Taking on More Risk with Reinsurance Renewal Saves Members’ Money

November 29, 2018
Public building after tornado damage; roof collapsed and windows broken
Reinsurance is a financial safety net against catastrophic losses, such as widespread tornado damage, that MCIT would otherwise be solely obligated to pay.

The discussion regarding the purchase of reinsurance in 2019 took an unexpected turn during the November MCIT Board of Directors meeting. After much consideration, MCIT will increase its self-insured risk to save more than $400,000 in premium for 2019.

Property Market Interested; Liability Is Cautious

Representatives of Guy Carpenter, MCIT’s reinsurance broker, advised that more than 20 companies were issued MCIT’s request for property and liability (casualty) reinsurance quotes during the fall. Although the market continues to have an appetite to write public entity business, only a few companies have the capacity to meet MCIT’s property reinsurance requirements without the need to partner with other carriers.

As for liability coverage, the market remains cautious of law enforcement claims and MCIT’s loss experience related to Driver’s Privacy Protection Act lawsuits. (See “Violations of Privacy” article on page 6 for risk management recommendations.)

Property Reinsurance Rate Drops

Hartford Fire was the only property reinsurer to provide a quote using MCIT’s preferred structure, which is $199.5 million excess of MCIT’s $500,000 retention. Although the quote represents a 2.5 percent rate decrease, the total premium paid to Hartford Fire will increase approximately 5.9 percent or $80,000.

This increase is influenced by the 8.6 percent rise in the total insured value of members’ property. MCIT will renew its property reinsurance coverage with Hartford Fire in 2019 at a cost of $1.425 million.

Liability Reinsurance Retention Increases, Saves Cash

Munich Re offered the most competitive pricing for liability reinsurance. The company’s long-term relationship with MCIT outweighed any concerns it has regarding MCIT’s claims experience.

In the past, Munich Re has quoted options that would allow MCIT to retain more of the cost of a loss in exchange for a reduced premium. MCIT has remained at the $500,000 retention level because comparing the increased risk to the cost savings was never a viable option until this year.

After reviewing a variety of reinsurance models for 2019 that compared MCIT’s potential savings to its loss experience, it was evident that MCIT could save money with minimal risk by increasing its retention level. The board voted to renew liability reinsurance with Munich Re with a $750,000 retention level at a cost of $921,500.

This change yields a savings of nearly $307,000 for 2019 compared to the cost of coverage in 2018. Had MCIT renewed at the $500,000 retention level, the premium would have increased 5.3 percent, which is $65,000 more than the previous year.

In total, the decision to take on more risk will save members nearly $440,000 in liability reinsurance premiums in 2019.