Public Entities & Their Insurance Providers Adjust Sails In Fiscal Storm

State and municipal governments are facing tight budgets and many are having difficulty paying for their police, fire, schools and services. Where the municipalities can’t cut back, however, is on insurance.

“Budget deficits have been a big issue but I think people need to be careful and make sure they are covered and can pay losses if they occur. There is a possibility of a claim that could be a lot bigger than the cost of insurance,” says Susan Kostro, senior vice president of Ironshore Specialty Casualty – Public Entity & Energy.

At the same time that municipalities are having to make cuts, many citizens still expect the same services they have had in the past, according to William Becker, Aon Risk Solutions’ Public Entity Practice leader.

“These tough budget decisions are forcing our clients to make short term decisions that are not necessarily the best in the long run,” says Becker.

Becker says some of the more common budget cuts and resulting risk management and insurance issues include:

• A Reduction in Force (RIF) in response to budget issues increases the likelihood of employment related claims due to the element of employment security unrest. Because of budgetary or other issues, some entities have either elected not to purchase coverage or to do so with very high deductibles for these types of claims.

“While reducing payroll costs will initially ease budget issues, in some cases long term costs are higher due to the increased liability surrounding these types of employment related claims,” he says.

• Many risk managers are being asked to take on additional duties as some of the RIFs and other budget cuts are implemented.

“We’ve seen an increasing number of risk manager roles being expanded to include the health/employee benefits side of the house. The issues and areas of concern are very different from the traditional property/casualty issues and an inexperienced manager could face many different challenges,” Becker says.

• Stress in the workplace, especially because of individual employees’ financial issues, increases the probability of employee theft. Statistics show that crime claims increase during an economic downturn.

“We have been recommending clients either purchase, or increase, their limits in this area. The coverage is relatively inexpensive considering the amount of protection,” he says.

• Public sector clients are relying heavily on tort caps. In various states, tort caps have been increasing over the past few years, which increase the amount of liability for public entities—most of whom have elected to self-insure for these liabilities.

But Ironshore’s Kostro says that their insureds seem to be aware of the risk exposure.

“We haven’t seen any fall off at all in terms of limits or what people are purchasing. It is surprising, but we haven’t seen any change in that all,” she says.

Still Profitable

The public entity market is competitive with pricing flat to lowering, but it is still a profitable segment because overall there are fewer insurers than some of the other property/casualty segments.

Kostro says this is because of the risks involved with public entities.

“It tends to be a marketplace that people don’t really dabble in,” she says. “It needs quite a bit of expertise because there is a lot of exposure. The expanse of what is covered under a public entity form includes many lines of business – it runs the whole gamut.”

Becker says that expertise will become even more important as technology, politics, climate change and population growth impact the way public entities operate and create more risk for the insurers and insureds.

“We are looking at trying to focus more on communities as they are developing,” he says. “Municipalities should be looking at 10 to 20 years from now before it’s too late. The weather, economy, all of that is making it more difficult for clients we have and we want to be more in step with them.”

Players Refocus

Ironshore began its public entity practice in March, 2009 but just rolled out its new form in December last year and increased capacity to $25 million. The company is focused on state and local governments and municipalities but plans to expand into higher education and non-profits in 2011.

Kostro said Ironshore’s recent moves are a way for the company to position itself to expand into the industry.

“A lot of the brokers who place the business are very similar and there is a lot of crossover in the broker industry with those three industries,” she says. “We want to align ourselves to address their full breadth of needs and what they are looking for.”

Aon has reorganized its public entity practice.

“The clients’ risks have become more complicated and the economy has created significant strain on resources, so we are refocusing our customer service approach, products and strategies to deal with those stresses in today’s risk management environment,” says Becker.

The company is working on several specialty products with its property/casualty carrier partners. It is also forming strategic alliances with other practices, such as the technology practice, and others in the Aon family to create more synergy with the public entity practice. This includes working with its Transportation Practice.

“We have reorganized management, allocated talent nationally, and have a whole new system for communicating internally,” says Becker.

Midlands Management Corp. is another company that changed to its public entity practice in 2010. The company introduced a public entity multi-line package for select public entity risks. Midlands tends not to focus on larger metropolitan cities and state funds partly because of the exposures they face, and because they target exposures within the first $1 million of the exposure.

Richard Bird, executive vice president and chief operating officer of Midlands, says demand and capacity have been strong for this class.

“Public entities that are responsibly managing their exposures are finding a number of carriers that are willing to partner with them,” he says.