Public Entities: A Specialized Niche

Take the hard market, combine it with the Sept. 11 tragedy, and mix those two ingredients into an already intricate and compound underwriting process and you’ve got yourself the public entities marketplace. Ask any of the handful of carriers who are still writing the coverage, and they’ll tell you it’s a specialized niche. Carriers and underwriters are paying their dues along with many others caught up in the hard market.

“Things have been pretty volatile for the last year,” Mark Dillard said. Dillard, vice president, Government Programs Division of Texas-based U.S. Risk Underwriters Inc., summed up the performance of the marketplace over the last couple of years.

“The market has definitely narrowed over the last couple of years,” he said. “It’s been a tough sector, and I think it was the flavor of the decade. I think a lot of players got into it through the mid and late-’90s, and discovered it was a tougher class than they expected and I think that their experience started catching up with them. A lot of folks were beginning to understand that their underwriting was not necessarily up to snuff and started seeing the results come in and realized that they were losing their shirts in certain areas of it. That, I think, was compounded by a general constriction of the reinsurance market in late 2000 and through 2001 and then 9/11 certainly pushed it sort of over the cliff in terms of reinsurance capacity and interest. I think all of those things coming together made 2002 pretty challenging for just about everybody in the sector.”

While many of the problems that are facing the public entities market are derived from the similar problems facing the industry as a whole, it’s the uniqueness and the complexity of the underwriting process that makes public entities such a specialized coverage. “They really run the gamut from the standpoint of that they have a multitude of exposures,” Bob Battaglia said. “You really need to know and be able to control those exposures that take place. [It’s] a lot different from an underwriting perspective than if somebody is doing something that is pretty straightforward.” Battaglia is the vice president of underwriting at Pa.-based Professional Underwriters, who write public entities coverage through their Community Works Program.

“They’re unique in the sense that they’re much more visible,” Michael Chaney, Public Entity program consultant for Wash.-based National Insurance Professionals Corp. (NIPC), explained. Schools and city-owned buildings (including recreation and senior citizen centers) will most likely see more activity than a private building might.

“From the standpoint of visibility, a public entity is a lot more visible target if you’re a third party claimant than some of the private organizations,” he added.

“Terrorism is definitely an issue with municipalities and insurance companies because they’re looking at the possibility, however remote, of a terrorist attack happening at a convention center or at a municipal building or something of that nature,” Mark McCrary, vice president of marketing at Professional Underwriters, said.

“Carriers are profiling their business to determine and control their exposure to terrorism. High-profile areas, major cities, landmark locations and the like are receiving a lot more scrutiny today than they were over a year ago,” Battaglia said.

“The existence hazard of say a landmark type building or one that would be susceptible to a terrorist strike, if they’re involved in water supply, those types of things, that’s something that is a concern today,” he added.

Dillard, who writes professional liability for public entities, said employment practices liability (EPL), is the hot issue affecting pricing today. “That has been the loss leader for most of the participants for the last six or seven years,” he said. Fifteen years ago, Dillard explained, EPL was not even part of the public officials liability policy.

“Through the soft market in the ’90s, more and more carriers began to enhance their coverage so as to include EPL,” Dillard said. “The problem is that most of the carriers did that with little if any consideration to an additional premium. So the rates for your public officials liability policy were fairly constant, if not diminishing through the ’90s, yet your coverage was getting broader and broader. It was getting broad in a very volatile and active coverage area, specifically in employment practices. In the late ’90s and close to 2000, when everybody started feeling the impact of increased employment practices claims and the ensuing dollars that were incurred for both defense and settlements. They’re very expensive claims to defend. And can be very expensive to settle.

“I think for the last year and a half or two, everybody’s been looking very hard at that. The rates and the product available in the market today reflect what the carriers have decided to do going forward. In essence, that’s a dramatic increase of the rates if they are continuing to provide the EPL as a component of the public officials policy. We at U.S. Risk have worked with our reinsurers and carriers that we represent to actually isolate the EPL as a separate coverage component. We charge a separate premium, there’s a separate limit and a separate deductible. We are accounting for that exposure separately and distinctly from the professional exposure,” Dillard added.

