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Insuring Governments in Hard Times

In this economy, it's a good time to visit your government clients. As budgets are cut and operations rebuilt, the client you knew may look very different.

By Mary L. Stewart,ARM,CPCU | Updated on March 31, 2009
Falling real estate values, reduced consumer spending and business closures are eroding local government tax revenue in 2009. Most state and local governments are required to balance their operating budgets. Consequently, public entities of all types are caught on a seesaw, struggling to maintain the previous quality and quantity of their services despite furloughs, layoffs and other cost-cutting measures. In hard times, public entities may not have the luxury of simply maintaining their previous levels of service. Many public entities’ activities are mandated by law, and the demand for those activities, such as public safety services, may increase during a recession. Entities also may assume responsibilities previously borne by failed private and nonprofit entities. For example, a local government may assume public transit responsibilities if the private sector bus company that serves the community fails, because loss of public transit service may be detrimental to the local economy. Communities whose privately operated ambulance service fails may expect the local government to handle the next medical emergency without any delay in service. As stresses upon families build and the capacity of nonprofit organizations declines, local governments also may see a sudden increase in the need for social services or domestic violence interventions. In this environment, public officials may feel forced to act quickly. They may change or merge existing operations. Outside vendors may be particularly attractive cost-cutting targets, because external cuts reduce the need for personnel actions and are, at least initially, less visible. Risk management and insurance budgets especially are vulnerable, because they do not reduce the services provided directly to the public. Changes in underlying operations Given these conditions, this is a good time to visit your government clients. As budgets are cut and operations rebuilt, the client you knew may look very different. Here are some of the issues worth discussing: Loss of institutional knowledge. Organizational changes may result in staff loss or reassignment. Staff who are furloughed or accept early retirement take their institutional knowledge with them unless the client gathers procedural knowledge and historical information before they depart. Functions can be lost unless employees have been crossed-trained in key positions. Address these issues to help the client plan in advance to protect the organization from a sudden loss of working information. Increase in liability and workers’ compensation claims. Eliminating services or combining programs also may increase liability and workers’ compensation claims, especially in hard times. Employees who have experienced sudden changes in services or programs, including layoffs of fellow employees, may stop observing safety and loss control rules due to time pressures, low morale or poor supervision. New or reassigned employees may not be adequately trained. In short, the need to keep services running may take precedence over “working smart” to prevent injuries, property damage and resulting claims. Reinforcing the need to continue safety and loss control programs even when it is difficult may help correct any deficiencies before a loss occurs. New and resumed activities. Over the years, many governments have outsourced operations such as trash collection or enterprise activities for various reasons, including lower cost and sharing of liability exposures. Budget cuts, vendor bankruptcies and other unforeseen circumstances may require that these operations be reabsorbed by the government. Smooth transitions usually require time and the cooperation of all involved; however, transitions due to economic conditions are seldom smooth. Outsourcing agreements usually are contractual relationships between the government and a vendor, and termination can result in losses, including professional liability and breach of contract claims. Additionally, the government may have little remaining institutional knowledge about managing the risks associated with the outsourced activity, and may have been relying on the vendor for insurance protection. Encourage clients to report such changes quickly, and review changes with clients to help them reabsorb operations with the same risk management planning they would use for new activities. Be prepared to help clients deal with the risk management and insurance implications of new service delivery mechanisms, for example, regional partnerships of local governments. Your helpful involvement with these new relationships can introduce you to a new group of clients. Insurance and services procurement During hard times, individuals often reduce the amounts of insurance they carry or drop insurance entirely. Governments are no different. Management may be urged to increase the government’s retention level, eliminate excess coverage, automatically choose the least expensive policy, or even go “bare” on selected exposures. To counter these pressures, clearly identify all of the exposures covered by your policy and the services offered by your company. Be able to explain clearly why the client needs coverage and why your policy is the best choice. Insurers that offer loss control and safety training programs and materials may have a competitive advantage during hard times. In-house programs are often at risk because they do not directly affect government services in the short term. The out-of-pocket cost for instructors, materials and travel is only one concern. Equally important is the challenge of scheduling training after staff reductions, when all personnel are needed to deliver basic services. Insurance companies that provide online training, training CDs/DVDs, or other materials that can be used independently at any location and at any time should promote these services in their presentations, quotes and published materials. Government clients also may eliminate fee-based services that are outside the insurance contract. These services include monitoring contractors’ certificates of insurance; conducting medical cost-containment reviews, independent medical evaluations and mock trials; and