Who’s holding the safety net? Insurance options for public entities
A cold wind gusts furiously as the colorful parade makes its way down a crowded Manhattan street. The spectators look on with admiration at huge cartoon character balloons – some as tall as six-story buildings – when suddenly, the Cat in the Hat veers out of control. It crashes into a light pole overhanging an intersection, knocking it down and injuring several pedestrians – one seriously.
This incident, which took place during last year’s famous Macy’s Thanksgiving Day parade in New York City, provides a dramatic illustration of the importance to municipalities of thorough insurance coverage. Fortunately for public entities in 1998, it is a buyer’s market when it comes to insurance. More and more private sector insurance companies, many of them in robust financial condition, are competing aggressively for public sector customers.
It wasn’t always that way. In the 1970s and ’80s, the insurance industry often looked upon municipalities and counties as undesirable clients because many local governments had not yet discovered the benefits of loss control and risk management.
Workers’ compensation was a high profile problem, and environmental pollution liability was coming into its own thanks to several court rulings that lumped environmental damage together with “sudden” or “accidental” damage. Additionally, court rulings have weakened the concept of governmental immunity, making less obvious trouble spots such as sexual harassment, wrongful termination or illegal employment-related practices, more troublesome.
As a result, the annual insurance expenses incurred by public entities – for premiums as well as claims – can fluctuate wildly from year-to-year.
Safety in numbers As the expression goes, “necessity is the mother of invention.” For local governments, reducing their risk was essential, and spreading it around through participation in insurance pools proved to be the solution.
Today, more than 400 pools covering about 35,000 public entities (about 40 percent of the total market) operate throughout the nation. Some have advanced beyond liability and workers’ compensation to offer more diverse services, including life insurance and investment management.
As they coalesced in the 1970s and 1980s, pool members had a vested interest in minimizing their exposure to claims. They implemented set policies, procedures and documentation to control losses, and they took a more aggressive stance in fighting claims, says Larry LaBelle, customer group director for municipalities with Coregis Insurance, Chicago. Moreover, some states helped by strengthening their governmental immunity laws, LaBelle says.
“The risk management has gotten much more sophisticated,” LaBelle says. For four years, Coregis has presented the Risk Management of the Year Award to the individual, municipality, school district or special district with the best risk management program, and “the list of applicants has gotten better and better each year,” LaBelle says.
Insurers do about-face Ironically, the insurance industry’s rejection of public entities provided the impetus for public pooling. “[Local governments] have turned themselves around as a market. Pooling has really done the hard work,” says Paul Genovese, president of the pooling section of the Arlington, Va.-based Public Risk Management Association (PRIMA).
As local governments have reduced their risks and losses, they have become more attractive to the private insurers that once rejected them. Today, those insurers want back in the ball game. The question for many local governments is: Should they remain in the pools or switch to one of the growing number of private sector insurers vying – often with highly attractive rates – for their business?
The insurance companies cite numerous reasons why local governments should be in their camp. For example, private insurers’ policies are not assessable, rating services rate their claims-paying ability, and insurance regulations apply to private companies but not pools.
Unlike many pools, insurance companies do not include assessability in their policies. If an insurance company has a bad year financially, it cannot go back to its customers and ask them to pay more money on top of what they have already paid for their premiums. Pools, however, typically are assessable.
The assessability argument is unconvincing to PRIMA’s Genovese, who dismisses it as “nonsense.” Genovese, chief executive officer of Compensation Funds of New Hampshire, Concord, N.H., says instances of pools exercising their right to assessability are rare, and most pools have reinsurance and reserve funds to guard against the need for additional assessments.
Thomas LoPizzo, director of group services for the Montpelier-based Vermont League of Cities & Towns, agrees. Although his association’s pool has an assessability feature, “We operate on a day-to-day basis so that we will never assess our members,” LoPizzo says. “We haven’t come remotely close.” LoPizzo, former president of PRIMA’s pooling section, says pools are “managed as well as, if not better than, a standard insurance company.”
Aside from assessability, private insurers maintain that their performance is much more open to public scrutiny. While bond rating services such as Standard & Poor’s and Moody’s Investors Service rate insurance companies’ ability to pay claims, they do not do so for pools.
Insurance companies also are subject to strict regulations, which vary from state-to-state, while pools are not. Moreover, an insurance company’s financials are easily available for public inspection, while learning the fiscal details of a pool may be more difficult.
And when it comes to investing revenues generated from premiums, the insurance companies have greater freedom. Many pools are not able to put money toward the same investments that private insurance companies do and are thus seeking changes in investing regulations that would allow them to branch out from the traditional public entity realm of investment.
