasts to set their premium pool. In the 

ACCC’s second monitoring report, the ACCC concluded that the premium pool for all 

five medical indemnity insurers was actuarially and commercially justified. 

When actuaries set a premium pool, they first create a pure risk pool, based on the 

assessed risks of members and assumed claims frequencies and average claims costs. 

When assessing the pure risk pool most insurers had insufficient data to measure the 

true extent of tort law reform on claims costs and frequencies. Only United reduced 

the pure risk premium pool significantly after assessing the impact of tort law reform. 

United was in the best position to assess the impact of tort law reform because its core 

state, New South Wales, was the first to introduce reform in 2001. When determining 

the appropriate premium pool, actuaries also account for the reduction in costs to 

insurers due to the high cost claims scheme and the run-off cover scheme. The 

estimated costs of expenses, net reinsurance costs and required surplus (to build 

capital to meet APRA’s minimum capital requirement) are also built into the premium 

pool. 

Chart 6 shows that medical indemnity subscriptions have increased from 1999 to 2003 

before stabilising in 2003-04. In 2003–04, the industry collected around $300 million in 

premiums from mainly medical professionals. Appendix C shows the amount of 

premium collected by the insurer and membership fee collected by the medical 

defence organisations (both referred to as subscriptions) across the industry. The 

ACCC expects that in 2004–05 an average 26 per cent of premiums raised will be 

surplus. The ACCC expects that the rest of the premiums raised will be used to pay net 

claims costs (an average of 36 per cent of premiums raised), reinsurance expenses 

(16 per cent) and underwriting and general expenses (22 per cent).

350 

300 

250 

200 

150 

100 

50 

0 

Income $million 

Chart 6: The medical indemnity premium pool 

1999 2000 2001 2002 2003 2004 


PREMIUM COMPARISONS 

Subscription Income Call Income 


Income $million 

350 

This section compares medical defence organisation subscription fees and insurer 

premiums for 2004-05 (for four medical indemnity insurers) or 2005 (for United) across 

seven common classes of doctors, to the state average. The charts compare mature 

claims made premiums for New South Wales, Queensland, Western Australia, 

South Australian, Australian Capital Territory and Northern Territory, 1 and second 

year claims made premiums for Victoria and Tasmania. 

When the information is considered as a whole, two trends are apparent. Firstly, for 

the same risk speciality there is large variability in premium charged (up to 

100 per cent difference). The differing proportion of premium that insurers allocate to 

building capital reserves can account for some of this difference. However, a larger 

factor in the difference in premiums is likely to be differing risk assessments of 

specialities, based on differing claims information. 

Secondly, United’s 2005 premiums are consistently and substantially lower than other 

insurers across all states for most specialities measured. Compared with its 

competitors United has taken a much more bullish view of the impact of tort reform 

and has now a much lesser imperative to continue to build up capital. United has a 

1 One insurer does not issue mature claims made premiums and provided hypothetical 

premiums. These premiums are likely to be higher than true mature claims made premiums. 

300 

250 

200 

150 

100 

50 

0 

Page 25


clear competitive advantage in the form of much lower premiums in almost every 

category. The source of this competitive advantage is discussed in the next section. 

As United’s premiums are generally lower across the board, there is no evidence of 

predatory pricing in any specifically targeted areas. While United’s 2005 premiums for 

the categories reviewed are consistently lower than the premiums of other insurers, its 

premiums were lower than those of some insurers for some specialties even before its 

recent 20 or 30 per cent reductions. 

Chart 7 shows premium variability for a general practitioner with an income of 

$200,001. General practitioners are the insurers’ largest market, with around 

40 per cent of all doctors. One insurer has the lowest premiums for general 

practitioners in all jurisdictions except Tasmania. 

Chart 8 shows that there is also large variability in procedural general practitioners’ 

premiums. Chart 9 shows how the premium of an anaesthetist varies between insurers. 

One insurer has the lowest premium in all jurisdictions except Victoria. Chart 10 shows 

that premiums charged for a general physician by one insurer are considerably lower 

than others, except in New South Wales. Obstetricians’ premiums for three insurers are 

similar. One insurer charges significantly more than others (see Chart 11). The 

premiums for both general surgeons (see Chart 12) and orthopaedic surgeons (see 

Chart 13) differ across insurers, however the cheapest insurer differs by jurisdiction. 