providing outside legal counsel. The problems surface later, when claim costs rise or the government finds that its contractor’s insurance has lapsed. For some services, one possible alternative is to provide services on a fee-sharing basis rather than for an hourly rate. The fee for many cost-containment services is a portion of the amount recovered. It may not be as easy to structure the same kind of arrangement for other services, but try to be creative and be sure your fees are not out of proportion to the value of your service. Excessive fees can create problems both within your client’s organization and between your company and the client. For example, one government discovered that the annual fees it paid its broker to manage certificates of insurance exceeded the salary of two of the employees in its risk management department. The government eliminated the service, but faced an ongoing morale problem that surfaced each time it considered another fee-for-service arrangement. Underwriting considerations Insurance carriers frequently establish minimum requirements that policyholders must meet to obtain coverage. For example, property carriers may require policyholders with “highly protected risk” status to provide documentation that they have performed routine inspections. The requirements may be part of the policy language, but they also can be agreed to after the policy was issued, and may not even be in writing. Compliance can be unreliable if insureds do not fully understand or remember coverage requirements, and non-compliance may increase following recession-related layoffs that eliminate the responsible staff members. Brokers, agents and insurance carrier representatives provide a valuable customer service when they help their government clients remember and satisfy the insurer’s underwriting requirements. Local governments also may have problems meeting underwriting requirements when an economic downturn forces them to assume responsibility for a new activity without advance notice and preparation. For example, a local government may take over a shuttle bus system previously operated by a private company that has filed for bankruptcy. All of the private company’s operating management may be gone within 24 hours. The bankrupt company’s insurance coverage will not cover the operations in the hands of the government, so the government must quickly find new coverage, even though it is unlikely to be able to satisfy common underwriting requirements, such as providing a claims history and having one year of operating experience. News travels fast Local governments have many similarities to private enterprise, but they are quite different in one important way. In most situations, government entities are not in direct competition with one another, and thus they are more likely to share information. There is a strong national network of local government risk management professionals, and they have many common interests, even if they are located in different states. For that reason, news travels fast. Insurance professionals should keep in mind that information about what they do in California may quickly make it to Florida. Once unfavorable information has made the rounds in any network, it is difficult to overcome. Several years ago, one company dropped its government clients, stating that it no longer wished to pursue that book of business. Government clients were forced to look elsewhere. Within a few months, word had traveled across the nation. The company reversed its decision the next year, but negative perceptions have persisted. Two years later, the company still has not recovered the government clients it lost. Every firm must make its own decisions about coping in this financial downturn, but those decisions are likely to have long-term effects, especially in the public sector. Why? Because governments can change laws. Boards and commissions frequently resolve issues by modifying local laws to permit the action they need. An insurer once told me that my organization couldn’t have $5 million in limits unless there was a law requiring that amount. Within three months, we had a local law that required $5 million in coverage. It is wise for insurers to remember that governments have this power. Strengthening relationships Hard times are often the incubators for change and the development of stronger relationships. As described in the transit company situation, a team of professionals that works together to solve a problem often has a strong relationship thereafter. If you help your government clients solve their problems, they will remember you when they have opportunities. Ask yourself this question: What can your company do to help governmental agencies? This is a great time to revisit service contracts and offer flexible assistance that matches the present resources and needs of government agencies. You might be surprised to find existing and potential clients open to new ideas and services they would have rejected a year ago. Your success will depend on your ability to think creatively and help governments find ways to accomplish their goals despite reduced resources. Here are some suggestions on ways to help governments: o Offer help with prevention and training. o Offer “gap” coverage to incorporate hard-to-place or newly acquired exposures for a limited time. o Review policy expirations (i.e., 30-day extension) and sunset clauses to extend policies beyond the normal time frame. o Re-evaluate exposures to make sure that government programs or services that have been eliminated or transferred through a contractual arrangement are removed from the renewal pricing. o Relax underwriting requirements to accommodate unusual arrangements. o Extend coverage to “co-op” contractual arrangements through which multiple governments join to buy goods and services. o Establish 24-hour communications with clients to address emergency issues and expedite changes in coverage. The United States is a resilient country with enough creative thinkers to work through its current financial condition. These suggestions may help you open communication with existing and potential clients and work with them toward a common goal. Mary Stewart is the director of research and development for the Public Entity Risk Institute (PERI). Stewart is a licensed insurance consultant in Virginia and has more than 25 years of experience as risk manager.

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