Your Key to Success
OVERVIEW OF INSURANCE POOLING
Presented by
Victor F. Lorch, ARM, ARPM, AINS
M.R. Lorch Insurance, Education and Risk
Management Consulting Inc.
Instructor Insurance Education Association
What’s It All About?

The development of insurance pooling

The nature of insurance pools

Insurance Market Cycles

How pools may need to respond to meet member needs during
these cycles and advantages of pool membership
DEVELOPMENT OF INSURANCE
POOLING
Events of 1970’s
The loss of sovereign immunity (state and local government could now be
sued for their actions or inactions affecting the welfare of their population
served by them) opened governmental entities to more lawsuits
Changes in tort claim laws as they effected governments exposing them to
more litigation (Governments are now held to same standard as businesses
and individuals)
DEVELOPMENT OF INSURANCE
POOLING
Events of 1980’s
The major insurers began to decline the writing of insurance for public
and nonprofit markets (charging higher premiums, or refusal to write
coverage ).
Dissatisfaction with state-run insurance programs
Governments either went bare (no insurance) or developed pools of
governmental entities to self-insure (spreading the risk amongst
themselves instead of an insurance carrier)
NATURE OF PUBLIC ENTITY RISK POOLING
Pooling defined (by GASB #10- Government Accounting Standards Board) cooperative group of governmental entities joining together to finance an
exposure, liability, or risk. Risk may include property and liability, workers’
compensation, or employee health care.
A pool may be a stand-alone entity or included as part of a larger governmental
entity that acts as the pool’s sponsor.
What Can a Pool Offer (WIFM)
 Group purchase of traditional insurance
 Large deductibles
 Offering various retention layers within the pool

