Public entities nationwide are seeing a slight improvement in their budgets as the housing market and economy start to pick up, but rising insurance rates could strain the fragile recovery.
The increased revenue many municipalities are bringing in has allowed them to fill important city positions like police officers and teachers as well as restart development projects that may have been put off during the recession. Experts in the public entity segment say while the rebound isn’t in all geographic areas or states, it is still encouraging.
However, as the insurance market stiffens up, underwriters say agents and brokers working with the public entity segment need to prepare their clients for new exposures and upcoming rate increases.
A lengthy soft market followed by the economic downturn kept prices in this segment very low for a long time, but carriers are pushing for higher rates in more today than just 12 months ago, says Robin Leal, underwriting director for Travelers Public Sector Services based in Franklin, Tenn.
She is not surprised professional lines rates are rising. “Before the downturn in the economy, loss costs were increasing and I think we are going to be in a rising rate environment for a while longer. Carriers are going back to basics and underwriting and looking more closely at exposures,” Leal says.
Mark McCrary, president of Glatfelter Public Practice in York, Pa., says because there wasn’t much in the way of construction or payroll increases for public entities in the last several years, claims and exposures have stayed flat. More revenues and more people back to work could change that for municipalities.
“We haven’t seen exposures growing much, and underwriters base their rates off of those. If they were to grow we could see prices go up,” says McCrary. “[An improvement in the housing market] could also increase income because now municipalities need more services like trash, fire and police. That could have an impact if it were to take off. It would be a good impact though.”
This is a tough line of business dealing with complicated exposures like zoning, licensing, permitting, and major projects that all involve individuals and third party vendors, according to Leal, who says it is important for agents and brokers to communicate with their carriers and find out about upcoming policy changes so they can relay that info to their clients as soon as possible.
Public entities need the information so they can budget appropriately and not be surprised at renewal time, she says. There may also be opportunities to negotiate with carriers to help municipalities save money in other areas.
“It is all about communicating [changes] early on to public entities. We can do a lot when it comes to restructuring a program or looking at deductibles and limits,” she says.
Most insurers work with small to mid-size public entity accounts because the larger ones tend to self-insure, says Tim Braeden, president of Trident, a wholly owned subsidiary of Argo Group that handles public entity accounts. He says the local agent relationship is very important to public entity clients.
“Local governments want to buy locally and they want to work with a local agent and keep as much money in the city as possible,” he says.
According to Braeden, the overall public entity space is seeing rate increases of around five to six percent, so communication will be especially important at renewal time.
“If you can get in front of a public entity when it’s time to do the budget, they appreciate that. Predictability and consistency are really important to public entities,” he says.
The fiscal struggles Travelers public entity insureds were facing the last few years prompted the carrier to enhance its public entity management liability (PEML) policy with a limited special expenses coverage reimbursement, says Leal. The new coverage reimburses public entities if they need to replace key employees in the event of a death or medically debilitating event that requires the person to step down or retire.
Insureds that opt for this endorsement have a sublimit of either $25,000 or $50,000 to reimburse costs associated with hiring a permanent replacement, including hiring a search firm or outside advertisement agency; advertising, travel, temporary lodging, meals and car rental; and a special election, including polling premises, ballot machines, temporary workers, printing of ballots, ballot counting and public communications.
“Public entities were facing the downturn in the economy and resorting to drastic measures to save money. We were looking at ways we could help to address that on a unique basis, especially if they have something that impacts key decision makers,” says Leal. “Overwhelmingly, most public entities are purchasing this new endorsement.”
One exposure that public entities can no longer afford to ignore is that of privacy and network security breach costs. While cutting out insurance is not an option for municipalities, insurers say tight budgets the last few years didn’t leave much room for cities and towns to buy extra insurance for emerging exposures like cyber risk.
Public entities are beginning to realize, however, the exposures they face from all of the personal information they collect and store.
“Public entities are becoming more and more aware of the problem. They see more activity in the world, in business and in general understand what the risk is,” says Glatfelter’s McCrary.
Glatfelter launched cyber liability and privacy crisis management expense coverage for municipalities and water related entities nationwide in March of 2012. Glatfelter embedded the coverage into its public entity program with $50,000 of first party coverage with no deductible and $1 million/$3 million third party coverage. McCrary says clients have been very receptive to it.
“We intentionally did not put a deductible on our program so as soon as an incident happens there is first dollar coverage. We don’t want someone sitting there figuring out how it happened and not getting out there and solving the problem,” says McCrary.
Braeden says his firm’s insureds have been asking for data and security coverage and Trident has plans to roll out a new offering for small- to medium-sized public entities within the next four months.
Travelers’ has had a privacy and network security liability product since 2007, says Leal, but the carrier recently re-tooled it with a new application process and lower limit options. The coverage is now being offered on every account at renewal for an additional premium starting at $500 for $25,000 in limits. If insureds opt for more than the basic $25,000, more information would be required but Leal says this option is a way to get the conversation started.
“We are trying to be more proactive and make insureds aware that they need this coverage,” says Leal. “People were underutilizing the product we already had and we realized it was because the application process was too hard. So we wanted to provide a basic introduction to the product and the basic coverage they need.”
The new approach has paid off so far, says Leal, “We have doubled the number of policyholders [buying cyber coverage] within 12 months’ time because we made it easy.”