PUBLIC ENTITIES HOPE FOR GROUP SAVINGS

Some public entities will see significant savings and broader liability coverage as a result of the creation of an excess liability insurance purchasing group by a group of government risk pools.

The five pools are participants in the National Public Entity Excess Program, or NAPEX, a multi-year facility offering members up to $21 million in limits, including an optional $10 million excess of $10 million layer, as of Jan. 1. The program is now seeking additional members from other governmental pools as well as single entities.

The NAPEX participants are not the only government entities currently exploring new risk financing options. An informal group of state county associations and risk pools are investigating forming a captive to provide excess liability insurance, while the National Assn. of Counties Financial Services Center announced a partnership with Sedgwick Inc. to develop new risk services for counties (see story, page 34).

Originally, NAPEX participants, who represent more than 450 public agencies, had set out to design a facility that would be ready for members in the event the market hardens (BI, June 3, 1996).

But the savings and coverage offered were so attractive that five of the group's six members decided to participate immediately, while the sixth is considering it, says the program's head, Betsy Kutska, executive director of the Wheaton, Ill.-based Park District Risk Management agency, which runs a pool on behalf of 121 Illinois park and recreation agencies.

Under the program, Reliance Insurance Co. of Illinois, a Chicago-based unit of the Reliance Insurance Group, offers $10 million of coverage above a minimum $1 million retention per occurrence, which can be self-insured, commercially insured, or in combination, at the member pool's discretion.

Under a quota-share agreement, Princeton, N.J.-based American Re-Insurance Co. is reinsuring 90% of that layer, said Gordon DesCombes, vp at Robert F. Driver Associates, which is the NAPEX program's Newport Beach, Calif.-based broker.

An additional $10 million excess of $10 million layer is underwritten by New York-based Insurance Co. of the State of Pennsylvania, a unit of American International Group Inc.

"All the types of liability coverage that public entities may need" are available under the three-year program, said Ms. Kutska. This includes: bodily injury, personal injury, property damage, employment practices liability, contractual liability, employee benefit liability, and public officials errors and omissions.

Coverage can be provided to follow the form of the primary pool's coverage or under a broad manuscript form that guarantees coverage will be at least as broad as the primary terms.

"The whole purpose here is that this coverage is as broad, if not broader, than whatever coverage the public entities may have at the current time," said Ms. Kutska. Her agency, "which is pretty typical," is obtaining general, auto and employment practices liability and public officials E&O through the program and has a $1 million self-insured retention.

Ms. Kutska said there has been a total initial cost savings of more than $600,000 a year for the five participating pools, which is a 28% savings over what the pools had been spending to purchase excess liability coverage. There are also additional potential savings of $500,000 per year through a dividend program, which brings the maximum potential savings to more than 50%, said Ms. Kutska.

Before switching to the program, the pools' limits ranged only from $6 million to $15 million as opposed to the $20 million excess of $1 million offered under the program, she noted.

All of the coverage is written on an occurrence basis. "Nose" retroactive coverage, which converts previous claims-made policies to an occurrence basis, removing any need to buy tail coverage, is available as well.

Although excess insurers usually control claims, the pools retain authority to decide how claims are administered, an important point in negotiating coverage, said Ms. Kutska. The insurer cannot cancel coverage except for non-payment of premium, though participants can cancel coverage with 60 days' notice, she said.

"Needless to say, we got a really good deal," said participant Sal M. Bianchi, risk manager/administrator for the Oakbrook, Ill.-based Intergovernmental Risk Management Agency, which has 68 members.

"I would have guessed, really, that almost any savings would have been enough to prompt someone to move to this excess pool," he said. "But frankly, we were, I think, all of us somewhat stunned by the aggressiveness of the underwriters.

The IRMA had excess coverage from Farmington, Conn.-based Discover Reinsurance Co. "for a number of years and we thought we had a pretty good program, but I think we saved about 35% on our premium (with NAPEX). That's pretty significant," he said.

"The five member pools that joined (already) all had pretty good programs on their own. I think it's kind of amazing, frankly. We keep asking ourselves how soft is soft and the market seems to be getting softer."

Mr. Bianchi said a half-dozen major reinsurers eager to do business presented proposals. "Reliance came in with the best program with the greatest savings," he said.

"This has just been a win-win situation for us," he said. "I suspect the Driver Co. and the underwriters were aware of the fact that they had to do some very aggressive things to get this thing off the ground and they have done those things, and I think they certainly made believers out of the five or six charter members."

Eventually, the group may switch to a captive structure, but not for at least the three year-length of the current program, said Mr. Bianchi. The next step, he said, is to wait until "we've gotten comfortable with each other and better understand each other's loss history and loss experience. Then I think we'll begin to embark on studying risk sharing and begin to assume some of the risk ourselves."

"It's my understanding that once we decide to do some multiline things, such as property or a workers comp program, then I think the captive idea is our best recourse" because the Risk Retention Act limits risk purchasing groups to writing liability, he said.

Moving to a captive also may wait until "the market isn't quite as soft as it is now. There's really no advantage at this particular time in the market to do any self-insuring when you can buy the commercial coverage at the kind of prices we're seeing," Mr. Bianchi said.

The group now plans to solicit additional members, said Ms. Kutska. Information and materials are being sent to the 50 to 60 government risk pools that have the Washington-based Public Risk Management Assn.'s certificate of recognition for compliance with its pooling advisory standards. Subsequently, solicitations will be sent to the 50 to 60 other members of PRIMA's pooling section "and any other pools we identify," she said.

"We do have a terrific opportunity out there," said Mr. Bianchi, noting that the only comparable program is the Washington-based NLC Mutual Insurance Co., a mutual insurer of the National League of Cities established in 1986. "There's really nothing out there on a multistate basis for the so-called non-association pools and there's a lot of us out there," said Mr. Bianchi, who added he expects the group, whose members are now in Illinois, Ohio and Washington, to have no difficulty meeting its 1997 goal of doubling in size.