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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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