120% 

-30% 

-60% 

-90% 

-120% 

Page 26 

90% 

60% 

30% 

0% 

Chart 7: Premium comparison for general practitioners 2 

Variation in premiums from industry average (% difference) 

NSW VIC QLD WA SA Tas ACT NT 

2 Based on an income of $200,001. 

Insurer A Insurer B Insurer C Insurer D Insurer E 

120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120%


Chart 8: Premium comparison for procedural general practitioners 3 


120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 

120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 



Chart 9: Premium comparison for anaesthetists 4 




120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 

120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 

3 Based on an income of $200,001 for a procedural GP who does obstetrics but not cosmetic 

procedures. 


Page 27


120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 

120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 

Page 28 

Chart 10: Premium comparison for general physicians 5 




Chart 11: Premium comparison for obstetricians 6 






120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 

120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120%

120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 

120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 

Chart 12: Premium comparison for general surgeons 7 





Chart 13: Premium comparison for orthopaedic surgeons 8 






120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 

120% 

90% 

60% 

30% 

0% 

-30% 

-60% 

-90% 

-120% 

Page 29

ASSESSMENT OF COMPETITIVE ADVANTAGE 

It is a matter of fact that UMP has a form of assistance in the assumption of its IBNR 

liabilities by the Commonwealth that was not granted to any other medical indemnity 

provider. The issue for judgment is whether that assistance does offer a competitive 

advantage and, if so, the options that are available to redress the imbalance. 

This review concludes that, on all the evidence available, the guarantee gives United a 

degree of comfort and strength in the market place that in turn gives it a competitive 

advantage. 

United has come from a capital deficit of $1 million at 30 June 2002, to a capital surplus 

of $175 million at 30 June 2004. The level of surplus capital in AMIL gives the insurer a 

net capital of 184 per cent of the minimum capital requirement compared with an 

industry average (excluding United) of 135 per cent. The group’s reinsurance costs 

have also reduced since 2002. 

Not all of the regaining of strength comes from the Government’s IBNR support. 

United’s strength also results from a conjunction of strong pricing in the 2003 and 

2004 years and the benefits of tort law reform in New South Wales, which commenced 

much earlier than in other states. However some 20 per cent of what would otherwise 

be United’s total liabilities have been assumed by the Commonwealth. This is an 

immensely valuable component of the balance sheet strength of United. 

A strong balance sheet and the assumption of legacy liabilities by the Commonwealth 

allow United to be more assertive in pricing, even within normal prudential limits. 

There is less of an imperative for United to continue to build up capital or to support 

the coverage of past IBNR liabilities. This is at a time when most of the other insurers 

are still working hard to replenish their capital. The ACCC reports that it expects 

approximately 26 per cent of the 2004-05 premium pool for the medical indemnity 

insurers to be surplus. 

It also allows United to take a more robust view of the likely benefits emerging from 

tort law reform and to capitalise on the experience of this that it is gaining in 

New South Wales. 

The analysis of price levels by insurer carried out as part of this review (discussed in 

the previous section) clearly shows that United premium levels are well under the rest 

of the market across all states and across all the specialities and income bands 

measured. 

Page 31

Assessment of competitive advantage 

However, there is no evidence that United has used recently acquired capital to 

subsidise premiums in specific target markets or engaged in predatory pricing. It is 

worth noting that there is a history of tactical pricing over time by most of the medical 

indemnity insurers or their precedent organisations, but no more so than would be 

expected in any active and competitive market place. (See the section on premiums and 

pricing for more detail.) 

ANNUAL VALUE OF COMPETITIVE ADVANTAGE 

To assess the value of the competitive advantage it is necessary to speculate on what 

commercial arrangements United would have to make in its place if the Government 

were to remove its guarantee. To redress the competitive advantage it would then be 

appropriate for a charge to be made on United, equivalent to the estimated annual cost 

of putting in place those commercial arrangements. 

The Australian Government Actuary has estimated that the central estimate value of 

the total IBNR liabilities as at 30 June 2004 was $356 million. The Australian 

Government Actuary also estimated that the high cost claims scheme and the run-off 

cover scheme would cover approximately $103 million of this in any case, leaving a 

liability net of these items of $253 million, referred to here as the net liability. 

If United were to take back these obligations it would have to raise capital to offset 

against the net IBNR liability. From experience gained in other areas where mutuals 

such as health insurance or credit unions have had to raise capital, it would most likely 

be done in the form of subordinated debt. This would not be an easy task given the 

recent history of the medical indemnity industry. 

