Public entities, such as government agencies and municipalities, have unique needs when it comes to insurance and risk management. Because their sources of revenue are public funds, i.e. taxpayer dollars, they are held to a higher level of stewardship than businesses in the private sector. In order to help mitigate risk while preserving revenue, some public entities are joining risk-sharing pools.
While there are advantages to participating in these pools, entities considering connecting with a pool should make sure they understand that, while these pools do offer distinct advantages, there may be drawbacks as well.
What is a Risk-Sharing Pool?
The word “pool” is used to describe the concept because it consists of a group of public entities that join together in a cooperative agreement that essentially “pools” their resources as well as their risks. The organizations participating in the pool are referred to as “members.”
Risk-sharing pools are owned and controlled by their members. These pools are not-for-profit and are expressly operated to mitigate risk and maximize safety. Pooling differs from captive insurance agreements in that captives are designed to boost profits in the private sector and use specially designed captive insurance software in order to manage the group. Risk sharing pools often utilize underwriting software specially designed for their purposes.
While no two pools are alike, most share common characteristics. Risk pools that are comprised of intergovernmental agencies and other entities such as school districts must comply with state legislation enacted to cover this type of agreement.
Advantages of Public Entity Risk Pooling
Participating in a risk pool can help a public entity make the most of its funding. Because the members share their risks and resources, they have better control over how the funds in the pool are used and they can better identify trends in claims that may signal safety issues that merit attention.
Disadvantages of Public Entity Risk Pooling
While the positives may appear impressive, public entity risk pooling can have drawbacks. For instance, when the property-casualty market is soft, it may be less expensive for public entities to purchase stand-alone insurance.
Another issue may lie with pricing practices. Many pools have had suppressed pricing over the past several years while non-catastrophic claims have climbed. While pools are not intended to make a profit, it is important that they maintain financial stability and this is becoming increasingly difficult for some pools.
Summing It All Up
While public entity risk-pooling may be a good way to share resources and risks across multiple governmental and other public entities, it is important that these groups do their research and make sure they understand the negatives as well as the positives.