INTRO: Recent outbreaks of severe weather have highlighted the risks and insurance costs faced by public entities. Joe Caufield, chief underwriting officer at OneBeacon Government Risks, suggests ways local governments can reduce the uncertainties surrounding buying their property/casualty insurance coverage.

Recent weather events such as Superstorm Sandy and the tornadoes in Oklahoma are living testaments to the unpredictability of natural disasters. Such events test our preparedness and, unfortunately, sometimes prove that we are actually ill-prepared.

While we may generally rely on weather reports to predict such events and guide our actions, there is no daily forecast for a government entity's commercial property program. And with budgets and personnel shrinking, it can be difficult to validate that your entity is properly insured. However, there are some practical steps within reach that can help risk managers and local government officials reduce the uncertainty inherent in the commercial property insurance market and help mitigate against future premium increases and losses.

These days, insurance is a global marketplace, with premiums being affected by events across the country and the world. Anything from earthquakes in Japan to winter storms in Europe can pressure the catastrophe rate for everyone. If the market incurs a large loss, such as from Superstorm Sandy last October, the statistical models insurers and reinsurers rely on heavily seemingly always suggest the next large loss will arrive that much sooner, ultimately affecting your rates.

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Similarly, program costs are affected by trends in the economy, such as the dramatically low interest rates over the past several years. Low interest rates highlight shortfalls in property catastrophe and property manual rates as insurers are unable to offset losses with investment returns. In the future, when interest rates begin to increase, the property insurance markets will be able to absorb higher loss payments and public entities will see the benefits in their insurance costs. Until then, risk managers can begin to accurately predict increases to their costs by paying close attention to the global trends that affect catastrophe modeling and loss cost trends.

While insurance has become global, it doesn't mean you need a global positioning satellite to know where you stand in the market. As the saying goes, history has a tendency to repeat itself, and in the cyclical world of property pricing, the past is a prologue. Reviewing your own historical rates may be your best future indicator.

To do this, you can utilize a fairly simple analytical procedure that focuses on benchmarking price. First, calculate you basic rate (the rate you pay per $100 of the total value of your public entity property). Then compare this basic rate, adjusted for any change in deductibles, for as many prior years as possible to develop a timeline of insurance costs. Examining this timeline can help entities develop predications predictions for their future costs and plan, budget or make changes as necessary.

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It is always important to understand the partners you do business with, but it can be especially important for entities to understand their insurance carrier and their various markets. For example, if your property insurer is a global player or insures significant coastal property, you may find you are exposed to bad results that could influence future pricing. This can throw a wrench into your best-laid plans and introduce a wild card element to your own coverage forecast.

This applies equally to generalist commercial property markets, specialty markets or public sector pools — most of which make extensive use of commercial property insurance and reinsurance. Each potential market that you currently use or may approach has a different underwriting profile and has implications for your ability to manage any uncertainty in your public entity's program.

Purchasing the proper amount of insurance is always important, but as government budgets continue to tighten, it becomes increasingly vital that public entity officials are thoroughly prepared before purchasing or renewing insurance.

One important way to do this is to have a documented statement of values. If a public entity is using an undocumented statement of values without a clear idea of the original source of those values, property markets will respond to that uncertainty by charging more. A documented statement of values can prove to be your most effective tool to manage costs.

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However, the reality is that sometimes public entities must start with an ambiguous statement of values. In such cases, an incremental approach is recommended. It is not a realistic goal to validate the required amount of insurance for each location each year. Instead, identify locations by criticality of function — public safety and health taking the lead — or by size or current value. A three- to five-year cycle to complete assessments for all needed insurance limits across all locations should be actionable. This incremental approach helps highlight how continuous the property valuation process needs to become. Utilities, maintenance and capital improvements are ongoing, and so, too, should be a consideration of valuation.

A public entity can go a long way toward reducing the uncertainty of its property program by describing its valuation program and highlighting recent changes; and keeping up with values will aid predictability.

Often there is only one government official or risk manager given the task of reducing a public entity's risk profile. And with consolidation happening at every level of government, this person may or may not be exclusively dedicated to that task. If the entity can identify and partner with local agents, brokers, consultants, insurance carriers, reinsurance markets or any other related service provider that knows the market and shares its interests in managing uncertainty and reducing costs, it can relieve pressure.

However, be cautious, because although budgets are tight, the best value may not be available from the lowest-priced consultant. The key to ensuring valuable, actionable advice is to identify partners with deep expertise who know climate trends and weather conditions for local regions and can help with your own program forecast.

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Public entities should try to qualify all partners on their ability and willingness to propose alternatives and execute on specific ideas. Do they bring local government expertise? Ask for examples. Because property submission detail is so important, ask how a submission is prepared. If your partners are not asking questions or formatting your information, the relationship likely will offer reduced value.

Don't wait for an event or catastrophe to take place to test your insurance preparedness. Like weather forecasts, your entity's coverage forecast should be updated often; the larger your property exposures the more frequently you may need to evaluate.

With a commitment to developing an accurate forecast for your entity, a detailed description of your needs and expert partners to share the work, you will be better prepared to evaluate your position in the market and adjust your required coverage terms to better manage your government entity's changed costs.

Joe Caufield is chief underwriting officer at OneBeacon Government Risks. He can be reached at 781-332-9497 or jcaufield@onebeacongov.com.