Private insurers cite other reasons, too, for local governments to do business with them. Chris Senior, general manager of Penco Regional, part of The Hartford Financial Services Group, Hartford, Conn., says private insurers are much better than the pools at providing contracts to their clients that specify terms of coverage.
Bruce Weaver, vice president of marketing for Chicago-based CNA Insurance, says his company offers a flexible menu of services that can be tailored to a municipality’s needs – needs he says vary greatly. By contrast, pools, according to Weaver, offer a “cookie-cutter approach” that does not always serve municipalities’ best interests.
LoPizzo could not disagree more. “Pools – especially those pools affiliated with state associations – know municipalities better than anybody else,” he says. “Their needs, liabilities, how they operate . . .”
But private insurers deny that they cannot serve a local government’s unique needs, since they typically operate through local agents who are familiar with the communities in which they reside.
Insurance skeptics Still, Genovese and LoPizzo both are skeptical that insurance companies are really looking out for municipalities’ best interests. The battle between the two sides is not dissimilar to the ongoing rift between commercial banks, which are for-profit, and credit unions, which are not-for-profit and do not have to pay taxes.
The insurance industry and pool administrators may be at odds regarding the pros and cons, but one thing they all agree on is that the current climate bodes well for municipalities in terms of saving money. The Hartford’s Senior says there’s no doubt that public entity insurance costs have come down. “Since 1987, between pools and private insurers coming back into the business, insurance costs continue to be driven down,” he says.
Genovese acknowledges that local governments may save money in the short-term by getting out of a pool and going with a private insurer. However, he cautions that they would also be much more susceptible to rate swings.
Contracts with private insurers are of much shorter duration than those of pools. Consequently, pools can average claims over a much longer period of time. Private insurers, on the other hand, have a shorter time to recoup any money paid out in claims.
What is the bottom line for cities and counties making the choice between private and public insurers? “It depends on what motivates them,” Genovese says. Because needs and public entity profiles vary so dramatically, there is not a one-size-fits-all answer.Private companies contend that they are more professionally run, have greater resources and experience and are held to a higher standard of accountability through ratings and regulations.
They also point to the absence of assessability as a selling point to private insurance. Pools counter that they know their members’ needs better than any private insurers, provide better customer service and can offer competitive yet stable rates since they are not in business to make a profit.
The truth is, for many public entities, the best answer is a mix of private and public insurance. Even if a local government chooses a pool, it will not be totally divorced from the private sector.
Pools, after all, sometimes have limited resources and expertise. Because of this, they often avail themselves of many services provided by private insurers, including third party administrators, consulting services and certified defensive driving courses for fleet vehicle drivers.
As was the case with privatization of other city and county services, which did not happen overnight, the presence of private insurance companies in the local government market will take time to grow. Just as municipalities proceeded with caution in determining whether privatization of their water treatment plants would work in practice as well as in theory,they also may proceed slowly and deliberately regarding insurance, testing the waters until they feel confident they have chosen the right entity – at the right price – to hold on to their safety net.
The Spring Pool Trustees Seminar, sponsored by the Public Risk Management Association (PRIMA), Arlington, Va., is scheduled for March 11-13 at the Menger Hotel in San Antonio, Texas.
A centerpiece of the retreat will be four roundtable discussions about pools for municipalities, counties, special districts and schools. Numerous insurance and risk management experts will lead the group discussions.
San Antonio offers a variety of attractions, including the Alamo (located next to the hotel) and the Riverwalk, which features shops, restaurants and entertainment. For more information, contact PRIMA, (703) 528-7701. For hotel reservations, call (800) 345-9285; or send a fax, (210) 228-0022.
Anyone familiar with the bond market knows that it is easier to attract buyers when bonds are either backed by assets, issued by an entity with an exemplary fiscal track record or insured. The latter bonds generally have lower interest rates since they receive the Triple A rating of their insurer.
The value of bond insurance is not lost on local governments, many of which realize it lowers financing costs while making the bonds more attractive to investors. In fact, some municipal bond mutual funds only purchase insured issues, and other mutual funds and investors are increasingly demanding bond insurance, according to financial experts.
“Strong investor demand for insured securities propelled insured penetration to record levels in both the municipal and asset-backed markets,” says James Malling, chairman of the Albany, N.Y.-based Association of Financial Guaranty Insurers (AFGI). About 50 percent of the municipal bonds issued in 1997 were insured, according to AFGI. In the 1996 municipal bond market, $97.9 billion of debt was insured, a 22 percent increase over 1995.
“Clearly, it’s an increasingly cost-effective way for municipalities to handle their debt issuance,” says Kathleen Evers, senior analyst with New York-based Financial Guaranty Insurance Company. “It saves the issuer money; that’s the bottom line. Bonds are sold for lower interest rates than they otherwise would be.”