The terms on which the subordinated debt would be raised must be a matter of 

speculation. However, the terms would probably lie between 8½ and 10½ per cent 

per annum. For the purposes of this review, I have assumed the intermediate point of 

9½ per cent is appropriate. 

The amount United would need to raise to match UMP’s obligations would be the net 

liability of $253 million. However, the UMP support payments from doctors would 

reduce the value of the obligation to about half of that amount. The value of UMP 

support payments at 30 June 2004 was $114 million. 

Thus, at the present time, a reasonable annual charge for the competitive advantage 

gained from the assumption of UMP’s IBNR liabilities by the Commonwealth could be 

Page 32

Assessment of competitive advantage 

assessed at one half of, say, 9½ per cent of $253 million in the first year and one half of 

9½ per cent of the IBNR net liability outstanding at each 30 June thereafter. 1 

It is suggested that a time limit, say 10 years, be placed on any such payments. Over 

that time market conditions will have changed substantially. The degree of competitive 

advantage from this source could be reassessed. 

1 Given that interest rates will change over time, this would be better expressed as 4 per cent 

over the long-term Commonwealth bond rate applicable at that time. 

Page 33

REDRESSING THE BALANCE 

The conclusions of the review are that: 

1. The assistance given by the Government which extends across the industry — 

the high cost claims scheme, the run-off cover scheme, the exceptional claims 

scheme and the premium support scheme — can have different impacts on 

different insurers from time to time but they do not have any systemic 

competitive bias. The measures have been extremely valuable in stabilising the 

industry and in bringing it back to health. 

2. The specific assistance given to United in taking over UMP’s past IBNR 

liabilities has created a competitive advantage. The competitive advantage to 

United arises because the Government has taken on all its legacy commitments, 

leaving it free to concentrate only on the future. All the other organisations in 

the market place must manage and fully fund their legacy obligations, as well as 

compete in the current market place. 

3. The analysis of pricing using the seven speciality and income bands agreed with 

the industry as a reasonable proxy for the market place clearly shows that 

United’s premium levels are well below those of its competitors. In general, this 

is the result of a much more bullish view of the future impacts of tort law 

reform, based on its longer experience gained in New South Wales. However, it 

is extremely unlikely that United could take such a view prudentially if it did 

not have the comfort of knowing that the Commonwealth had assumed its 

legacy obligations for IBNR claims. 

4. There is however no evidence that this competitive advantage has been 

translated into predatory pricing in specific targeted areas. Nevertheless, general 

pricing practices in the industry, whilst highly professional at the macro level, 

allow for a high degree of tactical gaming, especially in non-core geographic 

areas. This can be destabilising. A significant contributor to this gaming is the 

lack of accurate, accessible, industry-wide information. 

5. It is appropriate to act to address the competitive advantage of United. 

However, action should be taken with consideration to all the stakeholders 

involved, to enhance the increasing stability in the industry. 

Page 35

Redressing the balance 

OPTIONS 

The source of the competitive advantage is the assumption by the Commonwealth of 

UMP’s IBNR liability. The Australian Government Actuary assessed this as 

$253 million at 30 June 2004, allowing for the effect of recoveries from the high cost 

claims and run-off cover schemes. 

Options to redress the balance are: 

A: For United to take back the obligation by raising the appropriate level of 

capital in the market place. 

B: For United to make a regular series of payments to compensate the 

Commonwealth for the assumption of the obligations. 

C: For the Commonwealth to provide equivalent support to the other medical 

indemnity insurers or medical defence organisations. 

It would be unrealistic to require United to raise the appropriate level of capital 

required for option A and could create a high level of uncertainty among stakeholders. 

Providing more funding to other insurers under option C may well introduce further 

unforeseen competitive advantages, given their different starting points. As neither 

option A nor option C is considered practical or desirable, the remainder of this section 

focuses on option B. 

Option B 

To put option B into effect a range of issues must be addressed. These include the 

amount of the initial payment, the form of the payment, the minimum provisos 

governing the payment as well as the need in this still settling market place to 

recognise the interests of all the stakeholders. These are considered below. I have also 

separately considered whether significantly larger payments that actually take back 

the funding of the obligations are an alternative practical option. 

The amount of the payment 

Payments should continue for a period of 10 years including the first payment. 

