From their unique coverage opportunities to their extremely high values, public entities face a wide range of exposures you might not expect based on experience with your more traditional commercial accounts.

But when it comes to pricing, challenges in the public entities insurance space will sound familiar to anyone with experience in the broader property-casualty business.

Commercial auto is the first factor driving public entities rates in 2019, says Mark McCrary, president of Glatfelter Public Practice: “Industry-wide, auto has been needing to take some rate, and that has caused some issues for a number of players. You’re seeing that in a number of segments—not necessarily all segments, but generally speaking, you will see auto go up slightly because it needs to.”

“We’re seeing a lot of motion on commercial auto pricing and predicting moderate increases for the industry as a whole,” agrees Joe Caufield, chief underwriting officer at OneBeacon Government Risks. “That varies of course by state and by customer type, even within local governments, but there’s quite a few underlying ISO commercial auto loss costs filings out there that carriers are adopting, and there’s quite a few combined ratio issues for the industry on commercial auto.”

The last few years of heavy catastrophe seasons have also weighed heavy on public entities insurance. “Carriers are always looking at their property rates and losses and being mindful of where that pricing needs to be,” McCrary points out. “Some carriers in past years have gotten really aggressive on property, and that’s starting to come back to bite some of them in terms of some of the losses they’re taking.”

Finally, as police brutality continues making headlines around the country, Caufield suggests keeping an eye on law enforcement professional liability. Although the U.S. Supreme Court “has affirmed qualified immunity as the key defense for law enforcement officers in justified use of deadly force, many of these cases still go to trial,” he explains. “From a defense perspective, jurors are not always finding for law enforcement as often as they have in the past. That translates into increased costs and what looks to be moderate increases in that direction as well.”

Joining an interlocal pool may be one way for some public entities clients to obtain lower rates. E. Stuart Powell, Jr., former vice president of technical affairs at the Independent Insurance Agents of North Carolina, whose sister corporation brokers insurance for the state, says “pooling works fine as long as the contributions to the pool are approximate to the actuarial risk the pool runs.”

But the problem with pooling “is that there’s a tendency to underfund them,” Powell warns. “Pooling works as long as there’s adequate funds available, but if you’re not putting enough money away, when the losses show up, you’re going to be in a pickle.”

While insurance companies “are regulated to the point where they have sufficient reserves where they can survive it if they underestimate future costs, when you have pools that don’t have the same kind of reserve requirements that regulated insurance companies have, then underfunding can be a much greater problem,” Powell explains. “Then, the question becomes, how can you set something up that the city council or the county commissioners or the state legislature can’t come in and raid if they all of a sudden need some extra money?”

“You have to be eyes wide open,” McCrary agrees. “Many of these pools have joint several liability and assessability, and if you’re a $100,000 school district and you get a $40,000 assessment, I don’t know how you pay for that.”

Assessments can make it “very hard to predict or budget for what you may owe, whereas buying an insurance policy for $100,000 and getting a $1-million, $3-million, $5-million limit—that’s risk transfer,” McCrary says. “When you’re pooling your money and there’s a claim, whether it’s yours or not yours, if the money isn’t there to pay the claim, guess what? You may be getting assessed.”

Caufield adds that once a pool increases pricing for a particular risk due to poor loss experience, “they tend to leave it there forever and a day. I’ve looked at a lot of pooling clients where the mindset is, ‘Somebody has to absorb this rate increase. Let’s give it to this account—they paid that much last year, so they can pay it again.’”

Jacquelyn Connelly is IA senior editor.