Price, Increased Self-Insured Retentions and Coverage, Top Challenges Facing Public Risk Managers

May 22, 2003

Public risk managers said that price, increased self-insured retentions and coverage were the biggest challenges they face over the next year, according to a survey conducted recently by Munich-American RiskPartners, a division of American Re-Insurance Company and the Public Risk Management Association (PRIMA). The results were released Wednesday at Public Risk Management Association’s 25th Annual Conference in Reno, Nev.

When asked to identify the biggest challenges they face in their risk management program in the next year, 89 percent of respondents stated pricing issues, 52 percent said increased self-insured retentions and 41 percent said coverage issues.

“Insurance and reinsurance costs are rising due to loss cost increases, increases in severity and frequency, lower investment returns, and higher cost of capital. Given the tightening budgeting constraints public entities face, it’s understandable that pricing increases coming at the same time are a significant challenge for public entities,” Craig Smiddy, senior vice president of Munich-American RiskPartners Public and Nonprofit group, said. “While increases in self-insured retentions create additional challenges for public entities, it makes sense for public entities to increase their self-insured retentions to contain insurance and reinsurance costs by eliminating unnecessary frictional cost in lower layers where there is a significant amount of frequency.”

When asked to identify the tools they used to manage their organizations’ total cost of risk, the five most utilized tools identified were, loss control / safety and engineering programs (96 percent), self-insured retentions (79 percent), excess insurance/reinsurance (75 percent), large deductibles (58 percent) and intergovernmental pools (42 percent). “This is the time for public risk managers to show their tremendous value and worth to their entities. By utilizing both old and new tools for managing risks, we will be in a better position with our insurers and gain support and recognition from our top management and communities. Also, PRIMA can provide our members with the resources to assist them in today’s complex and changing risk management environment,” Ruth Unks, president of PRIMA, commented.

Asked to rate their relationship with their risk-taking provider on a scale of 1 to 5, with 1 being a long-term relationship with value-added services and 5 being a pure price/commodity based relationship, respondents gave the following ratings:

Rating Percentage
1 Long-term relationship 26%
2 29%
3 28%
4 10%
5 Price/commodity relationship 8%

The ratings show that 55 percent of respondents view their relationship as long-term with value-added services (rating of 1 or 2).

When asked how their relationship would change over the next year, respondents said:

Change Percentage
Change carrier(s)/consider new carrier(s) 58%
Change broker(s)/consider new broker(s) 26%
Strained relationship with insurers 31%
No change in either relationship 18%
Strained relationship with broker(s) 13%

“Because of budget constraints, some risk managers are shopping price right now, even though they desire a long-term relationship with their insurer or reinsurer,” Unks said. “These findings may also indicate that risk managers are looking to the Alternative Market in an effort to eliminate frictional cost associated with traditional ‘first dollar’ insurance and gain greater control over their risk management program,” Smiddy added.

In conducting the survey, Munich-American RiskPartners and PRIMA asked 1,150 public risk managers and CFOs from organizations with gross operating expenditures of more than $1 million to respond to an online survey on current market conditions. Of those who replied, 82 percent were risk managers or risk officers and 18 percent were CEOs, CFOs, and treasurers.

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