POOLS DIP BUT DON'T DIVE INTO SOFT MARKET

Public entity pools are eagerly taking advantage of the soft market to improve coverage and rates for their members.

Pools are leveraging the market to their advantage by establishing captives, reducing retentions, forming first-dollar workers compensation pools and setting up reinsurance programs for the first time.

But some observers think at least some pools could be taking even greater advantage of the soft market by buying more excess coverage and reinsurance and by bargaining harder for low rates.

And even those pools that are taking full advantage of the soft market must cope with the threat of insurers luring away their members with even lower rates.

This is a challenge pools are meeting through improved services and their more intimate knowledge of members' risks, observers say.

Meanwhile, many pools are enjoying the advantages of a soft market. "From my own personal experience, and from what I've seen with other pools, what they've been able to do is purchase additional limits as well as broader coverages for less money, while also reducing their self-insured retentions," said 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.

Her pool is among the five pool participants in the recently created National Public Entity excess program, an excess liability insurance purchasing group (BI, Feb. 3).

Among other positive changes, the soft market has enabled the pool to go to a $1 million per-occurrence retention from $3 million, she said. "That's certainly greatly advantageous to our members, both from a cost perspective and limits and coverage perspectives," she said.

But, she added, pools also are aware the current situation is not going to last forever. "A lot of pools are positioning themselves to purchase coverage when conditions are as they are now but fully realizing those probably won't be here forever" and planning accordingly, said Ms. Kutska.

Pools are taking advantage of the soft market, agreed Tom Vance, risk manager for the city of Anaheim, Calif., which is a member of the Authority For California Cities Excess Liability pool.

Some pools, for instance, are now reinsuring layers they had previously retained because "it makes more sense to purchase it commercially than it does to retain the risk," said Mr. Vance.

In other cases, pools have lowered their retention levels. Mr. Vance noted ACCEL has historically retained a $9 million excess of $1 million layer, but for the past couple of years has been able to obtain commercial insurance of $5 million excess of $4 million for that layer. "That's a significant reduction of our exposure, and we've done that based on an actuarial analysis of our exposure in that layer," said Mr. Vance.

Elizabeth E. Puddington, executive director of the New Hampshire School Boards Insurance Trust In Manchester, N.H., said, "We just finished a request for proposals within the last month or so, and we were able to reduce our costs for both property and liability excess, and over the last several years we've received, we would say, dramatically improved services from our two carriers," Arkwright Mutual Insurance Co. and risk retention group School College & University Underwriters Ltd.

"We've been real successful in taking advantage of the market both in hard and soft markets," said Michael Fleming, general manager of the CSAC Excess Insurance Authority based in Rancho Cordova, Calif. The group represents 52 of the 58 California counties. "It's just taking it to another level in the soft market."

Mr. Fleming said the authority is developing a primary workers comp pool as an option for its members. Participants in the pool, set to start running Jan. 1, would go from "dollar one" in coverage to $125,000, at which point the authority's excess program would kick in.

Another California pool that has used the soft market to its advantage is the LaPalma, Calif.-based California Joint Powers Insurance Authority, which has about 80 municipal members in southern and central California.

"We have, for the first time decided to purchase reinsurance for our self-insurance program," which will enable the pool to increase its limits to $25 million from $10 million, said Executive Director Bill Holt. The reinsurer on the three-year program, which becomes effective July 1, is Princeton, N.J.-based American Reinsurance Co.

"We have evaluated reinsurance every year and rejected it until now" because of its price, said Mr. Holt, whose authority also is considering a first-dollar workers comp pool. Right now the pool self-insures the first $500,000 of its workers comp coverage and has excess coverage above that.

"We basically have been fully self-insured for the last 11 years, but the insurance community seems to be in a position to offer us good products at a good price right now, and we are trying to take advantage of it while we can," said Mr. Holt.

In addition, pools associated with state county associations in Texas, Georgia, Missouri, North Carolina and New Mexico expect to file papers later this month or in June creating a Vermont-domiciled captive, County Reinsurance Ltd., that will provide liability, workers comp and property capacity as of July 1, said Jim Jean, business manager for the Texas. Assn. of Counties' self-insurance pools in Austin (BI, Feb. 3).

The captive is expected to reinsure a layer of up to $1 million above the pools' own limits, then obtain reinsurance for any capacity above that, said Mr. Jean, who said the group is now negotiating with several reinsurers. A group of about 20 state county associations participated in the captive's feasibility study, and at least some of them are expected to join the captive after its launch, said Mr. Jean.

The soft market "gives us a chance to try to fashion together an insurance program most suitable to pool members," said Mr. Jean.

During a soft market, not only is there coverage available, but the larger reinsurers are willing to work with the group, "and we felt that rather than waiting for a hard market and experiencing possible difficulties, that the numbers were ripe for us to do it at this time," said Mr. Jean.

