Day on Torts
SVMIC continues to enjoy wonderful profitability, even as the number of physicians it insures declines.
SVMIC – State Volunteer Mutual Insurance Company – is a physician-owned insurance company that was created over 30 years ago. It has grown from a company with paid-in capital of $7,500,000 to a entity with a policyholder surplus (think: net worth) of $251,321,321.
Let me explain what that means. Policyholder surplus is determined by subtracting reserves for claims payments and claims expenses from assets. Each time a claim is made a reserve is set. The size of the reserve is based on the severity of the claim, the likelihood of payment and the anticipated defense costs. The amount reserved on a claim changes over time, but the idea is that the sum total of reserves should pay all existing claims and all future defense costs. There is also a category of reserves known as IBNR – Incurred But Not Reported. This is for claims that the company "knows" to be out there but have not yet been reported to the company.
The amount reserved for a claim reduces that year’s income. In other words, if SVMIC (or any P&C insurer) sets aside money to pay a claim today, they can deduct it from this year’s income, even though the money may not (and probably will not) be paid on that claim until a later year.
Last year SVMIC increased its reserves by $51,786,000. That means that in the future it believes that it will have to pay $52M is losses and loss adjustment expenses (litigation-related costs) more than it thought it would have to pay as of December 31, 2007. Of course, that number is based part in a revision of pre-2008 claims plus the setting of reserves for all claims reported in 2008.
So, a policyholder surplus takes all of that into account. It means that if SVMIC were shut down for business on December 31, 2008 and it did not collect one more dollar in premiums it believes that it has set aside enough money to pay claims and defense costs and still have $251,321,100.
SVMIC has 15,501 insureds (down from a high of 16,415 in 2005). The number of policyholders decreased in Arkansas and Virginia because competitors have been reducing rates.
If that policy surplus was divided between its 15,501 insureds, each insured (who after-all is an owner of the company and would be entitled to whatever money is left if the company were liquidated) would receive an average of $16,213.
Let me hasten to add that the fact that SVMIC has $251M in "extra" money does not necessarily mean that it can reduce rates or make dividend payments to its owners. I don’t pretend to understand it all, but suffice it to state that good business practice and state law require companies to maintain a level of surplus appropriate to the business of and size of the company. In a simple way, it is like your personal financial situation – the fact that you have a positive net worth does not mean you can or should quit working. I have no idea rather SVMIC’s policyholder’s surplus is too high or too low, but the high rating given to the company by A.M. Best Company – an "A (Excellent)" rating tells me that it is what it should be.
A later post will discuss other aspects of SVMIC’s financial position.