What is the problem with occurrence-based insurance?

Let’s wind the clock back ten years, to events in Singapore in 2011

We see that heavy rain caused flash flooding that had cars floating along streets near Macritchie Reservoir.  The Marina Bay Sands Casino and Universal Studios opened their doors for the first time.  The SGX launched an ultimately unsuccessful takeover bid for the Australian Stock Exchange.  Lee Kuan Yew announced his departure from Cabinet, as did Goh Chok Tong.  Singapore Airlines announced the launch of Scoot, its low-cost long-haul arm.

And in 2011 almost all of Singapore’s doctors carried occurrence-based malpractice indemnity.

Fast-forward to the present day, and we see a dramatically changed landscape for malpractice insurance and indemnity.  In 2015, the discretionary mutual MPS announced the withdrawal of occurrence-based indemnity for obstetricians (and would later extend this to neonatologists).  Two years later all 6,000 public sector doctors moved from occurrence protection to a claims-made insurance programme.  Soon afterwards, the doctors employed by Raffles hospital also made the switch to claims-made cover.  The net result is that today only a small proportion of Singapore’s doctors are still covered by occurrence-based protection.

So what’s the problem with the occurrence-based cover?

There are in fact two reasons why occurrence-based protection has fallen so dramatically from favour in Singapore (and elsewhere, for that matter).  The first relates to the structure of the cover itself.  Occurrence-based policies typically run for twelve months, after which they provide unlimited future cover for claims that might have occurred during that twelve months, but have not yet emerged.  Effectively, each twelve-month period of medical practice is given its own run-off policy.  Imagine a doctor who practices for 30 years under occurrence-based protection before deciding to retire.  On the date of retirement, that doctor will have 30 separate policies providing run-off cover into the future.  It is a rare doctor in Singapore who anticipates being the subject of 30 separate malpractice claims in retirement.  This overkill in terms of run-off protection translates into substantial additional cost, which is why such policies have always been far more expensive than the claims-made alternatives.

The second problem arises on the insurer’s side of the ledger.  At the end of each twelve-month policy, the insurer would like to be able to determine whether they had made a profit or a loss.  With occurrence-based insurance policies, this is not possible, as every policy will remain open indefinitely to capture future claims.  The question of whether the policy year was profitable for the insurer will not be answered until the final window for bringing claims against the insured doctor has closed and in the case of doctors treating infants or children the wait can be as long as 24 years!  Small wonder, then, that insurers are increasingly migrating away from occurrence-based policies to claims-made offerings.

Do claims-made insurance policies, then, provide an adequate substitute?  For many years, the occurrence-based cover was held to give greater certainty, greater peace of mind in retirement.  This was entirely valid in the days when claims-made insurers gave no guarantees about the cost or availability of run-off cover.  In recent years, however, we have seen the emergence of claims-made insurance policies that offer automatic cover on retirement at no additional cost.  The availability of the cover is written into the policy document, such that the doctor need not make a specific application for run-off cover – when he or she retires the policy current on that day automatically switches to a run-off policy.

The point here is that the claims-made policy converts into single run-off protection, rather than the multiple protections provided by the occurrence-based cover.  For most doctors, a single policy limit would seem quite adequate as run-off protection.  The added incentive to choose a claims-made policy is that in comparison with occurrence-based policies there are premium savings of up to 50% available.  In a world where Covid-19 has negatively affected so many medical practices, that level of saving is nothing to be sneezed at.

There will always be some doctors for whom the multiple run-off protection of occurrence-based policies will remain attractive.  Based on trends over the past ten years, however, those doctors will be part of a steadily shrinking minority.