Risk Pool Finance Series: Hard Markets

One of the benefits of being in a risk pool is having a degree of insulation from hard insurance market cycles. The insurance marketplace ebbs and flows and public entity risk pools provide an important buffer to the volatility.

Soft markets are characterized by stable premiums, broad coverage, relaxed underwriting criteria, higher available limits, and more competition among insurance carriers for new business. Conversely, hard insurance markets bring higher premiums, less coverage, more stringent underwriting, less available capital, and fewer companies selling insurance which makes coverage more difficult to find at reasonable prices.

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The current hard market began in 2019 and was precipitated in large part by an increase in claims from natural disasters and catastrophic events, social inflation accompanied by large litigation payouts, low investment returns from fixed income portfolios, and economic uncertainty.

During these challenges, California JPIA members are insulated from the full impact of the hard market because the Authority optimizes its mix of self-insurance and purchased insurance.

For example, in the 2021-22 coverage structure of the liability programs, only 26% of the total insurance cost was composed of excess and reinsurance premiums or “pass-through premiums,” which are subject to market pricing. 74% was self-insured funding for claims and claim-related expenses. This means that about 3/4^ths of the total liability insurance cost is determined by internal factors such as the Authority’s own loss history, exposure profile, funding policies, and actuarial analysis; all of which allow for some degree of control.

Admittedly, external factors can potentially sneak in through the back door and be reflected within the Authority’s loss history such as social inflation, however, the remedy for that is direct investment in risk management and member support services. To this end, the Authority partners with members to implement long-term, customized strategies for managing risk, and invests in loss prevention programs, cost containment initiatives and provides comprehensive training resources. If risk management is the first line of defense, best practice claims management techniques are the second. With these measures effectively in place, the indirect impact of external factors on the Authority’s total cost of risk is mitigated substantially.

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