Reinsurance Carriers Avoid Public-sector Risks

November 22, 2019

Cycle Starts Over

In a rare move, the MCIT Board of Directors convened a special meeting after receiving information from the reinsurance broker. Companies quoting on 2020 liability and property reinsurance are demanding higher premiums as well as significant changes in the terms of agreements, such as excluding coverage for some members’ exposures.

According to MCIT’s reinsurance broker, Guy Carpenter, public entity pools such as MCIT are experiencing difficulties in placing property coverage in 2020. These changes are driven by large reinsurance companies working to improve their financial positions.

Smaller companies are following suit, further reducing options for those seeking reinsurance. This disruption in the property reinsurance market is affecting MCIT.

Property Reinsurance Rate Soars

Since 2010, the loss ratio of MCIT’s property reinsurers has been 54 percent. Even with this positive loss history, early marketing efforts indicated few reinsurers were interested in quoting coverage for 2020. In response, MCIT approved additional markets from which to solicit quotes.

After aggressive marketing efforts, Travelers was the only company that offered property reinsurance. Its quote of $1.8 million represents a 26 percent ($365,000) increase in the premium and requires significant changes in the structure and terms for reinsurance reimbursement.

In 2020, MCIT’s per claim retention increases from $500,000 to $1 million, the margin clause decreases from 150 percent to 125 percent, auto physical damage no longer is included in the calculation of MCIT’s retention and most notably, waste-to-energy operations, which affects four members, is excluded.

Recognizing the lack of time for these four members to find alternative property coverage, MCIT engaged its broker to find property coverage for the operations excluded by Travelers. The market for these operations is not large, and although the experience of MCIT’s members has been excellent, the industry has not been so fortunate.

Preliminary cost estimates range from $800,000 to $1 million for coverage for this group. It is not the intent of MCIT to pass this entire cost on to the four members in 2020. Rather, the board voted to use fund balance to assume 80 percent of the cost of the premium. The board will hold a special meeting to review quotes from the specialty market for property coverage for these members.

Frequency, Severity of Liability Claims Affect Reinsurance

The news regarding liability reinsurance was equally bleak. According to Guy Carpenter, this reinsurance market also experienced significant transition in 2019.

In response to increases in frequency and severity of claims, carriers are taking a more granular approach when underwriting public entity business.

Reinsurers’ pricing is influenced by the increased value of claims because of less social predictability, particularly regarding claims for cyber, sexual abuse, police body cams, drones, jail suicides and active assailant situations; and actual loss experience.

Since 2010, MCIT’s long-term liability reinsurer, Munich Re, experienced a 91 percent loss ratio. Its quote for coverage in 2020 of $1.8 million is a significant increase over its expiring cost of $921,500. At the same retention of $750,000, Berkley quoted a price of $1.4 million. The board voted to accept the Berkley quote.

Concerned about the significant increase in the liability reinsurance premium, MCIT’s 2020 work plan and budget includes the development of resources and strategies to address law enforcement liability related to jail operations, which is heavily influencing MCIT’s cost for liability reinsurance.

Old Story Begins Again

In the late 1970s, the insurance market reacted strongly to its adverse experience working with public entities. Insurance companies either canceled coverage or priced their products prohibitively high. In response, public entities looked for financial alternatives to address their losses, which was the genesis of pools such as MCIT.

Forty years later, the cycle appears to be repeating itself. The difference being that MCIT already exists and is positioned to protect members. Being part of MCIT, a tenured, financially solid risk sharing pool, ensures that members have cost-effective coverage as we weather this cycle together.