OVERVIEW OF INSURANCE POOLING
description
Transcript of OVERVIEW OF INSURANCE POOLING
OVERVIEW OF INSURANCE POOLING
Your Key to Success
Presented byVictor F. Lorch, ARM, ARPM, AINS
M.R. Lorch Insurance, Education and Risk Management Consulting Inc.
Instructor Insurance Education Association
The development of insurance pooling
The nature of insurance pools
Insurance Market Cycles
How pools may need to respond to meet member needs during these cycles and advantages of pool membership
What’s It All About?
Events of 1970’s
The loss of sovereign immunity (state and local government could now be sued for their actions or inactions affecting the welfare of their population served by them) opened governmental entities to more lawsuits
Changes in tort claim laws as they effected governments exposing them to more litigation (Governments are now held to same standard as businesses and individuals)
DEVELOPMENT OF INSURANCE POOLING
Events of 1980’s
The major insurers began to decline the writing of insurance for public and nonprofit markets (charging higher premiums, or refusal to write coverage ).
Dissatisfaction with state-run insurance programs
Governments either went bare (no insurance) or developed pools of governmental entities to self-insure (spreading the risk amongst themselves instead of an insurance carrier)
DEVELOPMENT OF INSURANCE POOLING
Pooling defined (by GASB #10- Government Accounting Standards Board) - cooperative group of governmental entities joining together to finance an exposure, liability, or risk. Risk may include property and liability, workers’ compensation, or employee health care.
A pool may be a stand-alone entity or included as part of a larger governmental entity that acts as the pool’s sponsor.
NATURE OF PUBLIC ENTITY RISK POOLING
Group purchase of traditional insurance
Large deductibles
Offering various retention layers within the pool
Purchasing different layers of excess and reinsurance
What Can a Pool Offer (WIFM)
Spread risk among many members (law of large numbers)
Across multiple years
What Can a Pool Offer (WIFM)
Happy Pool Member
Ownership in Pool
Pools Spread the Risk
Having its members retain part of the risk through a deductible layer
Retaining part of the risk through a self-insured retention (SIR) layer
Purchasing excess or reinsurance to cap pool liabilities
Joining an excess super pool to cap pool liabilities
Common Types of Pools
Risk Sharing Pool- risk of loss is pro-rated among pool members
Insurance Purchasing Pool- members pool together to group purchase insurance coverage, and member entities do not share in each other’s risk. ( An example is CAMEL Program offered by Alliant Insurance Services in California)
Common Types of Pools
Banking Pool- members maintain deposits in the pool and funds are made available to borrow against in the event of a member sustaining a loss. Member entities do not share in each other’s risk. They merely set up a fund that each may borrow against.
Claims Servicing or Account Pool- A separate administrative entity is established to manage the accounts of each member. Members may maintain balances with the pool, but member entities do not share in each other’s risk.
Insurance/Banking/Claims Servicing Pool
Insurance/Banking/Claims Servicing Pool
Risk Sharing Pool
Pool group purchases insurance services for members such as group
purchasing of insurance, banking, and claims services for its members
Pool members share their risks with one another. (Transfer of claim
liabilities to the pool).
There is no accumulation of any appreciable equity
Is a separate legal entity. Equity accumulated by pool
membership
Members of insurance pools account for all claim liabilities on their individual
financial statements (No transfer of claims)
The claim liabilities of members are not recorded on the individual member financial statements
11
Insurance/Banking/Claims Servicing Pool
Insurance/Banking/Claims Servicing Pool
Risk Sharing Pool
The pool financial statements show a net zero equity with any excess assets or liabilities as payable or receivable
from members
Pools are funded by members through premium like contributions (called
premium deposits) to provide insurance coverage similar to an
insurance company, but in a much more limited manner.
The premiums represent an equity interest in the pool.
