Insurance, self insurance comes in many forms

When considering the availability of liability insurance, municipal administrators and elected officials sometimes must feel like the gawky kid in high school with whom nobody wanted to dance, who later blossomed into an irresistible charmer.

For several years in the mid-1980s, the insurance options for municipalities ranged from not enough limits, to budget-busting premiums, to no insurance at all. It was this environment that resulted in the explosive growth of municipal self-insurance pools; here in Michigan, the MML-sponsored League Pool grew in two years to one of the largest municipal self insurance pools in the country.

How times have changed! Insurance companies and agencies that wouldn't touch a municipal account seven to 10 years ago, have developed products to increase market share with the same clients they shunned just a short time ago.

Most insurance professionals agree that it is in a municipality's best interest to control the process of insurance purchasing as much as possible—to practice risk management rather than simply buy insurance. The insurance options that are available can be listed and sum- marized along a control continuum, starting with the least amount of municipal control and leading to pure self insurance.

Conventional, "first dollar" insurance

This is the simplest, but least efficient, form of risk management protection. A broker or agent quotes a premium, you accept it, and in return you receive coverage under a policy form written by the insurance company. You do not own your loss information, and any loss control inspections are for the benefit of the company's underwriter in rating your premium.

Conventional insurance used to be the only feasible choice for a small municipality. The advantages are ease of purchase and the ability to pay an annual premium and forget about it. The disadvantage is lack of control over the entire process, and the fact that only about 60 percent of your premium is targeted for loss payments. The other 40 percent is used for commissions, company overhead and profit.

Broker controlled insurance pools

Many national insurance brokers have developed products with one or more insurance companies that allow them to form regional insurance pools with very few members as a start-up group. These pools usually are sold with relatively low pooled retentions ($25,000 to $75,000 per occurrence). They often feature an annual aggregate retention, which allows the broker to sell them as protected, non-assessable pools as a way to entice membership.

These products have the advantage of providing some control over the relatively low self-insured retention, and pool ownership of the loss data. The investment income on the Loss Fund allows these programs to compare favorably with conventional insurance. The disadvantage is that the broker tightly controls the process, and presents for the pool's consideration only those products for which it has exclusive selling rights. Services for claims administration and loss control usually are provided by the broker's wholly owned subsidiary, increasing revenue to the broker and limiting the options for the pool. Also, the broker usually will write very strict withdrawal requirements into the bylaws, further limiting a member's ability to select other viable alternatives.

These pools can be an attractive first step into self insurance for municipalities, especially if membership in a statewide pool is not available.

Statewide pools

These pools usually, but not always, are sponsored by a state's municipal league or other association. The sponsoring association provides administrative oversight and coordination of pool activities, and often will provide many of the services in house. While the pooled self insurance retention often can be quite large (e.g. $500,000 for the liability portion of the MML Liability and Property Pool), the structure for the individual member may appear to be similar to conventional insurance.

The advantages of statewide municipal pools are based on the greater control provided by the large size of these programs: policy forms written by the members rather than an insurer, expanded loss control and claims services, less stringent membership requirements and greater access to reinsurance and service provider markets. The disadvantage of these pools is that, as they grow in size, it becomes more difficult to keep a sense of pool, and some members may view their pool as a commodity rather than a service.

Statewide pools are very attractive alternatives for small to medium sized municipalities, which would have little buying power individually.

Individual excess insurance

Large municipalities which can retain an individual self-insured retention (SIR) of $50,000 per occurrence or more often find this option attractive. The municipality purchases a package insurance policy from a broker, but the municipality puts its own money in a bank account to pay for losses within the SIR. For an additional premium, annual retained losses often can be capped at, say, three times the SIR. Excess insurance is purchased up to a municipality's desired limits.

The advantage of individual excess insurance is the greater sense of control offered by going it alone rather than with a pool. True control is realized, however, only by those municipalities which already have in place a qualified risk manager with a capable risk management information system. The city must know what its true projected losses will be over three to five years, in order to anticipate the true cost of its insurance program. Without such a system already in place, the city will be relying heavily on the information provided by the selling broker.

Pure self insurance

This option is feasible only for larger cities which have a long history of quantifiable loss data based on a rather stable exposure base. There may be no liability insurance purchased at all, or retentions could be as high as $5 million to $10 million.

Summary

In the current competitive insurance market, municipalities may be presented with insurance options that do not mesh with either their appetite for assuming risk, or with their long-term risk management objectives. If League members find themselves selecting from alternatives with which they are not comfortable, the decision should be delayed until all questions are answered, and all the advantages and disadvantages are weighed.