Rate Guarantees: For everything you gain there's something lost

The environment for public entity insurance in Michigan is very competitive.

That statement is not news. Members of the Michigan Municipal League Liability and Property Pool have chosen to renew their coverage with the League Pool in record numbers in 1998, despite having at least two other statewide pools among their other options for coverage. The loyalty of our member communities is greatly appreciated.

Competition is so keen, however, that some League Pool members have been offered "three-year rate guarantees" by our competitors as incentive to leave the League Pool. These "guarantees" usually state that a member's premium is "guaranteed" not to increase more than five per cent per year for each of the next three years, except for increases in exposure base.

In return for this "guarantee," a member of the competing program agrees not to pursue competitive quotations for the duration of the "guarantee."

At first blush this sound like a pretty fair trade. All you have to do is give up your right to receive an optional quotation for three years, and in return you won't get your premium jacked up. Although it won't be mentioned, you also guarantee that your premium won't decrease. Let's take a closer look to see who's giving up the most in this scheme.

For ease of mathematics, let's assume you're a city that pays $25,000 a year to the League Pool for property and liability insurance. A competitor offers to match the League Pool's $25,000 premium, and offers the rate guarantee described above as an incentive to switch. In return, you agree to lock out competition as long as the competitor abides by the five per cent cap on premium increases.

Let's jump ahead three years and assume that the competitor has increased your premium an average of four per cent each year for three years — well within the five per cent cap. The result? The competitor has kept its side of the bargain, while you are paying a premium of $28,112 ($25,000 x 1.043). That's more than a 12.5 per cent increase, which doesn't translate into much of a guarantee!

If this member had stayed with the League Pool and not locked itself out of the current competitive environment, the likelihood is that during the same three years, its premium would end up much closer to the original $25,000 than the guaranteed quote, and maybe even lower.

The economics are simple. Competition keeps price down. It always has and it always will. Why give up your competitive edge by locking yourself in for three years?

As a rule, the Michigan Municipal League Liability and Property Pool does not offer rate or premium guarantees. Risk Manager Lisa Holinski of the Michigan Municipal League has been very successful in her annual negotiations of reinsurance premiums. Her efforts have resulted in annual decreases in these costs, which help greatly in keeping premiums stable.

The environment for public entity insurance in Michigan is very competitive. If you want to guarantee that your insurance premium won't go down, a three-year rate guarantee might be just the ticket.