The dividends paid by the pool to its members are recorded as insurance dividend income on the members’
financial statements
12
Public Entity Pool Benefits and ServicesAdvantages Include
Improved benefits and services over Insurance Industry
Broader terms of coverage, conditions and limits
More equitable rating basis
Stability of rates and contributions
Public Entity Pool Benefits and ServicesAdvantages Include
No profit loading (profits from investments may remain part of member equity depending on pool agreement
Tax-exempt status
No premium tax No commission
Lower overhead costs
PUBLIC ENTITY POOL BENEFITS AND SERVICESINCLUDE
Training and improved loss control (tailored to the needs of the membership)
Safety Programs and Financial Incentives to Membershipfor Participation in Programs
Loss prevention consultation (programs to assist in reducing the frequency and severity of claims)
PUBLIC ENTITY POOL BENEFITS AND SERVICESINCLUDE
Risk ManagementServices
Various other administrative services (claims administration, claims auditors, defense counsel, actuarial services, underwriting managers, employee benefit consultants)
INSURANCE POOLING IN THE 90’S
Losses for governmental entities were not as bad as predicted by the insurance industry in the 70’s. Insurance companies began looking to expand their book of business into governmental entities.
(Many governmental entities left their pools and returned to traditional insurance programs, only to return to pools in the 21st century as the insurance market changed again)
Insurance Pooling in the 90’s
The pool’s focus on loss control and reduction helped keep loss experience low
Financial markets were performing well and premium dollars provided a good opportunity for insurance companies to generate earnings on premiums invested.
Insurance Companies and the 21st Century
Financial markets attracted individual investors as well as insurance companies. Underwriting focused on obtaining cash for large premiums (“cash flow underwriting”), instead of underwriting risks (The rate of return on investments was as high as 20% on their reserves, with loss ratios exceeding 100%).
With the downfall of the technology industry, underwriting had to concentrate on evaluating risk and exposure, instead of high premium dollars, causing a substantial increase in rates.
Insurance Companies and the 21st Century Litigation trends were pushing up loss costs (Increase in attorney advertising and the rise of class action suits against large corporations).
Large losses were causing poor underwriting results
Increase in “natural disasters” (Hurricanes and storms worldwide in excess of $17 Billion)
Insurance Companies and the 21st Century Terrorism attack of September 11, 2001 cost insurance companies
approximately $50 billion
Pool Membership Desires Members want the lowest rates. Most governments focus on the current
budget cycle and how they can get the most of current funds (Some agencies have gone to two year budget cycles).
Members need stability in their long-run costs
Pool Member
Pool Membership DesiresPool stability is established to maintain significant equity to provide for:
Changes in the pooled insurance program (adding programs, changes in self-insured retention)
Any change in pool membership
Pool Membership Desires
Pool stability is established to maintain significant equity to provide for:
Changes in the pooled insurance program (adding programs, changes in self-insured retention)
Rate stabilization (not subject to hard and soft market cycles)
Pool Membership Desires
Pool stability is established to maintain significant equity to provide for:
Changes in the pooled insurance program (adding programs, changes in self-insured retention)
Any change in pool membership
Be Prepared for:
Insurance Cycles
“Soft market cycle” – carriers are willing to write coverage at “low rates ” for public entities and nonprofit entities
“Hard market cycle” – insurance companies market capacity is lower, insurance companies raise rates, reduce coverage, and pull out of certain markets (public entities and nonprofits)
HOW IT IMPACTS YOUR POOL PROGRAMS AND ITS MEMBERS
Challenges to Pooling In the Future
Pool Insolvency
Another Soft Insurance Market
Confidence Levels Underwriting Considerations for Future Membership
New Public Entity Loss Exposures
Federal Regulation of Insurance Industry
State Regulation of Pools due to Insolvency
Competition from InsuranceIndustry
Health Care Programs for Pools
Process of Evaluating Excess Insurers, Excess Pools and Reinsurers for Solvency Issues
Competition from Larger Pools
Retirement of Pool Personnel
Education of Pool Personnel
“The Key is In Your Hands”Further Topics Covered in “Essentials of Risk Pool Management”
The Pool Manager
Claims Audits
Pool Leadership, People, Personal, Growth, and Management
Actuarial Studies
Underwriting Considerations
Further Topics Covered in “Essentials of Risk Pool Management Course”
Pool Leadership, People, Personal Growth, and Management
Public Entity Loss Exposures, Risk Management and Liability
Understanding Financial Reporting
Financial Stability of Pool Risk Pools and Employee Benefits
Process of Evaluating Excess Insurers, Excess Pools and Reinsurers
Associate In Risk Pool Management Designation-ARPM
Completion of Following Risk Management Courses Risk Management Principals and Practices
Risk Assessment and Treatment Risk Financing
Completion of “Essentials in Risk Pool Management” Course
Completion of a Project Related Public Entity Pooling
Don’t let this
be you!