Mold, the ever-prominent fungus creating controversy across the entire country, is certainly a concern for underwriters when preparing a policy. Mold, like in many other lines of business, is a contributing factor to the increasing premiums across the market, both in municipalities and public schools.

“It affects different segments of public entities certainly more than it does others,” Battaglia said. “Particularly with schools, the existence of mold is a serious issue that needs to be identified and underwritten.”

“Mold is an issue for schools because of the habitational exposure of children and teachers and staff being in a building that much of the day. Those closed quarters are what carriers are looking at very closely,” McCrary said. “In our program, what we’re doing is stepping up the inspection somewhat, so that in certain territories that are even more prone to mold, we’re taking an even closer look at the building, structure, construction, occupancy; inspecting, before we write the account, to determine if there is a risk for mold; if there is existing mold, we’re looking at excluding it if it already exists in the building and we can document that it’s there before we write the policy.”

School violence also tops the list of risks underwriters take into account when writing coverage for public schools. While the string of school shootings that has occurred in the past remain prevalent, an act of terrorism involving a public school is a situation that can no longer be discounted as well. “Kids bringing guns to school, kids getting shot, teachers getting shot, people are a little leery of sometimes writing those risks,” McCrary said.

Rightfully so. Looking back at the news headlines over the past couple of years, it’s no wonder that underwriters—and carriers, are apprehensive. “There’s been a lot of shake up in the public schools to as far as carriers, probably more retrenching and withdrawing and pulling back in the public schools area than there has been even in the municipalities’ area,” McCrary noted.

“I think that school violence is one of the key issues to why so many school markets have disappeared,” Chaney added. “I think everybody’s concerned about terrorism and violence, and I think it’s probably much more prevalent in the metropolitan areas than it is in the rural areas. You’ll occasionally see it in the rural areas, but for the most part people are a lot more aware of what’s going on in the rural areas insofar as the schools. Obviously if you’re a town of 2,500 and some strange people show up… everybody in town is going to notice that. That won’t happen in New York or Denver or Chicago.”

Prevention, while not guaranteed, is the key to keeping school violence from becoming the primary factor driving premiums in the future. “From a loss control perspective, one of the things we look for is to verify the school has a plan to address security issues. Proper methods of controlling access to school property is important,” Battaglia said.

“There are very few markets for schools and the ones that are out there are fairly restrictive in both their underwriting and their pricing approaches,” Dillard said.

Geography can affect coverage as well. An insured’s proneness to natural catastrophes is the number one risk when considering geographic area. Coastal areas take the brunt of the increases. “Louisiana, for instance, is a state that always has been problematic,” McCrary said. “Their system of law is the old French provincial system of law. They have parishes down there instead of counties. A lot of companies won’t write the state of Louisiana. Texas is another one that’s had some weather issues. The whole mechanism of doing business in Texas is cumbersome compared to other states, with filings and approvals that an insurance company has to gain before being allowed to transact business in Texas. Florida’s always been hard hit with being coastal, the whole state basically sitting where it does.”

“Beyond that then there’s the legal climate that you have to deal with. The climate in some states is much more liberal than it is in others. There are tort claims acts and then states that protect public entities from these mega million dollar lawsuits and other states don’t have them. For the most part we try to stay in states that will afford us some degree of protection on the legal liability side,” Chaney added.

So how have all of these issues affected pricing?

“Pricing’s definitely going up. You look a couple of years back and admittedly, things were probably priced way to thin to make money, and now some carriers are looking at very moderate rate increases, but most are looking anywhere from 30 percent to 300 percent, depending on the account, where it’s located, what type of risk it is, what their loss picture is. It’s kind of all over the board,” McCrary said.

“I don’t believe it’s at the crisis stage as there are markets available but at the right price,” Battaglia added. “There is availability; obviously the pricing has had an impact and naturally that cost has to be born by somebody. It depends on what part of the country you’re in, and certainly on an industry segment basis it would vary.”

Dillard offered some advice for agents when preparing public entities coverage for a consumer. He recommended getting submissions in early and making sure applications are complete.

“I think that the agents can make things a lot better for themselves if they prepare their insured in advance for the direction this sector is going,” he said. “Especially accounts that have some experience in losses and so forth, those are the ones who are getting hit the hardest, obviously.”

Topics Catastrophe Carriers Texas Underwriting Market