Choosing the best way to protect your public entity from legal and financial risks can be daunting. For many non-public businesses, working with commercial insurance brokers provides an adequate level of coverage at a competitive price. However, for public entities, working with these insurance companies isn’t quite as easy.
Private companies can quickly raise prices or cut costs to account for fluctuations in their insurance premiums, but public entities are very sensitive to these quick changes in costs. At the same time, you have a duty to protect your agency from risks that, if left unchecked, could result in the loss of vital public services.
Public entities require superior coverage and stable, competitive costs — two things a well-managed risk pool offers. Risk pools offer insurance policies similar to what you’d get from a private insurer, but the costs are divided among all members of the pool. This makes having quality coverage more affordable for public entities and less susceptible to the volatility of the market.
This article will teach you how risk pooling works, discuss its benefits for public entities, and walk you through some types of insurable risk.
How Risk Pooling Works
A risk pool is a group of like-minded entities looking to insure similar risks (i.e. workers, buildings, vehicles, …). In California, these entities join together under an agreement to share the cost of insurance. Instead of a traditional insurance model, risk pooling focuses on sharing the burden of similar risks among the group.
Each year, an actuary — a professional who measures and manages risk — estimates the cost of risk for the group. That amount is divided among the group members and each pays their share of the total cost. When a loss occurs and a claim is filed, the costs for the claim are paid out of this central fund.
As you can imagine, estimating the cost of risk for an entire year is not an exact science. So at the end of the year, the risk pool will review their financial performance. If the total amount paid by the members at the beginning of the year was insufficient, members may need to pay an extra fee to make the fund whole again. If too much money was collected, the excess can be available for the pool’s use or paid out as dividends back to the members.
Let’s look at a simple example to fully understand how a risk pool operates:
- Five small schools decide to create a risk pool together. Each school pays $1,000 into the fund at the beginning of the year, per the recommendation of the risk management administrator or actuary. One school’s van is involved in a minor accident, which causes $3,000 in damage. The pool pays the full amount out of its fund and no other incidents occur.
- At the end of the year, the fund has $2,000 remaining. The pool’s Board of Directors, which is made up of representatives from each member agency, will decide to either apply the excess to next year’s premium or return it to the five schools.
Keep in mind that in real life, you’ll also have to contend with the underwriting process, the costs of administration, excess insurance costs, and other calculations and fees that dictate how much money your fund needs. However, this example does show you the basic framework of how a risk pool operates.
Unique Benefits of Risk Pooling for Public Entities
Risk-pooling arrangements offer a number of benefits over sticking with commercial carriers.
- Stability – Private insurers are under tremendous pressure to provide short-term results to their investors, but a well-run risk pool can look at risk financing in the long-term. This allows your risk management authority to maintain stable rates, even through volatile times.
- Savings – The Association of Governmental Risk Pools (AGRiP) estimates that, in the long run, risk pool members reduce their cost of insurance by an average of 15-25%. Plus, any excess funds may be returned to the members or used to benefit them through additional services.
- Coverage – Public entities are increasingly subjected to large settlements and jury awards. This puts these organizations at high risk for devastating losses. Without the right insurance plan, they may not carry enough in insurance limits to protect themselves from legal action. Risk pools use their size and buying power to provide insurance limits for public entities that often aren’t even available in the commercial market.
- Member-Driven – Member entities have direct input into the administrative decisions of their risk pool. Rather than having to accept whatever insurance coverage is offered to them, coverage can be tailored to meet their unique needs. Members can determine what services the pool will provide, the quality of claims management, and the method of cost sharing across the members.
- Collaboration – Risk pooling is a collaborative concept of insurance. It naturally drives the development of best practices and shared problem solving among agency members so everyone has access to affordable coverage. The group can do more than purchase insurance, too. Other benefits include group-purchased or shared expenses such as software, services, training, and more.
With these benefits of risk pooling in mind, let’s look at what types of insurance you have access to through this method of coverage.
Insurable Risks and Entity Types
Every risk pool is different. Some specialize in a single type of insurable risk or public entity (i.e. only schools) and others cater to a range of needs and agencies. Choosing the right risk pool for your organization depends on your needs.
Here are some examples of common insurable risks and services you might find in a risk pool:
- Workers’ compensation: coverage and claims management for members’ workers who are injured on the job.
- General liability insurance: coverage and claims management for a variety of liability risks such as auto, employment practices, bodily injury and more.
- Property damage: coverage and claims management for real property and contents such as buildings, tanks, pumps, vehicles, mobile equipment, and boats; also often offers coverage options for flood, fire, and earthquake.
- Employee benefits: includes items like vision, dental, and health insurance, life insurance, and retirement savings options for members’ employees.
- Miscellaneous: extra coverages specific to your member group. For example, at GSRMA, we offer coverage for crime, embezzlement, pollution, and cyber risks for our members.
Risk pools that cover a variety of entity types may offer one or all of these services to cities, fire departments, schools, public cemeteries, levee districts, water and sewer districts, irrigation districts, recreation districts, and many other special districts in California.
Is Your Organization Protected?
Commercial insurance prices and coverages can be too variable to plan for. This makes it tough for public entities to feel secure in their policies and confident they have the protection they need to avoid devastating losses in the event of a claim.
Risk pools are a simple solution. Belonging to a well-run risk pool can provide stability and improved coverage for your agency’s unique needs. You can enjoy peace of mind knowing your organization and the public it serves are protected from major risks.
Contact us to learn more about how a public entity risk pool can protect your organization, contact us. We’re here to help you protect what matters most.