The payment made in each year should be one half of x% of the IBNR liability (net of 

the high cost claims and run-off cover schemes payments) established as at 30 June in 

the preceding year by the Australian Government Actuary. To reflect movements in 

the cost/yield of money over time, the charge should be determined as follows: 

Page 36


Government long-term bond rate + 4% 

Payment = × IBNR net liability 

2 

Since the emerging liability could be quite volatile, given that the impacts of tort law 

reform have yet to settle down into a stable pattern, the upper level of the payment in 

any given year should be no greater that the payment established for the first year. 

If United was to obtain subordinated debt in the market place repayments would be 

tax deductible. Accordingly, it would be desirable to treat the payment to the 

Government as a legitimate business expense or to base it on a net amount. 

The form of the payment 

The competitive advantage in the market place rests with AMIL, the insurer of the 

United group, but the source of the competitive advantage rests with the parent UMP, 

which holds the obligation for the IBNR indemnity scheme claims. The payment must 

therefore come from AMIL to the Government either directly or via UMP. 

Payment could be required through a specific charge, deed or reduction in the 

Government’s IBNR payments. I can make no comments on the practicality of such an 

approach and leave that as a matter for the Commonwealth. 

Minimum provisos 

The provisos surrounding the payment are a critical part of the process of addressing 

the balance since a number of stakeholders are involved, including the practitioners 

making support payments, the practitioners who are currently insured with AMIL, the 

prudential supervisor APRA, the boards of UMP and AMIL and the Government. The 

provisos below are recommended as essential to ensuring that, whilst addressing the 

competitive non-neutrality, the continuing stabilisation of the industry is not impaired. 

The recommended provisos are: 

1. The payment can only be made if sufficient net surplus exists to cover the 

payment. 

2. The payment should not endanger the prudential soundness of AMIL. The 

minimum prudential requirement, set by APRA having regard to the nature of 

the industry, is 150 per cent of the minimum capital requirement. 

3. If the payment is not made then the obligation to make the payment should not 

accumulate. While future premiums should be set by an actuarial assessment that 

takes the desirability of making the payment into account, the actual payment 

would nevertheless only be made if the remainder of the provisos are met. 

Page 37


Each of these provisos should be subject to an actuarial sign off. 

In addition to the minimum provisos, there are wider issues to consider, to recognise 

the wide range of stakeholders. 

Respecting the interests of all stakeholders 

In settling the minimum proviso above, it was recognised that it would be 

counterproductive to be over prescriptive in all areas surrounding the payment. 

Market conditions can change rapidly and the key parties will need room to exercise 

judgment. The following matters should therefore also be taken into account. 

Pricing and the practitioners 

The medical defence organisations are mutuals and the consequences of any financial 

decisions fall ultimately on their members. Future pricing decisions will need to reflect 

the changing conditions in the market place and, as indicated elsewhere, the impacts of 

tort law reform are still emerging. Adjustments in pricing must occur over time if this 

recommendation is put into effect but it would be counter productive if sharp 

adjustments were made. 

Prudential soundness and the obligations of AMIL directors 

The directors of AMIL have set their desired level of prudential soundness at 

200 per cent of the minimum capital requirement rather than the 150 per cent required 

by APRA. This level is common amongst the major insurers in the market. At 

30 June 2004, AMIL’s coverage of its minimum capital requirement was 184 per cent. 

It expected to increase to 200 per cent during 2005. This suggests United could make 

the proposed payment while still meeting both the minimum capital requirement set 

by APRA and the AMIL board target. The board target should be respected but it 

should not be regarded as an absolute minimum. 

Maintenance of Government support 

The support given by the Government to the medical indemnity industry has been 

critical in returning it to a degree of health and in providing a stable platform for the 

coverage of medical practitioners. Medical indemnity is no longer a major issue for 

doctors. It is important that the level of support be seen as stable and ongoing. 

To that end an option which uses this payment to offset UMP support payments by 

those practitioners covered by that scheme is likely to be better supported by the 

market place than any other option for use of the payment. 

The option of larger payments 

It is conceivable for United to make larger payments to take back the obligation, or at 

least some of it, and therefore reduce the level of the subsequent competitive neutrality 

charge in future years. 

