PHIL’S CORNER: 2021 Policy Dividend – a Loyalty Reward
The OAMIC Board of Directors recently declared a policy dividend of approximately 5% of the earned premium for annual policy limits up to $1 million. This equates to about $448,000 to be paid to policyholders who have a current policy as of the Dec. 31, 2021, record date.
I like to think of this year’s divided as a reward to those loyal policyholders. It is also a means to reduce your net cost of professional liability insurance for the firm. As you know, dividends cannot be guaranteed and represent a sharing of profits with you, our members – who are the owners of the company. Unfortunately, there were no profits in 2021. However, the board recognizes 2021 was not an easy one for anyone, especially our policyholders.
OAMIC’s annual net income is so difficult to predict because it depends almost entirely on the coming year’s claims and the way they fall. A little about claim expectations from our standpoint: We know that lawyers professional liability insurance companies should expect an average of 2% of policyholders to have a claim in a given policy year. For us, that would be approximately 97 new claims each year. But, what if our policyholders are historically better than that average, as our members are? We can reasonably reduce it to a 1.5% ratio, so we’d expect only about 73 claims. Last year, we opened only 66 new claims in 2021 – an amazing 1.3% ratio.
Claims are looked at by both frequency, which is reflected in the numbers above, and severity, which is how much they cost. Last year, as in most years, our issue was a handful or two of claims with high severity. As an example, just four claims ended up totaling more than $5 million, including associated defense costs.
We are pleased to be able to distribute a policy dividend to you in a year where we did not have net income. At the same time, we did so in a manner that maintained a robust policyholder surplus. This will ensure we continue to maintain our excellent record of financial strength and support for you and all our members. We appreciate your loyalty and the trust you place in us. We look forward to serving you in 2022 and beyond. As always, please contact us if you have any questions.