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High-profile losses create hardening market for California public entities

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A surge in liability claims against public entities is driving up insurance prices for some cities, counties and schools in California during mid-year renewals.

While overall market capacity remains plentiful, some insurers — most recently Amtrust Financial Services Inc. — have pulled out of the market, and others are limiting their lines for public entities in the state or are inserting exclusions or writing higher excess layers as they adjust to the changing loss environment, sources say.

Most of the changes are being felt in California, but public entities in some other states are also seeing disruption in the insurance market, sources say.

Liability losses across several lines have increased dramatically over the past few years as video of alleged use of excessive force by police have spread across social media, allegations of sexual molestation and abuse against schools have been widely broadcast, and increased concern about traumatic brain injuries have dogged city and school athletic programs, they say.

“Everybody has a cell phone and is their own cameraman these days, and these videos go viral in seconds,” said Dawn Puro, senior vice president and head of public entity business at Ironshore Inc. in New York.

Increased losses are in part being driven by more widespread use of video technology in cases brought against the police, which has raised the profile of the cases, said Billy Deeb, director of public entities at Aon Risk Solutions in Los Angeles.  

In addition, public entities can have complex risk profiles, he said.

“The issue with municipalities is that they are not a homogeneous risk. You have auto liability, police liability, employment practices and other exposures, and they can have losses on all those exposures,” Mr. Deeb said.

The public — and, therefore, potential jurors — have “zero tolerance” for excessive force by police and sexual misconduct in schools, which is driving up settlement amounts, said John Chino, area senior vice president for Arthur J. Gallagher & Co. in Irvine, California. Cases that may have settled in the tens of thousands of dollars a few years ago are now settling in the millions, he said.

The rise in losses is felt particularly sharply in California where there is no immunity for public entities nor a cap on tort claims against public entities and there is joint and several liability for all parties involved in an incident, Mr. Chino said.

The increase in losses has led to some insurers exiting the market, sources say. C.V. Starr & Co. pulled out of the public entity market in California more than a year ago, National Casualty Co., a unit of Nationwide Mutual Insurance Co., also exited, and most recently Amtrust is not renewing policies, multiple sources said.

None of the insurers returned calls seeking comment.

Amtrust, which writes small commercial business but also has a specialty division, has also had well-publicized issues with its financial reporting. The insurer delayed filing its 10K with the Securities and Exchange Commission earlier this year. In addition, in April the Wall Street Journal reported that the insurer’s accounting practices had been investigated by the FBI. The insurer said it was not aware of an FBI investigation. Last month, family members of the company’s founders injected $300 million into the insurer, and last week Amtrust announced it was selling shares in personal lines insurer National General Holdings Corp. for about $210 million.

CSAC Excess Insurance Authority in Folsom, California, a risk sharing pool that provides insurance purchasing and risk management services to public entities in the state and has annual property/casualty premiums of about $400 million, had been looking to lower its exposure to Amtrust for several months and when the insurer missed its 10K filing, the pool sought to replace Amtrust on its programs, said CSAC CEO Mike Fleming.

Chubb Ltd. replaced Amtrust on its primary workers compensation program, Great American Insurance Co. replaced Amtrust on the excess comp program and various insurers, including some Lloyd’s of London syndicates, took over the Amtrust layers on its general liability program, he said.

Despite the changes in the insurers on the program, CSAC has not seen significant rate increases this renewal, Mr. Fleming said.

“Our programs are big enough that we are not seeing a lot of disruption. In some cases, there is no increase and in other cases it’s less than 5%,” he said.

An Amtrust unit has also been replaced on the Protected Insurance Program for Schools, a workers compensation program for more than 400 K-12 schools and community colleges in California administered by Torrance, California-based Keenan & Associates. The program was renewed without a rate increase despite the change, said Eva Gutierrez, vice president of marketing — property/casualty at Keenan. She did not specify the insurers that have replaced Amtrust on the PIPS program.

Workers comp policyholders are not seeing the same increases in losses that are being seen on liability business where “underwriters are becoming increasingly concerned about various issues,” she said.

Public entity liability policyholders with significant losses are seeing large increases, brokers say.

The general liability and workers compensation market for public entity business in California is hardening, but “we can still get the deals done,” said Craig Bowlus, managing director of Aon Risk Solutions’ pooling practice in San Francisco.

In some cases where accounts have reported significant losses, premiums and self-insured retentions are being increased by “multiples,” but accounts with better loss experience are seeing more moderate increases, he said.

“If the client has good loss experience, the impact has been minimal. If it’s average, they are looking at increases in the single digits, but if they have any sort of meaningful loss experience, then the increases are double-digits,” said Mr. Chino of Gallagher.

A willingness of other insurers to take the place of insurers exiting the California public entity sector is benefitting policyholders, said Daniel Howell, San Francisco-based managing director of the public entity group at Alliant Insurance Services Inc., which places the CSAC program.

“It’s not a crisis situation, but it’s taking more work to get the renewals done,” he said.  

In addition to increasing rates, insurers are restricting their capacity on individual placements, Mr. Howell said.  “Several years ago, one underwriter might be writing a line of $25 million but now they might write only $5 million-$10 million on a primary layer. It might take two others to replace the (reduced capacity) but it gets done for a similar price,” he said.

Some insurers are also looking to move to higher excess layers, brokers say.

Ironshore writes municipalities, higher-education establishments and religious institutions in the state and “our attachment point strategy and rating discipline has allowed us to maintain profitability in the sector,” said Ms. Puro. 

Some insurers are also inserting exclusions into policies. For example, Lexington Insurance Co., a unit of American International Group Inc., introduced an exclusion for certain cumulative brain trauma exposures, several sources said. AIG did not return calls seeking comment.

The hardening market for public entity liability business is most noticeable in California, but other states that don’t allow immunity for public entities are also seeing rate increases, Mr. Chino of Gallagher said. Prices are increasing for public entities in Washington and more limited increases are being seen in Arizona, he said.