Discretionary Mode of Indemnity – A Disaster for MDO’s Finances – Dr Richard Tjiong

On 12 September 1999, the London based Medical Defence Union announced that it was withdrawing from all overseas jurisdictions, including New Zealand and Singapore, and concentrate its indemnity business in Ireland and United Kingdom.  It cites as the chief reason the global litigation increases,  which in the MDU experience amounted to 15% annually.


This announcement followed the MDU’s departure from Australia in 1999, where their members are transferred to UNITED Medical Protection.  Two years ago,  the other London-based Medical Protection Society withdrew completely from medical indemnity in Australia, leaving its Queensland and New South Wales members to UNITED, and in every other state to the state based MDO.


The rationalisation of medical mutuals was foreshadowed by UNITED sometime ago. Though initially denied vehemently by some MDO agents, the rationalisation finally came with a big bang.   The process is bound to continue, dare I say inevitably because the litigation and financial challenges ahead will separate the “men” from the “boys” in the industry.


The “men” recognise the need to embrace insurance principles of management.  The “boys” continue with their purely discretionary, non-contractual, mode of assistance.  Neither of the British based MDOs issue an indemnity contract to their members.


There could be no argument to the fact that even the discretionary business conducted by the MDOs is in the nature of insurance.  Some of the most successful insurers in Australia have been mutual.  They are owned  by the members and do business in the main only with the members on a not-for-profit basis.


Be they mutual or for profit,  entities that conduct indemnity business do so with the guidance of centuries of collective industry experience in insurance.  Parliaments have enacted laws to protect the consumers by ensuring that these entities are financially sound.  Purely discretionary MDOs are currently outside insurance laws.


The biggest single lesson to be learned from the withdrawal of two major British defence organisations is that one could ignore insurance principles and regulations at one’s perils, and unfortunately at the perils of one’s members as well.


I have been privileged in having the opportunity to serve in Australia’s largest MDO with a history dating back to 1893, and have been closely involved with its indemnity operations for over 12 years.   NSW MDU was in fact a licensed insurer whiles remaining a mutual from 1956 to 1983.  It regained its insurance licence in 1989 and reposed it in a wholly owned subsidiary, Australasian Medical Insurance Limited.


The benefits of insurance licence is many.  There is greater transpancy of its finances, and hence members could hold the MDO more accountable for its subscription increases.  UNITED’s group claims reserves and assets are properly accounted for under the more onerous insurance accounting standards.  Investment income is lawfully more tax effective.   UNITED’s membership subscriptions are significantly subsidised by investment incomes.  The surpluses (“Members’ Fund” in the Annual Report)  are derived from historical investment surpluses.  Lastly, reinsurers are more willing to particpate in effective reinsurance program with a licensed entity than with unlicensed discretionary MDOs.  Thus UNITED carries reinsurance capacity in recent year to cover the actuaries’ prediction of risks by a factor of two and half times.


UNITED has often been criticised by its competitors for setting subscriptions that are “too low”.  Yet UNITED has been able to significantly increase its surpluses over the years and additionally met its Chelmsford-related liabilities (of around $22 million) when no other MDO in Australia has had to meet with this kind of liabilities.  UNITED must have done something right.


UNITED intends to continue to provide the best of services to its members at the most cost effective rates.  It is preparing itself to meet the challenges relating to GST and the Ralph-drive tax law changes.  Commencing this financial year, the benefits will begin to show from the economies of scale that came by the recent merger and acquisitions.  Health professional who continue to get only discretionary indemnity from their MDOs are arguably not getting the full values from their subscription dollars, and should ask “why am I not getting contractual indemnity?”


Dr Richard Tjiong

Executive Chairman

UNITED Medical Protection




They stand in contrast to commercial insurers, that are owned by shareholders; they do business with a group of clients, a distinctly different group from the shareholders, who rightly expect to share in the profits from the business conducted on clients.