Public entities underpin state and local infrastructure, providing crucial services like law enforcement, schooling, and social care to communities across the United States. When delivering these services, public entities face an increasingly complex risk landscape, including climate change, civil unrest, social inflation, and other growing liability exposures.
In recent years, mainstream media has been rife with reports of sexual abuse and molestation claims at public K-12 school districts, alleged wrongdoing or discrimination by law enforcement, and assorted constitutional right violations by educational and governmental entities. It is both the US taxpayers and the insurance community that cover the costs of these claims, which continue to rise in both frequency and severity.
This complex risk landscape has resulted in quite a turbulent public entity insurance market, which has experienced an exodus of carriers and capacity in recent years, especially in high volatility tort venues, like California and Washington. As a result, public entities have faced difficult renewals and have struggled to find adequate capacity to meet their coverage needs.
“Public entities have a budget. Insurance is just one line item on that budget, and they want to keep their insurance spend stable over time,” said Andrew Kay, EVP, Amwins Specialty Casualty Solutions. “When insurance markets raise rates by 30-40%, public entities must either source that money from another line item on their budget, or they must take on more risk through self-insured retentions.”
These are not easy decisions for budget-driven insurance buyers to make, and they led to some challenging conversations between insureds and brokers around the July 1, 2022 (7/1) public entity insurance renewals.
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Rate increases and capacity constraints in the public entity insurance market are largely influenced by the reinsurance marketplace, explained Brian Frost, EVP and public entity liability practice leader for Amwins Brokerage. In recent years, treaty reinsurers supporting excess facilities and niche public entity underwriting platforms have grown increasingly restrictive in their terms and conditions offered due to increased loss costs, nuclear jury verdicts, and emerging risks like climate change issues and PFAS ‘forever’ chemicals.
In particular, loss severity has exploded in states with joint and several liability, like California and Washington, where all parties in a lawsuit can be held responsible for economic damages up to the entire amount awarded.
“With joint and several liability in California, even if you only have responsibility for 1% of the claim, you could end up paying 100% of the economic damages of a loss,” said Frost. “That makes it challenging for an underwriter to effectively manage and price their loss potential through the traditional review process, because it’s increasingly difficult to anticipate and identify where you might get a 1% loss. So, the focus has turned to limit management – both compression and aggregation, and consideration around premium to limit from a payback analysis perspective.”
Both primary and excess insurers and reinsurers have made adjustments to their pricing and capacity as large liability losses have spread through limit towers. As pricing in the primary layers increased, the excess players also increased their cost of capacity, causing “a fair amount of consternation from the buying community” during the 7/1 renewals, according to Frost.
“The scarcity of capacity continued to play a part in this renewal cycle,” Kay told Insurance Business. “There remain fewer players, with less capacity to bear, which has put pressure on rates – but the challenges are often jurisdiction specific. On the underwriting side of the house, we tend to look at California and all other states. California still demanded approximately 50% effective rate increases year-over-year on average, depending on account performance and capacity, while the rest of the country saw rate increases around 10%.”
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California is a notoriously tricky legal venue because the state offers no legislatively effected damage caps for public entities facing tort-based liability claims. This makes California a very attractive state for plaintiff attorneys, who have been highly successful in the context of social inflation at monetizing joint and several liability claims involving public entities. Now, insurers and reinsurers are trying to mitigate their exposure to catastrophic losses in the western state by increasing rates and reducing capacity.
While managing public entity clients’ pricing expectations in the build-up to the 7/1 renewals, brokers also had to source additional capacity from what Frost described as “a rather finite set of markets”. This was challenging, he explained, because new capacity in the casualty space typically bypasses the public entity sector due to uncertainties around loss exposure and a lack of support on the reinsurance side.
With limited unencumbered capacity to counteract limit compressions, brokers had to be creative at the 7/1 renewals in how they structure coverage towers. Frost explained that some primary and excess insurers were requesting “capacity ventilation,” meaning that they would continue to provide a certain amount of coverage if the limit was split into two or more layers in a tower, with a buffer of alternative capacity in between.
Brokers also had to provide new solutions to public entity risk pools – cooperative groups of governmental entities who join together to finance an exposure, liability, or risk – some of whom sought to establish captive insurance companies to better manage their unique insurance needs.
“A number of public entity pools have established their own captives in recent years in order to optimize their (re)insurance program and retain risk in different ways,” Kay told Insurance Business. “A captive gives the pool more control over how they buy insurance or reinsurance, while also providing them a little more freedom or governance over their asset management and investment strategies.”
Overall, the 7/1 renewal cycle was challenging but it didn’t throw up too many surprises, according to Frost and Kay. Insurers and reinsurers continue to make rating corrections and structural modifications to attachment and limit to counteract increasing loss cost inflation, while simultaneously tightening up risk selection and underwriting around known volatile liability exposures, all the while trying to identify the next source of prospective high value litigation .