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The Pooling Effect. MUNICIPAL INSURANCE ASSOCIATION of British Columbia. Tom Barnes Chief Executive Officer & General Counsel [email protected]. Risk Pools. Well established risk financing mechanism Mutuals Association programs Not common in the public sector Low perceived risk - PowerPoint PPT Presentation
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The Pooling Effect
MUNICIPAL INSURANCE ASSOCIATIONof British Columbia
Tom Barnes
Chief Executive Officer & General Counsel
Risk Pools Well established risk financing mechanism
- Mutuals
- Association programs
Not common in the public sector
- Low perceived risk
- Insurance readily available at a reasonable price
Evolution of Public Entity Liability Risk
1960 1965 1970 1975 1980 1985
Public Entities --------Private Entities _____
The Liability Insurance Crisis Insurance industry abandons public entities
○ Dramatic premium increases
○ High deductibles
○ Restricted coverage
○ Constrained availability
Risk pooling was one of the few options available
FOLI Theorem – Market Cycle
Public entities: First Out Last In
The Result
100,000 public entities in North America
○ 85% get some form of coverage from a pool
$13-17 billion in premium
In North America 500 Pools
Liability
Property
Auto
Worker’s Compensation
Specialty Lines
“The greatest success in intergovernmental relations.”
Almost before most pools could begin operation, the market cycle saw:
Crisis end
Prolonged soft market established
The Pooling EffectYet pools have thrived, because of
The Science of the Pooling Effect
-$1,000
-$500
$0
$500
$1,000
$1,500
Coin Toss Bet : 1 Person
Heads: Win $1,150
Tails: Lose $1,000
The Science of the Pooling Effect
• In this simulation by a random number generator, the result is a collective net gain of $7,500 ($75 per person).
• Individual stakes are lower, despite total stakes increasing 100 fold.
54 participants have to get tails to create a loss ($11 per person).
The Science of the Pooling Effect
The tipping point is now when 540,000 people get tails, which is almost impossible with a 50/50 chance on each flip. There is a certain net gain.
Risk Pools apply the science of the Pooling Effect if its risks are:
Analogous
Diversified
Uncorrelated
The Pooling Effect is amplified in practice
Finances
Collegiality
Risk management services
Customized coverage
The Pooling Effect in PracticeFinances
Public Entities value long term cost:
Stability
Predictability
more than the market cycle that can occasionally deliver lower costs.
The Pooling Effect in Practice
FinancesPools inherently moderate the volatility of insurance costs over time
Member commitment
Capital adequacy
Cost allocation
The Pooling Effect in PracticeFinances
The combining of uncorrelated risks always produces the pooling effect
Prudent funding results in surplus funds
Surplus funds result in Financial return to members
Capital accrual
The Pooling Effect in Practice
Finances
Pools cost of capital is relatively low○ No capacity/ROE conflict.
○ Tax exempt investment accelerates accrual.
The Pooling Effect in Practice
Finances
Capital fosters stability.
Financial returns reinforce long-term commitment.
The Pooling Effect in Practice
Collegiality Information and knowledge sharing
Joint initiatives
Pool resources
Not viewed as giving a competitive advantage to an adversary.
The Pooling Effect in Practice
Risk Management Services
Sector-specific knowledge and experience applied for
benefit of all members
Higher risk members can’t be underwritten out of the pool
Risks themselves must be:○ Identified
○ Monitored
○ Mitigated
The Pooling Effect in Practice
Customized Coverage
Goal is to provide members the coverage they need.
○ Risks emerge and evolve, so must coverage
○ Even where there is no market to provide it
The Pooling Effect in Practice
The smallest member has access to the
resources usually available only to the
largest members.
The Pooling Effect in Practice Reinsurance
Pool working layers
Reinsure catastrophe exposure
THANK YOU
