Couple the unique risk exposures of public entities with continued economic challenges such as inflation and labor shortages, and “Groundhog Day" may be set to continue.
“It feels a little like 'Groundhog Day' around here as the story seems to remain the same for public entity markets," says Bob Lombard, area president, Risk Placement Services (RPS). “And unfortunately, that story is going to continue into 2024."
The repeating story refers to the continuing increase in rates, limitation of terms and increasing retentions rates that public entities are experiencing as they grapple with the rising costs on both property and casualty risks. Couple the unique risk exposures of public entities—including heightened law enforcement scrutiny, social movements such as the #MeToo movement and litigation funding—with continued economic challenges such as inflation and labor shortages, and “Groundhog Day" may be set to continue for now.
On the property side, “over the last 18 months the public entities market has seen a significant reduction in capacity, specifically for risks in catastrophe-prone regions, where the excess & surplus markets that were offering a $5 million excess line last year have reduced this to a $2.5 million line," says Darron Johnston, executive vice president, Amwins Brokerage of Georgia.
“What that did is it hurt renewal terms for a company that may have had a $15 million excess layer over the $10 million primary layer with coverage in three or four markets that is now going to need seven, eight or nine markets just to fill out that same tranche of capacity," Johnston explains. “The result is an exponential increase in premium rates."
While CAT losses continue to trend upward, public entity carriers have responded “by trying to understand where these exposures are coming from and how they can mitigate their exposure in those situations, whether by offering terms within certain boundaries, offering terms that are limited, or not offering terms at all," Lombard says. “We have to quilt together coverage for the entities."
And CAT losses are predicted to increase and continue to impact Americans as hurricanes develop stronger and faster and wildfires burn longer and produce more smoke, according to a congressional report released in October 2023.
In addition to CAT losses, “you've also got inflation valuation issues, where you've got an additional 15% to 20% rate and then the markets are pushing 10% to 20% in values, leading to an overall 40% to 50% premium increase," Johnston says. “And in the public entity space, or really any space, very few insureds' pocketbooks are set up to be able to accept a 50% premium increase."
“Auto claims are also on the rise for public entities, and we're starting to see 'medical inflation' trickle back into conversations," Lombard says. “We are seeing some carriers adding on a 3% surcharge on their rates for medical inflation and everybody's having to pay that 3%."
On the casualty side, “the thematic cornerstone of limiting compression to mitigate loss and portfolio volatility remains firmly entrenched in the public entity liability marketplace," says Brian Frost, executive vice president, Amwins. “Underwriters are concerned with the volatility of the loss severity that they've experienced from social inflation and nuclear verdicts."
Additionally, “so much of the pricing models are now dictated by actuaries and outside of the authority levels of local underwriters, with those actuarial teams taking a more conservative approach, leading to higher premiums," Frost says. “As a result, certain public agencies choose to self-insure more risk to manage increases."
To find the right coverage within a set budget for their public entity clients in the current market, independent agents will need to use their imagination. “Agents need to be relying on experts—people that understand the public entities business and understand how to communicate this business to the markets to get the best terms and conditions," Lombard says. “And in some cases, in order to do so, we may need to apply a layer of creativity by taking out the line of coverage that is causing problems."
With the market difficulties facing public entities, agents will need a willingness and expertise to tailor a program to fit their needs and budget. On the property side, that may include offering parametric solutions—which identify pre-defined event triggers, such as windspeed, ground shaking or river height—to supplement their traditional coverages.
“Agents play a crucial role in understanding their clients' needs and budget," says Manny Cocurull, president of KidGuard School Insurance, a DOXA Insurance Company. “By asking relevant questions, agents can gather valuable information to create tailored plans. Instead of providing a single all-or-nothing option, agents can present low, medium and high-cost options that align with the entity's specific needs and budget."
Olivia Overman is IA content editor.