Is an ’80s Revival in Store for Public Entities

The insurance market for pubic entities—municipalities, counties, school districts, etc.—seems to be headed for an ’80s revival, but unfortunately nostalgia can’t be attributed as the driving force. This throwback to the late 1980s is all about a hardening market, one with fewer players and higher prices.

At least that’s the feeling of public entity specialists like Robert Hughes, vice president-marketing for Program Management Services Inc. (PMSI), and Chuck Highlander, underwriting manager for Professional Governmental Underwriters Inc. (PGUI). PMSI, located in San Antonio, is the public entity arm of Brown & Brown Inc. PGUI, which covers police professional liability and errors and omissions (E&O) for school boards and public officials, is headquartered in Richmond, Va.

“Prices were on the rise even before 9/11 and it’s not getting any better,” Hughes said. He added that there are carriers willing to write public entity coverage, but the offerings are now minimal. “A year or two ago, companies were offering all kinds of additional coverage and services at no charge,” he said. “But now they are saying—’here’s our quote’—and it’s stripped down, we have to build it from there.”

“It is increasingly difficult, not as bad as in the mid ’80s, but it’s moving that route,” Highlander said. “Coverage is still available but from fewer markets than even two to three months ago.” He noted that prices are increasing as well. “We’re moving back toward pricing of the mid ’80s—pricing in the past year or past five years has been unsustainable.” Highlander added that it “is impossible for carriers to offer coverage at those prices and stay in business.”

Hughes remarked that the effects of the Sept. 11 attacks on the public entities arena are still uncertain. He said companies have talked about terrorist exclusions for public entities, but added that he hasn’t actually seen any yet. The wording of such exclusions is problematic, as is getting the approval of insurance commissioners. Still, he pointed out that there are city and county risks associated with Sept. 11 to which carriers are not going to want to be exposed.

Insurance pools: coverage, competition
Among the factors driving the hard market of the 1980s was the issue of sovereign immunity. The sovereign immunity laws kept lawsuits against public entities at a minimum, but in the middle of the decade they were thrown out in most jurisdictions and people began to sue governmental bodies.

Hughes said that before the laws were changed carriers didn’t have to worry much about a slip and fall at City Hall. After the laws were thrown out, however, companies started bailing out of the market and insurance pools formed or became more predominant.

In 1986, responding to the concerns of businesses and municipalities across the U.S. that had difficulty obtaining liability insurance, Congress passed the Federal Liability Risk Retention Act. The Act allowed the creation of vehicles through which insurance buyers could gain access to liability coverage, such as risk retention groups and purchasing groups, both forms of insurance pools. In the public entity arena insurance pools are usually tied to associations.

“Like in the late ’80s, insurance pools are going to be a factor (in the hardening market),” said Hughes.

Hughes said the pools have an advantage in that they have a lot of flexibility on pricing and coverage and don’t have to get state approval of rates or coverage. But he added that the problem with pools is that they are slow to modify their forms and pricing in response to market changes. In the 1990s the standard markets came in and slashed prices and added coverage to compete with the pools.

“Some companies had the depth to survive,” said Hughes, “but other, smaller companies were writing policies too cheap and couldn’t hold on for longer than two or three years. That’s not long enough to capture a large enough portion of the market.”

“This will be the first hard market these folks [the insurance pools] have been through,” Highlander said. “It will be interesting to see what they do. But I’ve seen no greater number of accounts running over there, not any more than the year before.”

Higher prices, harder to get
“Although [the market] is hardening, it’s heading back toward a proper price equilibrium,” said Highlander, “and we still haven’t made it back to the prices of the mid ’80s.” Highlander noted he’s seen prices firming up by 20 to 30 percent.

Hughes has witnessed even higher spikes in premiums, ranging from 25 percent to 300 percent, depending on the class of risk. “Before, customers were looking at trying to keep the rates from going up at all. Now they are trying to keep rates from rising more than 40 percent. I recently wrote a couple of renewals—one for a 40 percent increase, one for a 100 percent increase—and they were glad to get it.”

Both Hughes and Highlander agreed that schools are being hit hard. “Schools are particularly hard pressed,” Highlander said. “E&O for schools is getting harder and harder. It’s a terrible, terrible line—a tough line to write.” He said that the line is similar to writing E&O for a city, but it is a unique risk, adding that the risk is greater with schools than with municipalities because the claimants, children, are sympathetic.

Pricing for schools is the same as for municipalities, but the loss is more sizeable. The market for schools is in turmoil, asserted Highlander, because traditionally E&O for schools has been written for less than what it should have been. Consequently, companies such as Mid Continental, Scottsdale, The St. Paul and Hartford have exited the market. Hughes noted that with the current situation, smaller school districts may see premiums jump from $20,000 per year to $80,000 or $100,000 per year.

Carriers are calling the shots
Hughes said that PMSI is writing all lines with TIG Insurance Company, except for professional liability; they write professional liability with Great America. “TIG is a company on the move,” said Hughes, “they have said they are here to stay.”

Coregis Insurance, which is owned by GE, is another company to watch, according to Hughes. He added that PMSI is the largest or second largest producer with Coregis in the country.

A majority of the companies have some kind of loss control services included, said Hughes. “For instance, bus drivers are always a problem for school districts—not major accidents necessarily—but they are always bumping into things…So companies may sponsor driver training for bus drivers.”

He added that some loss control services are charged for, either by writing the charge into the premium or through a bidding process. “The days of a company throwing everything into a policy and it’s covered are gone,” Hughes said. “There’s a lot more negotiating going on.”

Hughes said agents are telling him that they can’t get quotes from companies and that the companies want more extensive information than they did before. Plus, companies are taking 30 to 60 days to give quotes, while last year they were giving quotes on a 10 to 15 day turnaround.

According to Highlander, underwriters are looking for a well managed entity as shown on the application. They will pay attention to the overall management of the organization, looking for what boxes are checked on the application and in what order. Management procedures, the existence and maintenance of employee manuals, and guidelines for procedures and employees are all areas of interest for the underwriters.

The carrier for PGUI’s school board liability program is United National Insurance Group. For police and public officials liability, the company writes through Hanover Insurance Group and United National, depending on the state. With all three liability programs, PGUI offers limits of $5,000,000 and up to $10,000,000 facultative. Deductibles are in the $2,500 to $5,000 range, compared with $1,000 a few years ago. About 99.9 percent of the law enforcement E&O coverage is written on an occurrence basis, said Highlander.

Highlander said that although PGUI can design programs for specific risks, it is not so common as it once was. He reasoned that companies have “fine tuned” their policies over the years in response to customers’ requests, so manuscripting policies is not as necessary as it once was.

The big shakeout
Hughes predicted that there will be a big shake out of companies in the public entities arena with regional companies “jumping out” of the market and opportunistic companies coming in. “But with the simple fact that 9/11 happened, there’s not going to be a whole lot of new players,” said Hughes, adding that “the big losers are going to be public entities, because they are going to pay a lot more for a lot less coverage.”

Especially hard hit will be states with high catastrophe exposures, like Texas and Florida. Hughes recommended that agents educate their “government officials and let them know that it [price increase] is coming—that they need to budget higher premiums for the next year or two.”