Everybody into the pool: supporters of pooling mechanisms to buy insurance say they’ve been one of the insurance industry’s big success stories
Pools come in different shapes, sizes and concepts, but all offer a method for spreading the members’ risk.
* In New York, a risk-sharing pool made up of public colleges and universities is closely following new workers’ comp laws favored by the new governor, Eliot Spitzer.
* Supporters of public-entity pools believe they do a better job at correlating premium contributions with exposures.
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Once upon a time, from the mid-1970s through the early 1980s, there was a hard insurance market, with high prices and limited availability of liability coverage. It was a difficult era for colleges and universities looking to insure their risks. They were at the mercy of prices over which they had no control.
“We had to take control of our own destiny,” explains Roger Fell, client executive of Marsh Inc.’s Philadelphia office. The market presented short-term challenges but long-term opportunities. Then the federal and state governments entered the picture to help with the critical hard-market situation, passing specialized legislation that enabled public entities and colleges and universities to form insurance pools to spread the risk and reduce their insurance costs. And, thus, a new strategy was born.
As with all cycles, that particularly hard market cultivated a concept for dealing with the difficulties of obtaining insurance. Pools, as lobbying groups and in different forms and structures, have been around since the late 1800s, but didn’t really take off until legislation allowed two or more entities to form a partnership for buying insurance products.
As such, pools offer members the opportunity to reduce their insurance costs while advancing better loss-control measures and policies. Public entities, such as municipalities, school districts and related departments, were among the earliest industries to embrace the pool strategy, followed by the typically independent colleges and universities, which saw the benefits too.
Today, there are more than 480 public-entity pools and dozens of university pools. They tend to be homogeneous–operated by all colleges or all specific types of public entities so their liabilities and exposures are similar.
“Pools are one of the biggest success stories in insurance in the past 50 years,” says Rich Terlecki, area senior vice president and co-managing director of Arthur J. Gallagher & Co.’s public-entity pooling niche.
Pools come in different shapes, sizes and concepts, but all offer a method for spreading the members’ risk and act as insurance companies, except they’re owned by the members. Captives are a version of pools, capitalizing the entity, sometimes forming a trust, and retaining enough premium income to pay out claims or secure coverages through the reinsurance market. They usually have members throughout the country. Risk retention groups are self-insurance vehicles, set up by federal legislation in 1981 to address the prohibition by most states of groups banding together to buy liability coverage. Risk retention groups may not be subject to state laws as are most pools. Some pools are just set up as purchasing groups, usually offering several lines of coverages, such as auto and general liability. Some are created to address just one risk, such as workers’ comp.
Genesis Ltd., which is celebrating its 27th anniversary this year, is one of the older higher-education pools. A group of blue-ribbon colleges and universities, it’s domiciled in Bermuda as a Class-3 reinsurance company and offers its 16 members, all shareholders of the corporation, general liability products and automobile liability. (See chart below). At one point it also offered property and workers’ comp but deleted those services early on. Due to the power of group purchasing, which puts the pool into a better negotiating position, “we get extremely competitive pricing,” says Marsh’s Fell, who’s also the administrator for Genesis. As with most pools, premium income is invested, and any surplus funds that aren’t earmarked for claims are returned to the members in the form of dividends.
Fell points out that, because of the nature of the pool, which includes professional schools and other specific departments and risks, policies purchased are crafted for the universities and aren’t “off the shelf.” Thus, Genesis enjoys a 15 percent to 50 percent savings on its coverages and 50 percent off the list price of its environmental insurance.
“It’s like retail pricing,” says Fell, something akin to paying T.J. Maxx prices instead of Saks Fifth Avenue prices for the same designer clothing. “Carriers like to write a lot of risk at once because it’s more cost-efficient and the acquisition costs are less,” he says. He points out that Genesis is a desirable account too. “It all adds up to a healthy long-term business relationship and cost-effective risk transfer.”
But not all risks are created equal, nor are they all easily identified. As enterprise risk management, or ERM, has swept the corporate landscape, how to deal with ERM is probably the newest development colleges and universities are confronting these days.