Physician-Owned Carriers Invest to Benefit Those Who Are Insured, not Shareholders
As experts in caring for patients, physicians generally focus on risk management in terms of patient safety. Yet there’s a hidden risk—to themselves and their practices—that physicians should consider: their medical malpractice insurer’s investments. Physicians should understand the risks of their medical malpractice carrier’s investments and make sure they are covered by an insurer who has their interests at heart and, therefore, takes a prudent and relatively conservative approach to investing.
Through responsible asset management, an insurer meets its core obligation: to pay the claims of its insured physicians. A responsible carrier may also have the opportunity to use its surplus—funds in excess of those needed to pay claims—to benefit the physicians who pay premiums. The scale of a company’s loyalty program for its insured physicians, for example, may be linked to the financial performance of its surplus investments.
In a way, physicians are investors in their insurer, just as their insurer is an investor in various markets. Physicians should choose a medical malpractice carrier that is physician-owned, because it has an affinity of interest with those who are insured. They should consider a carrier that structures investments to meet the financial obligations of the company, takes advantage of investment opportunities to protect and grow surplus, and makes conservative investment choices to ensure the company’s stability—so that it can prosper and protect a physician’s practice for the long haul.
A Success Story of Conservative Investment Strategy
Over the past 20 years, The Doctors Company, the nation’s largest physician-owned medical malpractice insurer, has seen its general account assets grow from $750 million to nearly $6.5 billion. Our surplus now stands at approximately $2.5 billion.
In addition to the positive flows from acquisitions, this rise in assets reflects the steady and methodical growth of a relatively conservative investment strategy, which focuses on downside risk protection and favors on income-generating strategies.
How Medical Malpractice Insurance Is Different
As an insurance company, we invest conservatively compared to pensions, endowments, foundations, or other pools of assets that have time horizons in perpetuity. However, within the realm of insurance companies, a medical malpractice carrier has longer tail liabilities, which allows investments to carry longer duration, generate investment income well above what is offered by government-issued paper, and, if properly structured, absorb excessive short-term market fluctuations.
For The Doctors Company, our strong capital position means that, relative to our liabilities, we have some surplus to invest more aggressively than simply holding highest quality investment-grade bond issues. That said, it’s important to specify what is meant by “aggressive” in the realm of an insurer’s investments. In addition to prioritizing downside risk protection, we always consider how much of our surplus is exposed to the daily fluctuations of the markets. In simpler terms, how much of our surplus is invested in equity. We work well within our capacity, in terms of what we could, in a worst-case scenario, lose in valuation, and continue to meet our obligations.
To give a simple-math hypothetical example: An insurer practicing prudent downside risk protection with 50 percent of surplus in equity should lose only 20 percent (of its surplus value) if the market dropped 40 percent (because only 50 percent of surplus is exposed to daily market fluctuations). However, downside risk protection typically translates into giving up capturing 100 percent of the upside, but the benefits of our long-term strategy outweigh the potential losses of opportunity costs.
We manage our assets responsibly, and we never expose our members’ assets to additional risk by risking our ability to pay their claims over the long term with any overly aggressive investment shifts, or timing, for short-term gain.
A Diversified Portfolio
We pursue a mix of active and passive strategies. We’re huge proponents of, and investors in, exchange-traded funds (ETFs) and the many benefits that they bring. As an insurance company, we’re very conservative with our overall investment program—we currently target about 80 percent in fixed income or similar strategies, and 20 percent in equity or equity-like investments.
In fixed income, we’re well diversified. We have U.S. investment-grade bonds, a dedicated U.S. Treasury portfolio, traditional and short-duration higher quality high-yield bonds, ETF exposure to non-U.S. markets, an allocation to convertible bonds, and a short-term/liquidity portfolio.
We have 13 percent in long-only equity, where we are well-diversified. We passively manage U.S. large-cap and non-U.S. equity, and we actively manage our investments in the U.S. small- and mid-cap markets.
In real assets, we have a carve-out of 7 percent in our strategic allocation. We invest in real estate equity and debt, infrastructure equity and debt, and renewable energy.
We have a 3 percent allocation to alternatives, which includes our commitments to environmental, social, and governance (ESG) and diversified, equity, and inclusion (DEI) investments.
We determine how much risk, or equity exposure, we can take with our surplus. We run asset allocation scenarios each year, and take into consideration the overall enterprise risk of our company. We balance our underwriting risks with our investment risks—whereas, in a given year, if we’re not taking as much risk on the underwriting side, then we can afford to take a more aggressive posture with our investments. And that’s defined by how much equity exposure we can withstand. The same holds true if the overall enterprise risks are reversed.
Best Practices When Investing Insurance Assets
In evaluating the specifics of a medical malpractice carrier’s portfolio, a physician or practice manager should look for an insurer who is also a prudent investor and has the interests of those they insure, not shareholders’ interests, at heart.
Prudent Practices When Investing Insurance Assets
- Balance underwriting risks with investment risks.
- Establish investment objectives for after-tax total return, considering income, volatility, and time horizon.
- Identify an acceptable level of surplus volatility through stress testing.
- Ensure sufficient liquidity by actively managing cash needs and flows.
- Manage risk-based capital impact of different strategies.
- Have an awareness of statutory investment codes.
- Collaborate with accounting to determine reporting impact.
Imprudent Practices When Investing Insurance Assets
- Chasing total return when enterprise risk study dictates a more conservative investment philosophy.
- Chasing income when enterprise risk study dictates a much higher acceptable level of volatility.
- Having insufficient diversification, i.e., having concentration risk.
- Being a forced seller of bonds at a loss.
- Missing an investment opportunity due to deficient approval protocol.
- Carrying too much or not enough liquidity.
- Attempting to please shareholders with high returns from risky investments.
Considering the potential risks—and benefits—of an insurer’s investment strategy can only improve the security of a medical practice.
TC Wilson was the lead investment consultant to The Doctors Company for 18 years prior to becoming its Chief Investment Officer in 2017. He has over 28 years of investment experience.
This material is intended for illustrative purposes only, and should not be construed as advice to buy or sell an investment, or as advice regarding how to allocate across your investment options.
The guidelines suggested here are not rules, do not constitute legal advice, and do not ensure a successful outcome. The ultimate decision regarding the appropriateness of any treatment must be made by each healthcare provider considering the circumstances of the individual situation and in accordance with the laws of the jurisdiction in which the care is rendered.