Michael Madden

1
The Benefits and Risk Lines Available byJoining
Insurance Pools

• Presented by
• Michael Madden
• Florida League of Cities, Inc.

2
History

• Businesses and municipalities across the United
  States were unable to obtain or afford liability
  insurance during the mid 1980's
• Federal Liability Risk Retention Act of 1986
  created two vehicles by which insurance buyers
  could purchase liability insurance risk
  retention groups (RRGs) and purchasing groups
  (PGs).

3
Statistics

• Total Number of Pools 466
• Number of Pools that provide WC 162
• Number of Pools that provide Prop/Liability 119
• Number of Pools that provide Health 89
• Number of Pools that provide Property 70
• Number of Pools that provide Liability 143
• Number of Pools that provide Unemployment 14

4
Legal Authority from Florida Statutes

• Sec. 166.021, Fla. Stat., in part provides
  municipalities shall have governmental, corporate
  and proprietary powers to enable them to conduct
  municipal government, perform municipal
  functions, and render municipal services, and may
  exercise any power for municipal purposes, except
  when expressly prohibited by law, and further
  defines a municipal purpose to mean any activity
  or power which may be exercised by the state or
  its political subdivisions

5
Legal Authority from Florida Statutes

• Sec. 125.01, Fla. Stat., in part provides
  counties, by and through their legislative and
  governing bodies, shall have the power to carry
  on county government and may exercise all powers
  and privileges not specifically prohibited by law

6
Legal Authority from Florida Statutes

• Sec. 768.28, Fla. Stat., in part provides the
  state and its agencies and subdivisions are
  authorized to be self-insured and to enter into
  risk management programs to provide protection
  against certain casualty and property claims

7
Legal Authority from Florida Statutes

• Sec. 111.072, Fla. Stat., authorizes the state,
  or any county, municipality or political
  subdivision of the state, to enter into risk
  management programs in anticipation of any
  judgement or settlement resulting from a civil
  rights action arising under federal law

8
Legal Authority from Florida Statutes

• Sec. 163.01, Fla. Stat., authorizes the state, or
  any county, municipality or political subdivision
  of the state, too jointly exercise any power,
  privilege, or authority which such governmental
  entities share in common and which eacah might
  exercise separately, and further provides such
  authority is in addition to and not in limitation
  of those granted by any other general, local or
  special law

9
Types of Pools

• Mutual Insurance Co
• Risk Retention Groups
• Group Captives
• Group Self Insured
• Self Insured Groups with Common Administrator
• Governmental Trusts

10
Characteristics of Trusts

• Established by an Interlocal Agreement
• Governing board of its members
• Can be assessable or non assessable
• Usually ran by a TPA or a broker
• Usually sponsored by an association
• Can be either regional or statewide
• Usually not regulated or rated

11
Benefits

• Economies of Scale Scope
• Lower acquisition and administrative costs
• Freedom of form and rates
• Higher level of service
• More flexible and responsive
• Ownership
• No regulatory costs
• No stock dividends

12
Benefits

• Lower and more stable pricing
• Liberal Underwriting
• Broader Coverage
• Better Service
• Local Knowledge
• Board Representation
• Flexibility
• Low probability of cancelation

13
Coverage Enhancements

• Occurrence vs claims made policy
• No Annual Aggregate Limits
• Defense costs in addition to policy limits
• Coverage for Inverse Condemnations
• No mandatory deductibles
• Extra Contractual Defense

14
Risks

• Financial Solvency
• Not Rated or regulated
• Not part of the Fl. Guaranty Fund
• Assessments
• Difficult to raise capital
• Mergers and Acquisitions are difficult
• Open claim files returned
• Coverage Disputes
• Non standard forms
• Reinsurance denial
• Joint and Several Liability

15
Two Models

• Association sponsored administered
• Small sponsorship Fee
• Lower administrative acquisition costs
• Less dependent on reinsurance
• Usually larger more established
• Closed system
• Direct sales force
• Broker administered

16
Broker Administered

• Large National or Regional Insurance Brokerage
  Companies
• For Profit
• No ownership
• Conflicts of interest can occur
• Placement of reinsurance
• Claims administration
• Marketing

17
Balance Sheet Pool A
18
Balance Sheet Pool B
19
Income Statement Pool A
20
Income Statement Pool B
21
Financial Leverage

• Reinsurance
• Ceded premium
• Retentions
• Structure
• Credit Risk
• Adverse development of reserves

22
Ceded Premium

• Ceded premium /net written premium
• Tells how much is being retained by cedent
• The more being ceded the more leveraged the
  carrier
• Less control over pricing and terms
• Changes over markets and lines

23
Surplus

• What is it?
• What is it used for?
• Actuarial Misses
• Replace Reinsurance
• Catastrophic Losses
• Rate Stabilization
• Why does it fluctuate?
• Actuaries driving the car

24
Financial Ratios

• Net written premium to surplus
• Relative security and ability to take on risk
• Reserves to surplus
• How much capital maybe impaired if claim reserves
  are undervalued
• Liabilities to surplus
• Measures exposure to errors in its loss reserve
  and all other liabilities

25
What is the right amount?

• Premium to Surplus Ratio
• Range .401 to 11
• NAIC over 21 dangerously high
• Reserves to Surplus Ratio
• Range .501 to 1501
• NAIC 31 or lower
• Liabilities to Surplus Ratio
• Range .601 to 21
• NAIC 21 or lower

26
Administrative Costs

• Range .10 to .45 of net written premium
• What is included
• Marketing and Administration
• Commission Disclosure
• Sponsorship fees
• Service Fees
• Claims administration

27
Disclosure

• Compensation
• Agent commission
• Retail Brokerage commission
• Wholesale Broker commission
• Lloyds Broker Commission
• TPA Service fees
• Claims administration
• Revenue sharing arrangements

28
Other Red Flags

• Check notes
• Investments
• Loss triangles
• Changes In reinsurers
• Large reinsurance recoveries
• Discounting claim reserves (time value )
• Legal and regulatory disputes

29
The Insurance Cycle
High Profits
Increased Capacity
Profits Rise
Seek Market Share
Relaxed Underwriting
Rates Increase
Hard Market
Soft Market
Flight to Quality
Rates Decrease
Capacity Decrease
Inadequate Rates
Insolvencies/Withdrawals
Mounting Losses
Inadequate Reserves
30
Reinsurance

• Credit Risk
• Structures
• Fronting
• Types of Markets