Purchasing different layers of excess and reinsurance
What Can a Pool Offer (WIFM)
 Spread risk among many members (law of large numbers)
 Across multiple years
 Ownership in Pool
Happy Pool Member
Pools Spread the Risk
 Having its members retain part of the risk through a deductible layer
 Retaining part of the risk through a self-insured retention (SIR) layer
 Purchasing excess or reinsurance to cap pool liabilities
 Joining an excess super pool to cap pool liabilities
Common Types of Pools
Risk Sharing Pool- risk of loss is pro-rated among pool members
Insurance Purchasing Pool- members pool together to group
purchase insurance coverage, and member entities do not share in
each other’s risk. ( An example is CAMEL Program offered by
Alliant Insurance Services in California)
Common Types of Pools
Banking Pool- members maintain deposits in the pool and funds are made
available to borrow against in the event of a member sustaining a loss.
Member entities do not share in each other’s risk. They merely set up a fund
that each may borrow against.
Claims Servicing or Account Pool- A separate
administrative entity is established to manage the accounts of
each member. Members may maintain balances with the pool,
but member entities do not share in each other’s risk.
Insurance/Banking/Claims
Servicing Pool
Insurance/Banking/Claims Servicing
Pool
Risk Sharing Pool
Pool group purchases insurance
services for members such as group
purchasing of insurance, banking, and
claims services for its members
Pool members share their risks with
one another. (Transfer of claim
liabilities to the pool).
There is no accumulation of any
appreciable equity
Is a separate legal entity.
Equity accumulated by pool
membership
Members of insurance pools account
for all claim liabilities on their individual
financial statements (No transfer of
claims)
The claim liabilities of members are
not recorded on the individual
member financial statements
11
Insurance/Banking/Claims
Servicing Pool
Insurance/Banking/Claims
Servicing Pool
Risk Sharing Pool
The pool financial statements show a Pools are funded by members through
net zero equity with any excess assets
premium like contributions (called
or liabilities as payable or receivable
premium deposits) to provide
from members
insurance coverage similar to an
insurance company, but in a much
more limited manner.
The premiums represent an equity
interest in the pool.
The dividends paid by the pool to its
members are recorded as insurance
dividend income on the members’
financial statements
12
Public Entity Pool Benefits and Services
Advantages Include
 Improved benefits and services over Insurance Industry
 Broader terms of coverage, conditions and limits
 More equitable rating basis
 Stability of rates and contributions
Public Entity Pool Benefits and Services
Advantages Include
 No profit loading (profits from investments may remain part of member equity
depending on pool agreement
 Tax-exempt status
 No premium tax
 No commission
 Lower overhead costs
PUBLIC ENTITY POOL BENEFITS AND SERVICES
INCLUDE
 Training and improved loss control (tailored to the needs of the membership)
 Safety Programs and Financial Incentives to Membership
for Participation in Programs
 Loss prevention consultation (programs to assist in reducing the
frequency and severity of claims)
PUBLIC ENTITY POOL BENEFITS AND SERVICES
INCLUDE
 Risk Management
Services
 Various other administrative services (claims administration,
claims auditors, defense counsel, actuarial services,
underwriting managers, employee benefit consultants)
INSURANCE POOLING IN THE 90’S
Losses for governmental entities were not as bad as predicted by the
insurance industry in the 70’s. Insurance companies began looking to
expand their book of business into governmental entities.
(Many governmental entities left their pools and returned to traditional
insurance programs, only to return to pools in the 21st century as the insurance
market changed again)
Insurance Pooling in the 90’s
The pool’s focus on loss control and reduction helped keep loss
experience low
Financial markets were performing well and premium dollars provided a
good opportunity for insurance companies to generate earnings on
premiums invested.
Insurance Companies and the 21st Century
Financial markets attracted individual investors as well as insurance
companies. Underwriting focused on obtaining cash for large premiums
(“cash flow underwriting”), instead of underwriting risks (The rate of return
on investments was as high as 20% on their reserves, with loss ratios
exceeding 100%).
With the downfall of the technology industry, underwriting had to concentrate
on evaluating risk and exposure, instead of high premium dollars, causing a
substantial increase in rates.
Insurance Companies and the 21st Century
Litigation trends were pushing up loss costs (Increase in attorney
advertising and the rise of class action suits against large corporations).
Large losses were causing poor underwriting results
Increase in “natural disasters” (Hurricanes and storms worldwide in excess
of $17 Billion)
Insurance Companies and the 21st Century
Terrorism attack of September 11, 2001 cost insurance companies
approximately $50 billion
Pool Membership Desires
 Members want the lowest rates. Most governments focus on the current
budget cycle and how they can get the most of current funds (Some
agencies have gone to two year budget cycles).
 Members need stability in their long-run costs
Pool Member
Pool Membership Desires
Pool stability is established to maintain significant equity to provide for:
 Changes in the pooled insurance program (adding programs, changes
in self-insured retention)
 Any change in pool membership
Pool Membership Desires
Pool stability is established to maintain significant equity to provide for:
 Changes in the pooled insurance program (adding programs, changes
in self-insured retention)
 Rate stabilization (not subject to hard and soft market
cycles)
Pool Membership Desires
Pool stability is established to maintain significant equity to provide for:
 Changes in the pooled insurance program (adding programs, changes in
self-insured retention)
Be Prepared for:
 Any change in pool membership
Insurance Cycles
HOW IT IMPACTS YOUR POOL PROGRAMS AND ITS MEMBERS
“Soft market cycle” – carriers are willing to write coverage at
“low rates ” for public entities and nonprofit entities
“Hard market cycle” – insurance companies market capacity is lower,
insurance companies raise rates, reduce coverage, and pull out of certain
markets (public entities and nonprofits)
Challenges to Pooling In the Future
 Pool Insolvency
 State Regulation of Pools due to Insolvency
 Another Soft Insurance Market
 Confidence Levels
 Retirement of Pool Personnel
 Underwriting Considerations for Future Membership
 Federal Regulation of Insurance Industry
 New Public Entity Loss Exposures
 Competition from Larger Pools
 Competition from Insurance  Health Care Programs for Pools
Industry
 Education of Pool Personnel
 Process of Evaluating Excess Insurers, Excess Pools and
Reinsurers for Solvency Issues
“The Key is In Your Hands”
Further Topics Covered in “Essentials of Risk Pool Management”
 The Pool Manager
 Claims Audits
 Pool Leadership, People, Personal,
Growth, and Management
 Actuarial Studies
 Underwriting Considerations
Further Topics Covered in “Essentials of Risk Pool Management
Course”
 Pool Leadership, People, Personal Growth, and Management
 Understanding Financial Reporting
 Public Entity Loss Exposures, Risk Management and Liability
 Financial Stability of Pool
 Risk Pools and Employee Benefits
 Process of Evaluating Excess Insurers,
Excess Pools and Reinsurers
Associate In Risk Pool Management Designation-ARPM
Completion of Following Risk Management Courses
 Risk Management Principals and Practices
 Risk Assessment and Treatment
 Risk Financing
Completion of “Essentials in Risk Pool Management” Course
Completion of a Project Related Public Entity Pooling