Page 38


Whilst larger payments might be contemplated without infringing the minimum 

capital requirement of 150 per cent mandated by APRA, such payments would cut 

across the target set by the AMIL board, to achieve and maintain 200 per cent of the 

minimum capital requirement, in line with most major insurers in the general 

insurance industry. 

Page 39

APPENDIX A: TERMS OF REFERENCE 

Terms of reference 

Background to the inquiry 

Some medical indemnity providers have expressed concerns about competitive 

neutrality in the medical indemnity market resulting from Government assistance 

provided to the industry in recent years. It is an essential principle that Government 

assistance not be used to provide a competitive advantage within an industry. The 

Government has decided to commission a review by a suitably qualified independent 

person to examine the concerns expressed. 

Scope 

The inquiry shall examine the source and extent of any competitive advantages in the 

medical indemnity industry arising from measures undertaken by the Australian 

Government specifically to assist medical indemnity providers since 29 April 2002. 

The inquiry shall analyse: 

• each form of Government assistance, and their interactions, in assessing 

implications for competitive neutrality in the medical indemnity market; and 

• any resulting competitive advantages, including but not limited to such possible 

advantages as savings on reinsurance or capital-servicing costs. 

(The analysis should consider each medical indemnity insurer individually, its parent 

or related medical defence organisation, and also each medical indemnity group as a 

whole.) 

Should any competitive advantage to one or more medical indemnity providers be 

determined, the inquiry shall identify and evaluate options to restore competitive 

neutrality. The evaluation of such options shall have regard to the Government’s 

general policy aim of ensuring a viable, affordable, fair and competitive medical 

indemnity market, recognising the interests of all stakeholders — insurers, doctors, 

patients and taxpayers. 

Page 41

Appendix A: Terms of reference 

Terms of reference (continued) 

For the purposes of the inquiry, competitive neutrality requires that a medical 

indemnity provider does not enjoy a net advantage over competitors arising primarily 

from assistance provided by the Australian Government specifically to medical 

indemnity providers since 29 April 2002. 

The principle of competitive neutrality does not extend to advantages arising from 

factors such as business size, skills, location or customer loyalty and how these factors 

might interact with Government assistance schemes available to all medical indemnity 

providers. 

The inquiry will report to the Government through the Minister for Health and Ageing 

and the Minister for Revenue and Assistant Treasurer by 15 March 2005. 

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APPENDIX B: GOVERNMENT ASSISTANCE TO MEDICAL INDEMNITY 

INSURERS 

The Australian Government announced a wide range of measures available to all 

medical indemnity insurers to improve premium affordability and security of cover for 

doctors. 

Measures announced by the Minister for Health and Ageing and the then Minister for 

Revenue and Assistant Treasurer on 17 December 2003 were intended to make the 

medical indemnity market more sustainable, to give doctors the certainty they need to 

continue practicing and to make medical indemnity cover more affordable for doctors. 

The package included: 

• tort law reform; 

• market reforms to medical indemnity insurance and better consumer protection for 

doctors who buy insurance; 

• the premium support scheme, to help doctors whose medical indemnity costs 

exceed 7.5 per cent of their gross private medical income. This broader scheme 

replaced the medical indemnity subsidy scheme; 

• the high cost claims scheme, to help medical indemnity insurers by funding 

50 per cent of the cost of medical indemnity insurance payouts between $300,000 

and up to the limit of the practitioner’s cover; 

• the exceptional claims scheme, to provide protection for doctors against personal 

liability for claims that exceed their level of insurance ($15 million for claims 

notified from 1 January 2003 to 30 June 2003; $20 million for claims notified from 

1 July 2003); 

• the run-off cover scheme, to meet the cost of claims against eligible doctors who 

retire or leave the private medical workforce permanently; and 

• the IBNR indemnity and UMP support payment schemes, under which the 

Government meets the cost of claims from UMP’s unfunded IBNR liability and 

UMP members contribute to that cost. 

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Appendix B: Government assistance to medical indemnity insurers 

Tort law reform 

With the crisis in insurance premiums, the Government worked with the states and 

territories to facilitate a nationally consistent approach to tort law and legal system 

reforms. 

A principles-based review of the law of negligence, the Ipp report, resulted in a 

number of recommendations designed to reform the law. States and territories are 

moving to implement many of the recommendations, which should lead to greater 

consistency across jurisdictions and result in a system that imposes a reasonable 

charge on both doctors and patients. 

