Public entities well-positioned to bear increased cost of risk
By Joseph S. Harrington, CPCU
Sound and stable. That characterizes the financial condition of most municipalities and other public entities in the United States in the aftermath of the COVID-19 pandemic and the high inflation that followed.
Entering into 2024, the National League of Cities could disclose in its City Fiscal Conditions 2023 report that, despite (or because of?) high inflation in 2022, U.S. cities saw their tax values surge, property values increase, and unemployment rates drop the following year.
“Stable credit fundamentals” are buoying the market for municipal bonds, reports Breckinridge Capital Partners in its 2024 Municipal Market Outlook. The investment firm attributes these conditions to strong liquidity, modest debt burdens, sturdier pension fundamentals, and rising residential real estate values.
There are important exceptions to this generally rosy picture, but for the most part, municipal risk managers will not be operating in distress mode as they implement loss control measures and purchase insurance. That’s a good thing, because the market for municipal insurance, like the market for just about every other sector, is hardening for both property and liability risks.
Rates up; capacity stable
According to William Coté, vice president, Greene & Associates, “Since 2020, there have been contractions of capacity and increases in premium across all classes of municipal business, as well as increases in deductibles or retentions on primary placements.
“More recently, the market has generally stabilized as to availability of coverage for the typical municipality, but rates will continue to rise over the coming year.”
Ali Hoefle sees much the same from her perspective as assistant vice president of Amwins Group.
“Over the past two years, there’s been a shift in underwriting, with carriers carefully managing capacity deployed and aggregates to limit volatility,” Hoefle says. “Managing of aggregates has a significant impact on municipalities, as they tend to have large concentration of risk in one area.
“Insureds can hope for a deceleration in rate increases in 2024, but that will vary by geography and loss history,” she adds.
“Officers are being held to a higher standard, and there has been a wave of legislation regulating their response
to incidents.”
—Dante Pezzi
Area President
Risk Placement Services
Hoefle says market intel regarding January 2024 reinsurance renewals did not feature the “extreme” rate hikes many carriers saw in 2023, but added that insurers “are still taking on very large retentions that need to be funded and priced accordingly.”
Hoefle sees parametric insurance as among the “creative solutions” available to municipalities faced with increased frequency and severity of natural disaster losses. (Parametric insurance is based upon probability of a predefined event based on a triggering event and a pay-out mechanism.)
Coverage is based upon the event and is not specific to the physical damage of an asset. Since municipalities almost always incur substantial extra expenses that are not often covered under traditional property insurance to recover from a natural disaster, parametric coverage provides “speed of payment,” in Hoefle’s words, for rapid recovery.
First-party property exposures have recently became more challenging for municipalities, according to James Woodard, managing director of the Sandner Group, an insurance services group that recently became a division of One80 Intermediaries.
“Catastrophic climate events, as well as aging buildings, increased vacancies, and insurance-to-value deficiencies, are creating the most stress for public entities,” he says. Compared to commercial properties, Woodard finds that “the relative lack of basic information on construction, occupancy, protection, and exposure is another impediment when negotiating terms for a class that is no longer considered preferred.”
“Schools that are in high crime areas or have
a history of security problems are definitely being
charged higher premiums than other, comparable risks.”
—William Coté
Vice President
Greene & Associates
Liability strain
In the area of third-party liability coverage, municipalities saw “a significant underwriting shift in 2020 and 2021 in response to a difficult legal climate and an increased frequency of ‘nuclear’ verdicts,” says Dante Pezzi, area president of RPS.
“To keep up with the rising cost of claims, liability insurance markets underwent a massive correction, which heavily impacted capacity and pricing,” he says. “As underwriting caught up to the legal climate, a sense of stability returned. In 2023, rate hikes leveled off from high double digits to mid-single digits, and capacity became more abundant.
“This stability may be short-lived, however,” Pezzi adds. “We are seeing an uptick in claims activity driven not only by new losses, but also by older claims making their way through the courts as states act to open up the statute of limitations on certain types of claims.
“We expect rate increases to creep back up into double digits in 2024. While there are a number of new market entrants that may ease market pressure, we do not expect them to drive down prices.”
Dave Corieri, public entity practice leader for One80 Intermediaries, says the various “headwinds” facing municipalities will lead to a sustained hardening of the market for coverage.
“Several carriers have exited this class of business, and there is a scarcity of new entrants and capacity,” he says. “Carriers that remain are routinely applying liability exclusions for certain functions including zoning enforcement, law enforcement, cybersecurity, and sexual abuse.”
“Catastrophic climate events, as well as aging buildings, increased vacancies, and insurance-to-value deficiencies, are creating the most stress for public entities.”
—James Woodard
Managing Director
Sandner Group, a division of One80 Intermediaries
Officers under scrutiny
Public safety is arguably the most important responsibility of municipalities, and a function that has drawn increased scrutiny in recent years.
Coté finds “a growing number of suits against law enforcement officers” as “increasing distrust in authority and in law enforcement has made aggrieved parties more willing to bring suits.”
“Law enforcement exposure, especially large county correctional facilities, continues to be a leading challenge for underwriters,” says Pezzi. “Low staffing levels for a number of these facilities are a major concern, as are claims arising from jail medical operations, which are often subcontracted to a third party which is often required to carry only a small amount of insurance.”
According to Pezzi, “The public expects a certain level of protection and response from officers as long as they are not overstepping and abusing their positions.
“Officers are being held to a higher standard,” he adds, “and there has been a wave of legislation regulating their response to incidents. These laws include bans on the use of chokeholds, mandating use of body cameras, and allowing state attorneys general to bring civil actions against agencies and personnel who display a pattern of poor conduct.”
“Managing of aggregates has a significant impact on municipalities, as they tend to have large concentration
of risk in one area.”
—Ali Hoefle
Assistant Vice President
Amwins Group
Public safety
While municipalities face growing exposure for the conduct of police and other public safety personnel, they are also under pressure to be prepared for serious security threats, such as mass shooters.
“Schools and municipalities are expected to have detailed disaster policies and procedures in place in the event of a disaster scenario,” says Pezzi. Citing the much-criticized response to a mass shooting at an elementary school in Uvalde, Texas, he says, “There must be a plan in place for coordination across agencies to establish a chain of command, so that in the event of disaster, the plan to execute is clear.
“The standards for security preparedness are high, and insurers want to see copies of security plans to ensure that public entities are actively developing and adjusting responses to protect the public.”
Coté finds that “enhanced underwriting attention is being paid to security protocols.
“Schools that are in high crime areas or have a history of security problems are definitely being charged higher premiums than other, comparable risks,” he says. “The availability of insurance for active shooter incidents and other threats has grown in response to increasing demands.”
Woodard encourages insurers to promote emerging technologies available to municipalities for managing security threats. As examples of these advances, he cites applications of artificial intelligence to detect armed intruders and use of bullet-resistant glass laminates to secure entryways.
“Reinsurers and insurers have been slow to respond to the benefits technology can offer in diminishing risk and the potential for catastrophic losses,” says Woodard.
He believes more thorough consideration of technological developments will benefit public entities “working to stay ahead of security threats,” while also supporting insurance programs addressing active assailants, crisis response, and student accident medical losses.
For more information:
Amwins Group
amwins.com
Greene & Associates
whgreene.com
One80 Intermediaries
one80.com
Risk Placement Services
rpsins.com
Sandner Group
one80.com/programs/sandner-group-services
The author
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.
