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Inside the Authority: Understanding the Insurance Procurement Process

Since the 1970s, it has become increasingly difficult for public agencies to find affordable property insurance coverage. Joint powers insurance authorities (JPIAs) emerged as a way for public agencies to consolidate their resources and expertise and to mitigate rising prices.

The first JPIAs were established in California, the California JPIA being among them. These organizations purchase insurance encapsulating member risk; thus, members don’t have “insurance” with the Authority; the Authority provides “coverage,” which is reinsured by the insurance that the Authority purchases within the procurement process.

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At its core, the California JPIA is dedicated to ensuring that its member cities have comprehensive and reliable insurance coverage. “The insurance procurement process can seem inscrutable, but when it comes down to it, securing coverage is about relationship-building and accurate risk assessment,” said Insurance Programs Manager Jim Thyden.

The California JPIA kicks off the insurance procurement process each year by assembling an underwriting packet containing member data, audited financials, actuarial studies, and significant claim write-ups. After that packet is prepared, insurance brokers present it to different insurance underwriters. The insurance underwriters have done their calculations to determine what they deem to be a fair price for member coverage. Once they compare these calculations, brokers and underwriters negotiate to reach a pricing agreement. The process culminates at the end of the fiscal year, with the final agreements being secured on July 1 and formalized over the subsequent months.

Thyden clarified a vital distinction within the insurance coverage process. “Members don’t have “insurance” with us; they have “coverage.” We are the ones who buy insurance to reinsure the coverage we provide to them.

Cultivating strong relationships with insurance brokers and carriers is central to the California JPIA’s procurement process. “The Authority’s broker partners need to effectively communicate to the insurance underwriters the exposures our members have and how they manage them,” said Thyden.

Establishing reliable lines of open, friendly communication throughout the procurement process is essential. This results in smoother negotiations with insurance companies and brokers and improved member rates. These relationships are pivotal and help the Authority weather the storms of the insurance market. 

Though JPIA participation continues to mitigate coverage costs, prices in the insurance procurement industry fluctuate considerably; in some years, insurance is more readily available, and buyers like the California JPIA have more power—in other years, insurance demand spikes, and sellers have more negotiating sway. This unpredictability is compounded by the rise of “nuclear verdicts”—massive legal settlements that have dramatically increased the cost of claims. “Nuclear verdicts have shifted the insurance procurement landscape,” said Thyden. “A claim that used to cost $10 million might now cost $100 million.” These astronomical figures influence premiums worldwide, affecting every aspect of the insurance procurement process.

The volatility of the risk management industry is compounded by its global interconnectedness. Events around the world have direct consequences for local insurance buyers. “When a disaster happens, insurance companies need to spread their losses,” said Thyden. “A $150 million earthquake in Chile affects insurance buyers worldwide.”

Despite the challenges, the California JPIA is recognized as a leader in the field. “We’re often referred to as the gold standard of public entity pools, both by underwriters and other pools in the industry,” said Thyden.

How Members Can Help Us Navigate the Insurance Procurement Process

Engaging Authority members is critical in securing the best possible insurance terms. “The best thing our members can do is to manage their risks well,” said Thyden. “The fewer losses we have, the easier it is for us to get insurance and the less it will cost.”

Furthermore, timely and accurate information from members is vital. The Annual Underwriting Information Report (AUIR) is a crucial document that the Authority uses to calculate the membership’s collective risk. Bringing accurate numbers to the insurance negotiation table as soon as possible is key to preserving industry relationships and securing favorable coverage. “We need members to fill out the AUIR completely, accurately, and quickly,” said Thyden. “If they do that, we get to the top of the underwriters’ stack quicker, and everything happens more efficiently.”

Securing municipal insurance is a complex, multi-faceted endeavor that relies on solid relationships, a deep understanding of the market, and active engagement from California JPIA members. Despite the volatile nature of the process, it is equally vital and provides financial protection and peace of mind for city officials and residents. By managing local risks and completing the AUIR quickly and accurately, cities can secure their future and focus on serving their communities. 

For more information and assistance with your community’s insurance needs, please contact your regional risk manager.

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