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Presented by:

Erike Young, MPPA, CSP, ARM-E

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Planning Risk Financing Sources for Public Entities

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1. Forecasting the risk financing needs of a public entity

2. Analyzing the special legal requirements that govern a particular entity’s risk financing arrangements

3. Finding the appropriate blend of types and amounts of retention, transfer and hybrid risk financing techniques

4. Obtaining insurance policies and bonds that meet the special coverage needs

5. Marketing a public entity’s insurance account –choosing the insurers and their intermediaries that can best serve an entity’s needs 4

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Risk financing needs are the amounts of money that an organization will need at various times in the future to finance recovery from an accidental losses that it pays

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Challenges ◦ Forecasting, for each peril, how many losses are

likely to occur each year

◦ Determining when losses are likely to occur and when reported

◦ Estimating loss severity

◦ Applying trend factors, such as inflation

◦ Payout patterns

◦ Estimating dollars needed to finance recovery from a given loss

◦ How long a claim will develop and its tail.

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Loss Forecasting Variables

◦ Loss frequency patterns

◦ Loss reporting patterns

◦ Loss severity patterns

◦ Loss trending factors

◦ Loss payout patterns

◦ Loss development factors

◦ Claim closure patterns

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Conditions to watch with variables

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Steps to forecast for a given peril

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Special challenges in forecasting for public entities

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Correcting for special challenges ◦ Seek credible public sector loss data for

comparable entities

◦ Examine whether patterns, factors, and trends developed from private sector data are relevant to the particular type of public entity in question

◦ Work with other risk management and actuarial professionals to strength the database for forecasting public sector losses

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Public entities have legal rights and are subject to legal restrictions that do not apply to public entities. ◦ Most rights/restrictions are found in state constitutions,

state statutes, county ordinances, city charters, and the courts

Public entities must always ◦ Be prepared to fulfill certain essential government functions

◦ Use public money and other public resources in ways that citizens can see serve the public good.

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Raising Taxes or Fees ◦ Difficult to do and requires long term planning

Issuing Debt Instruments ◦ Laws may limit purposes for issuing debt and may require

vote of the public

Obtaining Emergency Appropriations ◦ Considered disaster relief and requires various levels to

declare state of emergency

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Joining Public Entity Risk Pools ◦ Very common now and most states allow

◦ Risk pools establish and maintain separate account for each entity member (withdrawing members?)

◦ Hybrid technique that combines retention and transfer

Obtaining Required Insurance and Bonds

Retaining Untransferable Exposures ◦ Some coverages are too expensive or not available to public

entites (earthquake…)

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Open meeting laws or “sunshine” laws

Annual budgeting

◦ Zero-based budgeting requires that each fiscal year starts with a zero budget and no carryover of funds.

Makes long term planning and reserving for losses difficult

Risk financing pools can help get around these requirements, if required by law

Complying with Public Entity Bidding Requirements ◦ Usually required for broker services, but not insurance

purchases

◦ Need to use book answer 15

Public entities are generally immune from obligations to pay taxes imposed by other public entities

If public entity starts performing tasks similar to private sector, those activities may be taxable ◦ This is one of the reasons the many public entities

have not formed captives

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Public entity should rely on own funds (retain) to pay for losses when doing so produces financial, political, or other benefits

Retaining risk is the least costly way to finance recovery for predictable, small losses

Not intended for catastrophic claims

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Factors Underlying Retention Decisions

Managerial Factors ◦ Attitudes of senior elected/appointed officials, tend

to be risk averse

Financial Factors ◦ Long term goal is to retain more risk

◦ Understand TCOR

Legal factors ◦ In some states, retention of certain types of risk

may not be allowed

◦ Certain deductibles may be required

◦ Some may require purchase from the state

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Clear Risk Retention Policy ◦ Not an operating procedure, but helps get “buy-in”

from officials on retention policy.

Textbook offers following guidance:

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Procedures for Paying Retained Losses ◦ Current expensing

direct charges against current operating budget of the department suffering the loss

May not have sufficient money to pay for a large loss claim or frequent claims within retention layer

◦ Funded reserve – Best method

Separate account, backed by actual cash or liquid investments based on funding requirements in actuarial study

Concerns about “raids” on an account

Should include dividend or rebate provisions when reserves are excessive

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Effective Use of Deductibles ◦ Used to retain some, but not all, of the risk since

total loss potential is above the amount that an entity can safely retain.

