Is flow to insurance pools slowing?
The viability of municipal insurance pools remains strong, despite soft pricing in the traditional markets and the growing interest of regulators. There are more than 400 municipal pools nationwide, and cities and counties continue to look to them as a cost-effective means for insuring workers’ compensation, general and professional liability, property, employee benefits and specialty services.
Most pools carry with them the advantages of shared cost and shared risk. On the other hand, some pools are designed as joint purchase groups for the sole purpose of volume purchasin, and others are formed to bank funds and make loans for loss payments or to share risk management services but no actual risk.
In the 1970s, when insurance prices rose sharply and availability declined, governments began turning to pools in an effort to make their coverage more affordable. Prior to that, insurance was an insignificant portion of a government’s budget; but with increased litigation, workers’ compensation claims and federal civil rights cases, governments were deemed poor underwriting risks, and prices soared in response.
Preexisting legislation known commonly as the Intergovernmental Cooperation Acts and designed to permit local government entities to band together and share in the provision of essential services was interpreted to enable the creation of insurance pools. At the time, insurance regulators were generally uninterested in local government affairs, so early pools went unregulated.
Pricing has historically been unbeatable for governmental pools that share risk. The pools are tax-exempt, they do not have stockholders, and their staffs are generally lean and paid on a scale more equivalent to public payrolls than private enterprise. In the absence of major regulation, participants have been able to increase limits and enhance or add coverages quickly because there was no time lost in seeking approval.
The popularity of municipal risk-sharing pools has grown steadily, with their numbers nearly doubling since 1987. In a 1993 study authored by Peter Young, business professor at St. Cloud State University, St. Cloud, Minn., and published by the Public Risk Management Association (PRIMA), 60 percent of participants cited unavailability and unaffordability of coverage as the main reasons their pools were formed.
Despite the return of affordable insurance coverage in the traditional marketplace, municipalities continue to take advantage of pools. Public risk managers have long complained that the conventional insurance market cannot always provide the support or the specialized services that government entities need, and pools, in addition to lowering coverage costs, have given participants the framework to tailor their own services, including claims and litigation management, information management systems and loss prevention.
Also, administrators report a sense of control with pools. For example, pools generally design their own coverage documents, and membership requirements based on in risk management guidelines ensure that individual losses and the cost of coverage for all members remains low.
As the number of municipal insurance pools has grown, so has regulatory interest in them. Young reports that 60 percent of municipal pools responding in his study are regulated to some degree, primarily by state insurance commissioners.
The National Association of Insurance Commissioners has examined pools recently, but municipalities should expect no immediate change in federal scrutiny. In fact, until regulation brings on insurance taxes or more in-depth disclosure requirements –neither of which is imminent — the outlook for pools is promising.