So where do we go from here?

How does that adage go? “Be careful what you wish for because it might come true?” Well, here we are!

A few short years ago the wish list for municipal insurers certainly would have included:

1. relief from the soft market;
2. relief from catastrophic loss exposures;
3. a more conservative Appellate and Supreme Court; and
4. adequate reinsurance capacity.

What has happened in insurance may not be the same as Al Michael’s asking “Do you believe in miracles?” But the stars are aligned quite favorably for insurers to return themselves to profitability.

We have the hardest market in many years. Municipal insurers are charging higher prices and, for the most part, municipalities are absorbing the increases. Even the savviest city negotiators understand that the great deals they were getting on insurance for many years couldn’t last forever.

Exposure to catastrophe losses declined significantly when sewer systems became a local government rather than an insurance issue. Insurers also received relief from police pursuit liability. Asbestos liability, which is still hitting insurers nationally very hard, has not been a big issue for Michigan municipalities. Mold is a concern, but not nearly to the extent it is in more southern climes.

A more conservative judiciary is regarded as one of the primary legacies of the Engler administration. The probability is that for the foreseeable future, a literal interpretation of state law will be the rule, rather than judicial activism.

Reinsurance capacity is critical to an insurer’s ability to offer coverage. The difference between this hard market and the mid-1980s is that now there is plenty of capacity. Yes, municipal insurers had to raise prices, mostly to pass along the significant increases in their reinsurance costs. But, with few exceptions, municipal insurance is readily available. In the mid-1980s, reinsurance capacity evaporated and many municipalities had no coverage available at any price.

Most of our wishes have been granted. So where do we go from here?

Group self-insurance programs (pools) dominate municipal insurance in Michigan. This fact bodes well for cities and villages, whose membership in a pool provides a greater opportunity to influence decisions than with a commercial insurer.

Stay alert and ask questions

I encourage those of you who are members of a pool to keep an eye on which direction your pool takes over the next year or two. I think there are two probable paths.

A pool might decide to charge as much as the market will bear, using the hard market as an opportunity to build surplus. This is not inherently bad, especially if surplus needs strengthening. But members should know what their pool’s surplus goals are and what will happen to their rates when the surplus goal is met. (Surplus in your pool might be called member’s equity, or the fund balance, or some other term to define the excess of assets over liabilities.)

Or, if surplus goals are met, current market conditions provide a unique opportunity to experiment with new structures, new products and new methods of service delivery.

How much surplus is enough? The answer is, I believe, higher for pools than for commercial insurers, who usually use a ratio of $2 of premium for every $1 of surplus as a goal. As a rule of thumb, if your pool has more than a 1 to 1 premium-to-surplus ratio, you are justified in asking for an explanation of your pool’s surplus goals.

For example, the MML Workers’ Compensation Fund has surplus that has been well above a 1 to 1 ratio for several years. In response, the Board of Trustees studied various options for using surplus and decided on a long-term dividend distribution plan. The goal is to reduce surplus on a controlled basis over a period of years, through the use of dividend checks and renewal premium credits.

Our Liability and Property Pool has a premium-to-surplus ratio of about 1.20 to 1. Our goal is to reach a ratio of 1 to 1. We will use any surplus in excess of our target 1 to 1 ratio to reduce our reliance on the commercial reinsurance market, and to stabilize our members’ premiums.

Pools are the engines of innovation for municipal risk management. An active governing board and engaged membership are vital for a pool to take advantage of market opportunities and move forward with confidence.