◦ Different types of deductibles

Straight – most common, similar to car insurance

Franchise

If loss above certain stated amount/percentage of insured value, loss will be paid in full

Disappearing – Not very common (p 319)

Aggregate deductible

Provides for a stop-loss when total of all claims reach an aggregated amount.

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First-Party/Property Losses ◦ Buildings

◦ Plate glass

◦ Floating personal property

◦ Property in transit

◦ Auto physical damage

Third-Party Liability Losses (w/excess) ◦ Workers’ compensation

◦ General liability

◦ Professional liability

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Risk pools have been good sources for: ◦ General liability

◦ Environmental Impairment

◦ Flood

◦ Insurance for loss of property tax revenues due to natural disaster

Competition between risk pools and commercial market helps create new/innovative coverages

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Property Coverages ◦ Commercial Property Coverage

Building and Personal Property Coverage Form

Cause-of-Loss Forms – indicates what is covered

Business Income Coverage Form

◦ Boiler and Machinery Coverage

Includes inspection of boilers and pressure vessels

◦ Commercial Crime Coverage

◦ Commercial Inland Marine coverage

Covers property in transit, bailee exposures, and movable property

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Combined Property and Liability Coverages ◦ Business Auto and Garage Coverages

Parking garages, fleet storage

◦ Ocean Marine Policies

For entities which owns, operates, charters boats, or ships goods by water

Hull Policy covers hull, materials/equipment, supplies for crew

◦ Aviation Insurance

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Liability Coverages ◦ Commercial General Liability Coverage

Foundational policy that covers bodily injury, personal injury, and property damage

Common types of exposures covered

Bodily injury and property damage liability

Damage related to premises or operations of insured

Personal injury and advertising injury liability

Libel, slander, false arrest

Medical payments

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Liability Coverages ◦ Workers’ Compensation

◦ Medical Professional Liability Insurance

◦ Environmental Impairment Liability Coverage

◦ Airport Liability Insurance

◦ Excess and Umbrella Liability Insurance

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Public Officials Liability Coverage ◦ Covers all public officials and employees

performing duties in the course and scope of their employment

◦ Does not cover criminal acts

Police Professional Liability Insurance (p340-343)

Educators Legal Liability Insurance ◦ Mainly covers school board members

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Suretyship ◦ An agreement whereby one party agrees to

answerable for the debt or default of another

◦ Involves three parties

Principal/Obligor – is obligated to perform for the benefit of the obligee (contractor)

Obligee – creditor (Public entity)

Surety – guarantees to the obligee that he principal will fulfill the underlying obligations (insurance)

◦ Most often used in construction

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Surety vs. Insurance

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Surety vs. Insurance

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Contract Bonds ◦ Bid bonds (p. 349)

◦ Performance bonds

Guarantees that principal will perform work according to contract, plans, and specs at agreed price and within time requirements

Surety can correct by

Complete work using existing contractor

Complete using replacement contractor

Public entity arrange for work to be completed and surety pays increased cost

Pay amount of bond to public entity obligee

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Contract Bonds ◦ Payment Bonds

Labor and materials bond that guarantees that bills incurred by contractor will be fully paid at completion of project

◦ Maintenance Bonds

Guarantee that faulty workmanship will be corrected when identified within certain time period

◦ Misc. Contract Bonds

Subdivision bonds

Supply contract bonds

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License and Permit Bonds ◦ License provides special privileges to those

granted a license

◦ Public Entities require licenses for two primary reasons

They are a source of revenue

They can help regulate a particular industry

◦ Permits are similar to licenses, but are often needed for special functions

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License and Permit Bonds ◦ License or permit bond guarantees are in five

categories

Compliance guarantee

Comply with law/regulations (building code)

Good faith guarantee

Protect the public against any harm

Credit guarantee

Conduct affairs in best interest of others

Financial guarantees

Will pay certain taxes (collect sales tax)

Indemnity guarantees

Using required for doing work on public property

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Public Official Bonds ◦ Nature of guarantee

Guarantees that official will uphold promise to faithfully and honestly perform all official duties

◦ Noncancelable and of Indeterminate Length

Only terminate when official leaves office

◦ Public Entity Dishonesty Insurance

Separate coverage under commercial crime insurance

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Statutory Standard ◦ Public entities must follow procurement rules

which often require RFP, RFQ, or RFIs

Insurance Bid Specifications ◦ RFP is typical process

◦ Explore as much as market as possible

Selection of Agent or Broker

Effective Working Relationship

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