In relation to medical indemnity insurance, state and territory Ministers agreed to 

implement reforms to the standard of care, limitations periods and caps and thresholds 

on damages. 

To underpin state and territory law reform, the Government amended the Trade 

Practices Act 1974. 

Prudential regulation and product standards 

The Medical Indemnity (Prudential Supervision and Product Standards) Act 2003, which 

commenced on 1 July 2003, requires prudential supervision and product regulation of 

providers of medical indemnity cover. 

The Act allows only general insurers to provide medical indemnity cover, under 

contracts of insurance. As a result, providers of medical indemnity cover are subject to 

appropriate prudential supervision by APRA. Also, under the Act, the indemnities 

insurers offer to doctors must meet set standards of contractual cover and consumer 

protection. Product standards help to ensure that a minimum level of continuous 

protection is available to doctors who wish to switch indemnity providers. 

Stand alone product disclosure rules under the Act also apply, to assist doctors to 

understand the nature of their cover, complemented by product disclosure rules in the 

Corporations Act 2001. In addition to requiring the insurer to provide the doctor with 

information about the significant characteristics and features of the cover on offer, the 

stand alone regime also requires that the offer documentation include a clear, concise 

and effective explanation of the risks for the doctor from not taking out the product 

and alternative options to the cover on offer. 

Premium support scheme 

The premium support scheme helps eligible doctors with the costs of their medical 

indemnity insurance. 

Page 44


Where a doctor’s gross medical indemnity costs exceed 7.5 per cent of gross private 

medical income, the doctor pays only 20 cents in the dollar for the cost of the premium 

beyond the threshold limit. For example, if a doctor’s medical indemnity costs are 

$1,000 more than 7.5 per cent of gross private medical income, the premium support 

scheme pays $800 and the doctor pays the additional $200 above the threshold. 

For procedural general practitioners working in rural areas, the premium support 

scheme covers 75 per cent of the difference between premiums for these doctors and 

those for non procedural general practitioners in similar circumstances (that is, in the 

same location, with the same income and the same insurer). Rural procedural general 

practitioners are eligible for the premium support scheme regardless of whether they 

meet other scheme eligibility criteria. 

High cost claims scheme 

Under the high cost claims scheme, the Government reimburses medical indemnity 

insurers, on a per claim basis, half of an insurance payout above a set amount, up to 

the limit of the doctor’s cover. 

The point at which the scheme cuts in has fallen over time. The scheme covers half of 

claims, up to the limit of the practitioner’s cover: 

For claims notified on or after The scheme applies to payouts 

1 January 2003 and before 22 October 2003 above $2 million 

22 October 2003 and before 1 January 2004 between $500,000 and $20 million 

After 1 January 2004 between $300,000 and $20 million 

Exceptional claims scheme 

The exceptional claims scheme covers doctors for the cost of medical indemnity claims 

that exceed the limit of their contract of insurance. For the scheme to apply the doctor 

must have medical indemnity insurance cover of at least $15 million for the period 

1 January to 30 June 2003 and $20 million for the period from 1 July 2003. Where the 

doctor has a contract of insurance that has a limit higher than the threshold, the 

scheme applies above the contract limit. Claims can be either a single very large claim 

or an aggregate of claims that together exceed the contract limit. 

HIC administers the scheme. It did not make any payments under the scheme during 

2003-04 and, based on actuarial data, it does not expect to make any payments under it 

in the 2004-05 financial year. 

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Run-off cover scheme 

Under the run-off cover scheme the Government guaranteed, from 1 July 2004, to pay 

the cost of medical indemnity claims against doctors aged 65 or more and permanently 

retired from the medical workforce, or on maternity leave, retired for more than 

three years, retired due to disablement, or the estates of those that have died. 

There is a charge on medical indemnity insurers to pay for the cost of run-off claims 

against eligible doctors. Insurers pass on this charge to doctors through their insurance 

premiums. While this charge on insurers will fund the scheme for emerging claims, the 

Government has committed to funding the start-up liability. 

The run-off cover scheme covers claims where the insurer was first notified of the 

claim (or the facts giving rise to the claim) on or after 1 July 2004. 

Under the run-off cover scheme, insurers are obliged to give eligible doctors medical 

indemnity cover on the same terms and conditions, and for the same range of 

incidents, as the last cover that they had prior to becoming eligible for the scheme. This 

must cover the period when the doctor was a registered medical practitioner and had 

medical indemnity cover with an insurer. 