But at least some pools could be taking even greater advantage of the soft market, believes Jim Smith, president of Austin-based AMGRIP, a consulting firm. "Not many of them are taking advantage of the soft market because they have the philosophy that they believe that there will be another cycle in the industry, and they want to hold the retentions that they currently are holding," he said.

"Now is the time to be reducing retentions and passing those savings on to their members," said Mr. Smith, who described pools' funding of loss layers themselves rather than obtaining reinsurance as an "ingrained philosophy that they have had for the last five years.

"It also gets into an issue of some of the actuarial firms recommending that they fund as opposed to purchasing reinsurance," said Mr. Smith. "In the current situation, they're better off purchasing the reinsurance cheaper and passing those savings on to their members."

There have been two trends the past few years, according to Lisa Chanzit, a principal with Tillinghast in Boston. One is for pools, as they mature and become more financially solid, to take on more risk themselves despite the relatively low cost of excess coverage and reinsurance "just because they have the financial wherewithal" to do so.

"On the other hand, other pools have used the opportunity to actually purchase more and more reinsurance or excess insurance," a tendency that, taken to its extreme, could mean a pool would no longer be financing the risk, though still providing risk management services.

"It really is a case-by-case situation, and it depends on the philosophy of the group," said Gordon DesCombes, vp at Robert F. Driver Associates, the NAPEX program's Newport Beach, Calif.-based broker.

While on the one hand, there "are lots of opportunities" because of the soft market, at the same time "there's a lot of false analyses made out there sometimes where, frankly, maybe people shouldn't be buying insurance. It goes both ways, in my opinion."

Meanwhile, despite its advantages, the soft market can represent a threat to pools as insurers seek to attract members with low rates, say observers. "There has been a downside to the soft market for pools in that some pools have seen a depletion of some of their membership" by those who are using the commercial market instead, said Anaheim's Mr. Vance.

"All pool members need to carefully evaluate their return to the commercial market, because there is no doubt that the commercial market is cyclical, and while it is tempting and perhaps even just good business practice to try to take advantage of the soft market, it is important not to do permanent damage to the intergovernmental pooling structure, because it's most likely those same entities will want to return to pooling when the market tightens," he said.

Tillinghast's Ms. Chanzit said, "The soft market's been a two-edged sword for pools, obviously, because on one hand the competition for their products and services has heated up considerably over the past five to eight years, but on the other hand, pools have been able to obtain reinsurance and excess insurance very reasonably compared to 10 or 12 years ago."

The soft market's impact will vary, said Ms. Chanzit. "I think the pools that are in a very good financial position and have funded conservatively from the beginning do have the financial strength to weather the current competitive environment, but the pools that have been thinly funded are going to have a hard time competing."

One pool that has gained members despite the soft market is the Raleigh, N.C.-based North Carolina League of Municipalities' 298-member property and liability pool, the Interlocal Risk Financing Fund of North Carolina, which had a net gain of 25 members last year. In addition, its workers comp pool, the 430-member North Carolina Interlocal Risk Management Agency, had a net gain of three members, said Bob Haynes, director of risk management services.

Among the reasons for its continued success despite the soft market is "we've been able to provide enhanced services" in areas including loss control and risk management, said Mr. Haynes, who noted the league also has risk management consultants who provide training. In addition, "I think we've been able to demonstrate from a claims standpoint that we are very fair, and we represent the municipal point of view and understand municipal needs" and exposures and can tailor coverage to those needs, he said.

At the same time, he said, "Price is the main driver right now, and I respect the fact that city councils have to balance the budget, and that is not always easy." The league has "tried very hard to stretch the program so we're returning as much money as possible to our membership, and we've also been offering package discounts" to municipalities that use both pools.

The market has forced pools to become more competitive, said Tim Greer, executive director of the Denver-based Colorado Intergovernmental Risk Sharing Agency.

"In 1986, when the market became so hard, they were the only solution, and there are (insurance) companies in the soft market that are targeting particular areas and making operations very difficult for pools." Mr. Greer noted he does not consider the market to be uniformly soft.

However, "Well-operated pools have been able to refine their operations and become extraordinarily competitive," said Mr. Greer.

Pools, though, could be doing a better job obtaining good rates for their members, says Steve Kahn, a principal with consultant ARM Tech Inc. in Lake Forest, Calif. "I don't think over the last couple of years pools have taken adequate advantage of reductions available from reinsurers and excess insurers and first-dollar insurance companies have taken advantage and become more competitive against pools," said Mr. Kahn.

"I think they just haven't worked the excess market as hard as they could," he said.

Stephen Swendiman, managing director of the National Assn. of Counties' Financial Services Center in Washington, said, however, "Many of the pools, are, I think, shifting their strategy, offering more services to members, and doing a lot better job with risk management."

Mr. Swendiman noted that along with Sedgwick Inc., with whom it has a partnership to develop new risk services for counties, the NACo center plans to provide administrative services to County Reinsurance Ltd., the captive now being formed. Also involved in the captive's management will be Burlington, Vt.-based USA Risk Group; the broker is J&H Marsh & McLennan Inc. of Georgia