Typically in today’s market, there’s a difference of 10 “basis points,” or .1 percent, in the interest rate a municipality would pay for Triple A insured bonds and Single A noninsured bonds, Evers says. For a $100 million bond issue, one basis point translates into an annual savings of $100,000 per year in interest.
AFGI estimates that bond insurance saved municipalities about $2 billion in 1996 and that the total savings in borrowing costs since the inception of municipal bonds in 1971 is $20 billion.
The Public Risk Management Association (PRIMA), Arlington, Va., has released two publications intended to help pool administrators complete their application for the Advisory Standards Recognition Program. The certification program was set up as a means to evaluate pools’ operating procedures and performance every three years.
Operations Manual for Public Entity Pools is a 58-page manual that assists pools in reviewing and completing a self-evaluation and program application. The other publication, Claims Audit Guidelines, provides a step-by-step guide through the pre-audit, audit and claims audit report formats and also outlines auditor qualifications. A claims audit ensures that a claims budget is managed efficiently and also allows a pool to evaluate claim trends and develop risk management programs.
Each publication costs $15 for members of PRIMA’s pooling section; $25 for non-pooling section PRIMA members; and $45 for non-PRIMA members. Add $3.50 for shipping and handling. Orders may be faxed to Marie Smith, (703) 528-7966.
MBIA 113 King Street Armonk, NY 10504 Phone: (914) 765-3892 Fax: (914) 765-3898 E-mail/Website: [email protected] /www.mbia.com Services Provided: Financial guarantees, municipal services, investment management and consulting. Contact Name: Risi Mattler
American International Group – Public Entity Division 175 Water Street, 27th floor New York, NY 10038 Phone: (212) 458-3018 Fax: (212) 785-9234 E-mail: Richard.Thomas @AIG.com Services Provided: Insurance coverage that is specifically tailored to municipalities, including workers’ compensation and general, auto and public officials liability. Contact Name: Richard Thomas
Go Pro Underwriting Managers, Inc. 7401 Beaufort Springs Drive, Ste. 400 Richmond, VA 23225 Phone: (888) OK-GOPRO Fax: (800) 972-5345 E-mail/Web Site: [email protected]/ www.gopro.com Services Provided: Insurance (comprehensive – including property & casualty, professional liability, workers’ compensation and commercial auto) and risk management services for public entities. Contact Name: Ted Joyce
Ambac Assurance Corp. One State Street Plaza New York, NY 10004 Phone: (800) 221-1854 Fax: (212) 509-9190 Web Site: www.ambac.com Services Provided: Insures the full range of municipal bond types, including general obligation, lease-backed, excise tax and airport financings; also transportation, utility and higher education issues. Contact Name: Joseph Salzano
Association of Financial Guaranty Insurers 122 South Swan St. Albany, NY 12210-1715 Phone: (518) 449-4698 Fax: (518) 432-5651 e-mail: [email protected] Services Provided: The association’s mission is to enhance awareness and appreciation of the economic and social benefits of financial guarantees. Membership consists of insurers and reinsurers of municipal bonds and asset-backed securities. Contact Name: Robert Mackin Public Risk Management Assn. 1815 N. Fort Myer Drive Suite 1020 Arlington, VA 22209 Phone: (703) 528-7701 Fax: (703) 528-7966 Web Site: www.primacentral.org Contact Name: Dennis Kirschbaum
Coregis 181 West Madison Suite 2600 Chicago, IL 60602 Phone: (800) 879-4428 Fax: (312) 849-5383 E-mail/Website: [email protected] /coregis.com Services Provided: Insurance services exclusively for public entities, including property and casualty, professional liability and employment-related practices; loss control program design and review, risk assessment/ consultation, safety training. Contact Name: Thomas Eisenhart
Financial Guaranty Insurance Co. 115 Broadway New York, NY 10006 Phone: (800) 352-0001 Fax: (212) 312-3222 Web Site: www.fgic.com Services Provided: Insurer of securities sold in the capital markets, principally municipal bonds and non-municipal structured finance obligations. Contact Name: Roger Coy
CNA Insurance Co. CNA Plaza, 38South Chicago, IL 60685 Phone:(312) 822-5413 Fax: (312) 755-2048 E-mail/Web Site: [email protected] http://cam.cna.com/muni/ Services Provided: Property and liability coverage for municipalities, including general liability, workers’ compensation, automobile, valuable papers and electronic data processing. Contact Name: Bruce Weaver
Mutual of America 320 Park Avenue New York, NY 10022 Phone: (212) 224-1741 Fax: (212) 224-2527 Services Provided: Mutual of America’s family of companies provide comprehensive pension and retirement-related products; 457 and other salary savings plans; payroll deduction variable universal life insurance and institutional funds. Contact Name: J. Thomas Burkhard