OVERVIEW OF INSURANCE POOLING Your Key to Success Presented by Victor F. Lorch, ARM, ARPM, AINS M.R. Lorch Insurance, Education and Risk Management Consulting Inc. Instructor Insurance Education Association

 The development of insurance pooling  The nature of insurance pools  Insurance Market Cycles  How pools may need to respond to meet member needs during these cycles and advantages of pool membership What’s It All About?

Events of 1970’s The loss of sovereign immunity (state and local government could now be sued for their actions or inactions affecting the welfare of their population served by them) opened governmental entities to more lawsuits Changes in tort claim laws as they effected governments exposing them to more litigation (Governments are now held to same standard as businesses and individuals) D EVELOPMENT OF I NSURANCE P OOLING

Events of 1980’s The major insurers began to decline the writing of insurance for public and nonprofit markets (charging higher premiums, or refusal to write coverage ). Dissatisfaction with state-run insurance programs Governments either went bare (no insurance) or developed pools of governmental entities to self-insure (spreading the risk amongst themselves instead of an insurance carrier) D EVELOPMENT OF I NSURANCE P OOLING

Pooling defined (by GASB #10- Government Accounting Standards Board) - cooperative group of governmental entities joining together to finance an exposure, liability, or risk. Risk may include property and liability, workers’ compensation, or employee health care. A pool may be a stand-alone entity or included as part of a larger governmental entity that acts as the pool’s sponsor. N ATURE OF P UBLIC E NTITY R ISK P OOLING

 Group purchase of traditional insurance  Large deductibles  Offering various retention layers within the pool  Purchasing different layers of excess and reinsurance What Can a Pool Offer (WIFM)

 Spread risk among many members (law of large numbers)  Across multiple years What Can a Pool Offer (WIFM) Happy Pool Member  Ownership in Pool

Pools Spread the Risk  Having its members retain part of the risk through a deductible layer  Retaining part of the risk through a self-insured retention (SIR) layer  Purchasing excess or reinsurance to cap pool liabilities  Joining an excess super pool to cap pool liabilities

Common Types of Pools Risk Sharing Pool- risk of loss is pro-rated among pool members Insurance Purchasing Pool- members pool together to group purchase insurance coverage, and member entities do not share in each other’s risk. ( An example is CAMEL Program offered by Alliant Insurance Services in California)

Common Types of Pools Banking Pool- members maintain deposits in the pool and funds are made available to borrow against in the event of a member sustaining a loss. Member entities do not share in each other’s risk. They merely set up a fund that each may borrow against. Claims Servicing or Account Pool- A separate administrative entity is established to manage the accounts of each member. Members may maintain balances with the pool, but member entities do not share in each other’s risk.

Insurance/Banking/Claims Servicing Pool Risk Sharing Pool Pool group purchases insurance services for members such as group purchasing of insurance, banking, and claims services for its members Pool members share their risks with one another. (Transfer of claim liabilities to the pool). There is no accumulation of any appreciable equity Is a separate legal entity. Equity accumulated by pool membership Members of insurance pools account for all claim liabilities on their individual financial statements (No transfer of claims) The claim liabilities of members are not recorded on the individual member financial statements 11

Insurance/Banking/Claims Servicing Pool Risk Sharing Pool The pool financial statements show a net zero equity with any excess assets or liabilities as payable or receivable from members Pools are funded by members through premium like contributions (called premium deposits) to provide insurance coverage similar to an insurance company, but in a much more limited manner. The premiums represent an equity interest in the pool. The dividends paid by the pool to its members are recorded as insurance dividend income on the members’ financial statements 12

Public Entity Pool Benefits and Services Advantages Include  Improved benefits and services over Insurance Industry  Broader terms of coverage, conditions and limits  More equitable rating basis  Stability of rates and contributions

Public Entity Pool Benefits and Services Advantages Include  No profit loading (profits from investments may remain part of member equity depending on pool agreement  Tax-exempt status  No premium tax  No commission  Lower overhead costs

PUBLIC ENTITY POOL BENEFITS AND SERVICES INCLUDE  Training and improved loss control (tailored to the needs of the membership)  Safety Programs and Financial Incentives to Membership for Participation in Programs  Loss prevention consultation (programs to assist in reducing the frequency and severity of claims)

