When insurance costs are increased or coverage is not available, history has taught county risk managers and purchasing professionals not to panic. They simply take another approach. Today, counties handle insurance losses in four ways:
- They pay all costs or self-insure.
- They purchase insurance from commercial companies to pay the costs.
- They share the cost with other public entities, or
- They use a combination of these methods.
Budget size generally determines the way loss costs are handled. The counties with the largest budgets can afford to pay all the costs out of their revenues or from reserves they have set aside with the expectation of eventual insurance-related losses. Changes in the insurance industry have little effect on these counties.
Many counties with medium to large budgets take a very sizeable deductible that gives them the freedom of self-insurance, and they also purchase catastrophic coverage from the commercial insurance market or their association insurance pool to protect the county budget from extremely large losses. The cost of this commercial insurance affects these counties, and today many have accepted less coverage at a higher price and a few can no longer afford the commercial coverage. For other counties in this medium to large range, commercial insurance is no longer available and they have turned to their association insurance pool, or they are going without this safety net.
The largest group of counties, those with small to medium budgets, buys from the commercial marketplace or they participate in an insurance pool. An insurance pool allows them to share the financial benefit and professional staff that the largest counties enjoy. As a member of this nonprofit group, the county takes a small deductible, the pool takes a large deductible, and the pool purchases reinsurance at the catastrophic level from the commercial insurers. Insurance pools recently acquired many new members as counties were pushed out of the commercial insurance marketplace.
The professional trade publications have been running stories of a “hard market” in the insurance industry for more than two years. A hard market is marked by increased costs and reduced availability.
Before the terrorist attacks, the market was slowly hardening, as evidenced by slightly increased costs (less than 10 percent increases for non-health insurance coverages) and reduced coverage for some entities if they experienced costly claims.
Competition combined with high returns on investments seemed to keep the insurance companies from raising prices to cover actual costs and losses. A history of loss control helped to maintain losses within a predictable range, further enhancing the flat pricing model.
However, the World Trade Center loss will cost the industry 7.2 percent of surplus (compare that with Hurricane Andrew, at a cost of 6.2 percent of industry surplus.) Those are dollars the industry would like to make up. The stock market has reduced investment returns dramatically and those, too, are dollars the industry would like to recoup.
Loss control and prevention surrounding attacks is in its infancy for many vulnerable facilities, and actuaries are scrambling to set a price for this insurance. This all results in increased premiums, and some are accusing the industry of opportunistic pricing.
In the early 1980s primary insurance costs increased dramatically, and in response public entities formed nonprofit insurance pools across the country. Those pools have remained intact and financially sound. Even when prices in the commercial market dropped significantly, few pool members returned to the commercial market.
A similar structure was created on a nationwide basis for the catastrophic or reinsurance coverage purchased from the commercial insurance industry. In 1986, a reinsurance company was formed by cities for city or multi-jurisdictional pools. There are now 26 members.
In 1997, counties formed a similar pool for pools with five founding states. Two more states joined this year. The commercial insurance industry still provides some insurance to these alternative reinsurance providers.
The coming insurance market conditions are another challenge for counties. They will now have to take a more aggressive approach to reducing risk and be more creative in how they finance their cost of risk. It will be interesting to see what counties devise in response to the insurance industry stresses of the 2000s.