IBNR indemnity scheme and UMP support payments 

Under the IBNR indemnity scheme, the Government funds the IBNR liabilities of 

participating medical defence organisations that did not have sufficient funds to cover 

these liabilities at 30 June 2002. UMP is the only medical defence organisation 

participating in this scheme. The Government’s initial intention was to fund only the 

unfunded IBNR liability but later extended the scheme. Under the scheme, the 

Government indemnifies UMP for the cost of claims arising out of incidents not 

notified before 1 January 2002. 

When the Government took on United’s IBNR liability it was estimated at around 

$460 million. As at 30 June 2004, the estimated value has fallen to $356 million. The 

Australian Government Actuary has noted that the IBNR estimate is subject to 

significant inherent uncertainty, due to the long period over which claim payments 

will be made and the difficulty in estimating the amount that will eventually be paid 

for individual claims. 

To fund payments made under the IBNR scheme the Government introduced an IBNR 

contribution scheme, to collect contributions from medical practitioners and other 

health professionals who were members of UMP as at 30 June 2000. 

While the original announced policy was for United’s then members to reimburse the 

Government over time through an annual levy, the Government later agreed to fund 

around three-quarters of the IBNR claims as they emerged. The remaining quarter is to 

Page 46


be met by doctors who were members of UMP (or other organisations taken over by 

UMP) at 30 June 2000. 

In reducing the amount to be met by UMP members, the Government renamed the 

IBNR contribution scheme to the UMP support payments scheme. Act of Grace 

payments refunded payments of $2.9 million made under the IBNR contribution 

scheme during 2003-04. 

The UMP support payments scheme is capped at a maximum of six years and reflects 

the length of time the doctor was a member. For example, a doctor who had been a 

member of UMP for two years would pay UMP support for two years. 

Doctors who were members of UMP and who have medical incomes above $5,000 

a year pay (per annum) the lesser of: 

• the original annual IBNR levy; 

• 2 per cent of gross Medicare billable income from the preceding 12 months; or 

• $5,000. 

For the 2003-04 contribution year, the maximum payable by a doctor was $1,000 as the 

original IBNR moratorium was still in place. The maximum payable for 2004-05 is 

$3,000. 

Page 47

APPENDIX C: SNAPSHOT OF THE MEDICAL INDEMNITY INDUSTRY 1 

Group name United MIPS group MDAV group MDAN group MIA group 

= = = = = 

Medical Defence 

Association of SA Ltd 

(MDASA) 

The Medical Defence 

Association of WA 

(MDA National) 

+ + + + + 

The Medical Defence 

Association of Victoria 

Ltd (MDAV) 

Medical Indemnity 

Protection Society 

(MIPS) 

United Medical 

Protection (UMP) 

Mutual MDO 

Medical Insurance 

Australia Pty Ltd 

(MIA) 

MDA National 

Insurance Pty Ltd 

(MDANI) 

Professional 

Indemnity Insurance 

Company Aust. 

Pty Ltd (PIICA) 

Health Professionals 

Insurance Australia 

Pty Ltd (HPIA) 

Australasian Medical 

Insurance Limited 

(AMIL) 

APRA regulated 

insurance company 

(active) 

� � � � � 

Appendix C: Snapshot of the medical indemnity industry 

17,600—34% 11,792—23% 9,357—18% 8,300—16% 4,638—9% 

Market share at 

1 July 2004 2 

129.1 39.5 42.33 53.1 33.0 

2003-04 subscription 

revenue ($m) 

NSW/Queensland/ACT Victoria/Tasmania Victoria WA SA 

Dominant state by 

members 

Determination 

Not participating 

delayed for 2004-05 

Participating Not participating Determination 

delayed for 2004-05 

IBNR indemnity 

scheme 

175.1 38.0 22.8 44.5 14.7 

Net assets at 

30 June 2004 ($m) 

1 Unless otherwise stated, information is from United Annual Review 2003-04, Health Professionals Insurance Australia Pty Ltd Annual Report 

30 June 2004, MDAV 2004 Annual Report, MDA National Annual Report 2004 and Medical Insurance Australia Group Annual Report 2003-2004. 

2 Membership numbers are from the insurers’ financial condition reports or provided directly by the insurer and are based on indemnified doctors. 

This excludes dentists, optometrists, students and other health care professionals. 

3 First year claims made premium. 

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