PUBLIC ENTITY POOL BENEFITS AND SERVICES INCLUDE  Risk Management Services  Various other administrative services (claims administration, claims auditors, defense counsel, actuarial services, underwriting managers, employee benefit consultants)

INSURANCE POOLING IN THE 90’S Losses for governmental entities were not as bad as predicted by the insurance industry in the 70’s. Insurance companies began looking to expand their book of business into governmental entities. (Many governmental entities left their pools and returned to traditional insurance programs, only to return to pools in the 21 st century as the insurance market changed again)

Insurance Pooling in the 90’s The pool’s focus on loss control and reduction helped keep loss experience low Financial markets were performing well and premium dollars provided a good opportunity for insurance companies to generate earnings on premiums invested.

Insurance Companies and the 21 st Century Financial markets attracted individual investors as well as insurance companies. Underwriting focused on obtaining cash for large premiums (“cash flow underwriting”), instead of underwriting risks (The rate of return on investments was as high as 20% on their reserves, with loss ratios exceeding 100%). With the downfall of the technology industry, underwriting had to concentrate on evaluating risk and exposure, instead of high premium dollars, causing a substantial increase in rates.

Insurance Companies and the 21 st Century Litigation trends were pushing up loss costs (Increase in attorney advertising and the rise of class action suits against large corporations). Large losses were causing poor underwriting results Increase in “natural disasters” (Hurricanes and storms worldwide in excess of $17 Billion)

Insurance Companies and the 21 st Century Terrorism attack of September 11, 2001 cost insurance companies approximately $50 billion

Pool Membership Desires  Members want the lowest rates. Most governments focus on the current budget cycle and how they can get the most of current funds (Some agencies have gone to two year budget cycles).  Members need stability in their long-run costs Pool Member

Pool Membership Desires Pool stability is established to maintain significant equity to provide for:  Changes in the pooled insurance program (adding programs, changes in self-insured retention)  Any change in pool membership

Pool Membership Desires Pool stability is established to maintain significant equity to provide for:  Changes in the pooled insurance program (adding programs, changes in self-insured retention)  Rate stabilization (not subject to hard and soft market cycles)

Pool Membership Desires Pool stability is established to maintain significant equity to provide for:  Changes in the pooled insurance program (adding programs, changes in self-insured retention)  Any change in pool membership Be Prepared for :

Insurance Cycles “Soft market cycle” – carriers are willing to write coverage at “low rates ” for public entities and nonprofit entities “Hard market cycle” – insurance companies market capacity is lower, insurance companies raise rates, reduce coverage, and pull out of certain markets (public entities and nonprofits) HOW IT IMPACTS YOUR POOL PROGRAMS AND ITS MEMBERS

Challenges to Pooling In the Future  Pool Insolvency  Another Soft Insurance Market  Confidence Levels  Underwriting Considerations for Future Membership  New Public Entity Loss Exposures  Federal Regulation of Insurance Industry  State Regulation of Pools due to Insolvency  Competition from Insurance Industry  Health Care Programs for Pools  Process of Evaluating Excess Insurers, Excess Pools and Reinsurers for Solvency Issues  Competition from Larger Pools  Retirement of Pool Personnel  Education of Pool Personnel

“The Key is In Your Hands” Further Topics Covered in “Essentials of Risk Pool Management”  The Pool Manager  Claims Audits  Pool Leadership, People, Personal, Growth, and Management  Actuarial Studies  Underwriting Considerations

Further Topics Covered in “Essentials of Risk Pool Management Course”  Pool Leadership, People, Personal Growth, and Management  Public Entity Loss Exposures, Risk Management and Liability  Understanding Financial Reporting  Financial Stability of Pool  Risk Pools and Employee Benefits  Process of Evaluating Excess Insurers, Excess Pools and Reinsurers

Associate In Risk Pool Management Designation-ARPM Completion of Following Risk Management Courses  Risk Management Principals and Practices  Risk Assessment and Treatment  Risk Financing Completion of “Essentials in Risk Pool Management” Course Completion of a Project Related Public Entity Pooling Don’t let this be you!