Pooling and insurance - one and the same?

• Author: Cullen, Daniel J.
• Position: Intergovernmental insurance pool

Important points to consider when determining whether to participate in an intergovernmental insurance pool or to purchase commercial insurance.

There is an old saying often referred to when addressing similar objects and concepts: "If it walks like a duck, talks like a duck and looks like a duck, then it must be a duck." Further investigation, however, often reveals that it is not really a duck but a close cousin. Although it may resemble a duck in many ways, this cousin will have some subtle but real differences truly distinguishing it from a duck.

In the same light, joining a public entity risk financing pool may look similar to purchasing commercial insurance. There are, however, many subtle and not-so-subtle differences. These differences establish the public entity risk financing pool as a completely separate financial instrument from its cousin, the commercial insurance company. Most pools provide the member entity with a coverage document, true transfer of risk, for a premium paid under the terms and conditions agreed to in a binding contract. At first glance, this looks like commercial insurance, but as one looks further at the financing instruments, the differences appear.

All public entity risk financing pools are not identical, just as all commercial insurance programs are not exactly the same. The many trends and similarities among pools, however, allow their comparison and contrast with commercial insurance.

When investigating whether to use a pool or commercial insurance, there are four basic areas to be evaluated:

* the professionalism of the organization's management,

* the binding contractual arrangement,

* the financial security of the operation and

* the ultimate cost of risk.

Contractual Relationship

Public entities considering joining a public entity risk financing pool must realize these pools require the entity to take an ownership interest in the program. Most pools, through their joint powers agreement or enrollment documents, bind the entity into the program through the assessable provisions of these documents. Under an assessable agreement, the pool can charge a member entity an additional premium for excess costs to the pool during a covered period of time. Because pools usually discover their ultimate loss experience and charge the assessment years after the policy period, they may charge this assessment even if the member has left the program.

On the flip side, pools often give their members a dividend or...