Crossing their fingers: whatever price the marketplace will dictate this time around, risk managers Craig Smith and Nancy L. Chambers feel they've done their duty in their fight to keep the impact on taxpayers to a minimum

Risk & Insurance, May, 2004 by Cyril Tuohy

The last time Craig Smith of the Waterloo Region Municipalities Insurance Pool in Ontario, Canada, went to renew his municipal insurance, market forces were working in his favor. This time, it's a very different story.

Smith and Chambers say this renewal season will be a test case to see how much more they'll have to pay. Neither is under any illusion. This year will be tougher than the last two three-year renewals they've been through.

"Coming up for renewal (in June) coming off our second three-year term, obviously we're going to be faced with the increased premiums that are out in the marketplace now," says Smith, risk manager for the pool. "It's a much harder market than it was last time we renewed."

While they've built up a surplus which is expected to offset any premium increase, Smith says "hefty increases" are in the works.

Of course, Smith and Chambers were exceptionally lucky last they. They had the good fortune to renew three months before the September 2001 attacks, which sent a teetering market into a tailspin. "We went forward into 2001 on a very positive note and we really haven't faced the storm until this time," says Smith.

Whatever price the marketplace will dictate this time around, Smith and Chambers feel they've done their duty in their fight to keep the impact on taxpayers to a minimum.

Smith says the premium levied on municipalities has been cut by 15 percent since 2001, and the eight municipalities in the pool were presented a dividend check of $1 million.

But will the hard market take back the pool's hard-won gains? Smith and Chambers will have to wait until June to find out. In the meantime, they say their current reserves--$2.8 million in surplus--will be used to offset any increases in premium.

"We're optimistic that we're going to be able to weather the storm," says Smith.

"Nobody has a crystal ball but it looks like things may be softening in the marketplace and hopefully this may be a one-year term that we are faced with this type of market and maybe we'll be in a better position next year," he also says. "So we're optimistic."

Chambers, who is also president of the Risk and Insurance Management Society Inc., also is confident the impact to taxpayers will be minimal with the 2004 renewal.

A FRUITFUL EXPERIMENT

In 1996, facing premium hikes from 20 percent to 38 percent, and getting the cold shoulder from the insurance markets at large, Waterloo's risk managers decided it was time for the municipalities to strike out on their own.

"We were told nobody wanted to quote on the business," says Chambers.

With 460,000 residents scattered among eight municipalities ranging in size from 9,000 residents to 200,000 residents, municipal risk managers, armed with an actuarial analysis, decided they could cut their long-term premiums and slash administrative overhead.

"By pooling or grouping together the municipalities are able to afford to take a much higher self-insured retention than they would individually," says Smith.

One community, the municipality of North Dumfries which has a zero deductible, was able to participate in the in the pool.

That saved the municipality premium dollars, allowing a greater percentage of those dollars to go to paying claims instead of toward insurance broker fees.

Under the pool structure, the municipalities signed up for two three-year terms. The first lasted from June 1, 1998 to May 31, 2001. The second lasts from June 1, 2001, to May 31, 2004.

A total of $4 million in premium was paid to the incumbent insurer in 1996--$1.5 million to buy insurance, another $1.5 million to pre-fund, $400,000 to administrative and operating costs, and $600,000 in surplus.

At the end of the first three years, the municipalities found themselves with a surplus of $3.2 million, says Chambers. Of that $1 million was given back to the municipalities.

Risk managers for the pool have negotiated a fixed price for the primary insurance layers. Prices for the excess layers are renegotiated every year. The communities have seen an increase in premiums in the excess layers.

The pool risk for the municipalities is up to $500,000 per claim, or $1.5 million in aggregate claims.

AN UPHILL FIGHT

"Initially it was quite a challenge to implement," Smith recalls. "We took numerous months to formulate the program, to go forward, to educate our councils and to bring them up to speed to make this financial decision because it was a rather unique concept."

Waterloo's risks are placed through a consultant-actuary. The firm has a brokerage arm that places the covers. "We've got a consultant-actuary which also has a brokerage arm to place the covers that we require but clearly they were hired from the actuarial-consultant perspective and obviously we needed to place the excess cover in the marketplace so they had to have a brokerage arm," says Smith.

So far, the municipalities have been rewarded and risk managers Chambers and Smith have won over their elected bosses.

With the pool going back into the marketplace and the possibility of increasing retentions, Chambers says she's "keeping a careful eye on how it's going." Other Canadian public finance managers are keeping an eye on the Waterloo pool.